The news from Africa is not good.

The Darfur crisis is spilling over into Chad and the Central African Republic, and Somalia is pulling the Horn of Africa into collapse. Al Qaeda has inspired terrorist attacks in Algeria and Morocco, while militant attacks have cut Nigeria’s oil exports by a third. Zimbabwe’s monetary inflation has passed absurdity and is now estimated in the tens of thousands percent annually. Deadly floods are wreaking havoc on the usually arid Sahel region, while Lesotho is experiencing its worst drought in thirty years.

And yet, two major financial firms recently released reports claiming the investment climate in Africa is the best it has been since independence. What gives?

Commodities, mostly. The bull market in oil and other commodities has helped to push Africa’s economic growth rate above the world average since 2001. Africa’s GDP has grown, on average, 5 percent each year in that period, compared to the overall global growth rate of 4.2 percent.

While higher commodities prices were certainly the catalyst, other changes in the financial landscape might give Africa its best chance yet to become an investment destination. Many analyst believe the current run up in commodity prices is secular in nature, as the price increases are mostly attributable to long-term trends, and will continue as long as China, India, and other emerging markets continue to grow.

If Africa is really going to avoid landing hard if commodities turn south, it will have to undertake difficult but necessary steps to remove the plague of corruption.

The growth in the major emerging markets is feeding back into Africa in new ways as well. Investors from China, India, Russia, and the Middle East do not like to invest in credit default swaps and the other new-fangled financial tools touted by Western banks in recent years, according to a recent report (PDF) from RogersCasey. These “resource rationalizers” instead like to park their newfound riches in real assets, which Africa offers at a discount.

Chinese officials have crisscrossed the continent in recent years, investing in new infrastructure and providing soft loans to secure access to Africa’s mineral and oil wealth.  China’s involvement in Africa has come under criticism around the world, and increasingly from Africa itself, but Beijing has also poured money into regions that Western firms have ignored. Less noticed has been India’s push to secure access to Africa’s resources, but India’s trade with Africa has been growing by nearly 25 percent annually in recent years. Investors in the Middle East like the Shar’ia-compliant opportunities that Africa’s commodities offer, and petrodollars that would have gone to London and other markets are finding their way into African investments.

Merrill Lynch is also bullish on Africa’s future. In a recent report the investment bank called Africa “the final frontier” and laid out the top ten investment opportunities in the continent. Oil and commodities top the list, but telecommunications and information technology should also provide significant returns for investors, according to the bank.

In the report, Richard Bernstein and Jose Rasco sketch a picture of Africa that is turning the corner toward long-term stability and growth. The Africa they describe is one that is using the inflows from the commodity boom and the reduction of its debt burden by the G8 to invest in the infrastructure needed to diversify its economy, and thus avoid the next downturn in commodity prices, should such an event happen.

While regions like the Horn of Africa and countries like Zimbabwe appear stranded on the path to ruin, peace and democracy have spread to much of the continent, and most of Africa is looking increasingly stable. Rwanda has undergone a remarkable transformation since genocide devastated the nation, and investors are flocking to Kigali to build its infrastructure. Liberia, the Democratic Republic of the Congo, and Sierra Leone have all emerged from failure to hold elections in recent years, and a tentative peace deal in Cote D’Ivoire may soon usher another African nation into the global financial market’s sights.

Indeed, foreign direct investment flows into Africa increased to nearly $40 billion in 2006 from under $10 billion in 2000, according to the World Bank. At the same time, the G7 nations, International Monetary Fund, and China have cut Africa’s burden by writing off much of its historical debt. This has allowed for African nations to finance their development through public markets for the first time and helped to attract international investors to the continent’s frontier markets.

There is no internationally recognized pan-African equities index, but if you look closely, the changes to Africa’s financial landscape are obvious enough. Investec set up a pan-Africa fund in late 2005, and South Africa’s Standard Bank has just launched two African funds globally through its asset management arm, Stanlib. The funds are heavy in mining and resources, but, in a sign of the emerging diversification of Africa’s investment opportunities, they also hold some consumer service and finance stocks.

Still, the optimistic mood may soon pass. Nigeria, Sub-Sahara Africa’s second largest economy after South Africa, remains plagued by corruption and the Delta region, where most of its onshore oil reserves lie, is a mess. Angola was able to avoid making the reforms the IMF recommended in thanks to Chinese soft loans and its newfound oil wealth. A cursory glance at the World Bank’s “Doing Business Map” shows that the continent remains a terrible place to set up shop. If Africa is really going to avoid landing hard if commodities turn south, it will have to undertake difficult but necessary steps to remove the plague of corruption.

Financial markets cannot save Africa alone. It will need to save itself.

In other ways, too, the arguments put forth by Africa’s cheerleaders look weak. The Merrill Lynch report states, “since 1980 Africa has averaged 12 [percent] of the word’s arable land. However, the continent accounts for 23 [percent] of the world’s surface area. This means that as a percentage of the world’s total, Africa has a lot more to offer in agriculture production.” But the authors neglect to note that the world’s largest desert covers a quarter of the continent. True enough, Africa’s arable land area could be increased by irrigation, but that will come through land reforms and the reduction of farm subsidies in other nations—not by natural endowment.

The authors also stress the benefits of Africa’s young population. Africa’s youth (those under 15) are expected to make up 42 percent of the population by 2015. Bernstein and Rasco claim, “[t]his presents some interesting possibilities because it will provide the nations of Africa with young workers who will want to earn, learn, and burn (their earnings).” But for a continent that already struggling to feed and care for its current population, more troubling possibilities seem likely to come from the demographic trend.  

The recent volatility in global markets may also be bad news for Africa. Easy money has defined the past few years of the global economy, and the current belt tightening might be the continent’s loss. Risk tolerances are decreasing, and there may be fewer investors willing to search out higher returns in “frontier markets.” Also, because most of the current investment opportunities in Africa are in real assets, they are easy to dump for investors needing to cover losses on derivatives on credit gone sour.

In the end, global financial markets cannot save Africa alone. It will need to save itself. The World Bank and donor countries can help to finance the necessary infrastructure investments Africa needs to get on its feet, but African government’s will have to stop diverting the revenues from oil and other commodities to their cronies and invest back in their own nations. China has not been helpful in this regard -- by neglecting to put conditions on the money it loans, Beijing only enables corrupt officials to steal from Africa’s future.

Still, the recent interest from Western financial firms has not come out of nowhere. The investment climate is improving in significant ways across most of the continent. But the road from “frontier market” to “emerging market” will be an arduous journey for Africa’s governments. Despite the current opportunities, many may still turn back before reaching their destination.

Adam Wolfe is a senior analyst with the Power and Interest News Report.

Image credit: Photo by flickr user ctsnow.