The Financial Times reported last month that three major international offshore financial centers – Mauritius, Singapore, and Luxembourg – are taking steps to protect investors seeking wider exposure to African opportunities. This includes inking investor protection and promotion agreements with several African countries that protect investors from nationalization risk as well as double-taxation treaties aimed at reducing corporate and individual investor tax liability.
While the latter type of agreement is somewhat controversial given that they typically reduce tax revenues received by host governments and so, allege critics, increase poverty and inequality, the former are seen as absolutely crucial given the high stakes involved when a company directly invests into a host country. Such risk, for instance, became apparent this past decade in Venezuela, where the regime led by the late Hugo Chavez expropriated and nationalized a host of foreign-owned businesses including some owned by American oil giants Exxon-Mobil and ConocoPhilips.
While such investor protection agreements cannot completely shield investors from nationalization given the ups and downs of host-country politics, they nonetheless often serve as a break against uncompensated confiscation of investor assets by forcing host governments to participate in arbitration panels at the World Court and other such international legal institutions. In the past such panels have legally awarded investors billions-of-dollars-worth of financial compensation – which often allows burned investors to seek to freeze host-country assets in other countries if they are not compensated for their losses.
The importance of such agreements which secure and sustain a large flow of foreign direct investment into a host country cannot be underestimated. Both China and India, for instance, saw a massive increase in FDI into their economies after inking these deals as investors became reassured that their factories, real estate, and in-country financial assets would not be unduly subject to government confiscation. Thus, in addition to providing some protection against nationalization the deals often serve a double purpose of signaling to global investors that a country is a safe place to do business in.
Of the major offshore financial centers leading the charge to ink deals on the continent, the most aggressive is Mauritius – the former Indian-Ocean British colony which has transformed itself into a major offshore banking center. The island nation has so far reached agreements or is in the process of doing so with nineteen African states, with more likely to follow. Since capital originating from Mauritius is responsible for nearly 40 percent of FDI inflows into India over the past decade, the expectation is that this could open the door to even more of investor capital into Africa, which saw $50 billion in investment last year.
While good news, it is not all easy sailing for investors looking to cash in on the African growth story. The Fed’s recent announcement that it will begin tapering off its quantitative easing program has roiled emerging markets, adding significant currency risk and raising the specter of a repeat of the Asian Financial Crisis of the 1990s. Still, the fact that offshore financial centers are looking to expand their presence in Africa through tax and investor protection agreements is a good sign that, regardless of any Fed-induced tapering turmoil, the long-term smart money is still betting a significant part of its kit on African opportunities.
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