After five months, Algeria has reached an impasse, as the Hirak popular protest movement continues unwaveringly to press for the total reformation of the country’s political system. EXX Africa assesses the political, security, and commercial implications of the current situation, which has been marked by the dismantling of the political and business connections of the former regime of president Abdelaziz Bouteflika.
Transport logistics are a vital and promising sector for business in Africa. However, traversing land, sea, and air routes across the continent comes with a plethora of political and security risks. EXX Africa explores the key concerns in this regard, their manifestation, impact, and outlook.
Doing business in Africa is beset with a number of political and security risks. Recent research by Aon reveals that 70 percent of countries in sub Saharan African are currently at risk from strikes, riots, and other types of civil unrest while 25 percent are at risk from sabotage and terrorism. Although government assets are most frequently targeted during such events, these risks ultimately affect the viability and profitability of private entities and investments as well.
The latest Emerging Markets Logistics Index, which ranks 50 emerging economies across the world, places these concerns in the transport logistics sector. Agility Logistics produces this index. Rankings are pulled from data from institutions such as the IMF, the OECD, the World Bank, the UN, and the WEF, among others, and is supported by a survey of trade and logistics industry professionals. Findings from the 2018 Index reveal that many of the top supply chain risks in sub Saharan Africa relate to political and economic concerns, with industry professionals citing corruption (23 percent), government instability (18.3 percent), terrorism (9 percent), and piracy (4.1 percent) as major risks. In North Africa, terrorism (43.8 percent) and government instability (19.9 percent) together represent almost two thirds of the primary concerns.
A similar long-term study by Willis Towers Watson echoes these findings. Its 2016 Transportation Risk Index, compiled from data and insights derived from 350 interviews with executives in the sector, noted that the number one long-term (up to ten years) megatrend for logistics across the continent concerned geopolitical instability and regulatory uncertainty.
Such political and security risks tend to affect transport logistics across the continent in three ways: border closures or delays, the targeting of state assets, or the targeting of private assets. We explore each of these manifestations, identifying their major trends, impact and outlook below.
Border closures and delays
Government and geopolitical instability frequently result in the planned or unexpected closure of land, sea and air routes, affecting the movement of goods and services. Such closures most often arise as a result of a change in government – whether by democratic or undemocratic means – or as a result of bilateral tensions between neighbours.
Election periods pose one of the primary threats in this regard. Even votes deemed free and fair, and organised by democratically elected governments can cause disruption. During the General Elections in Nigeria in February 2019, for example, the government announced the closure of all borders and implemented various restrictions on vehicular movements for the voting weekend. A similar elections-related border closure took place in December 2018 when the Democratic Republic of Congo (DRC) closed its borders with its nine neighbours as it held its long-awaited polls.
Unexpected changes of power, such as via an insurrection, coup, revolution or rebellion, further results in risks to the logistics sector and induces high levels of uncertainty. During the successful removal of President Omar Al-Bashir in Sudan in April 2011, following weeks of anti-government protests, the transitional military council closed the country’s airspace for 24 hours as well as all border crossings until further notice.
Unsuccessful attempts at regime change can also result in panic, as witnessed in January 2019 when Gabon suddenly closed its border with Cameroon following an attempted coup against President Ali Bongo. All cross-border trade ground to a halt forcing local businesses to divert their goods to Equatorial Guinea.
Poor bilateral relations can further limit the flow of goods and services. While there are some known long-standing tensions between neighbours that have resulted in border closures, such as between Morocco and Algeria (ongoing for 25 years) and Ethiopia and Eritrea (borders have closed again despite a peace deal in July 2018), emergent socio-political developments can cause abrupt stoppages to cross-border commerce as well. In February 2019, Rwanda unilaterally decided to close its busiest border with Uganda over mutual allegations of threats to national security. The decision not only affected bilateral trade but impacted trade to Burundi, the DRC and Zambia as well. One month later, borders were again closed in Southern Africa, this time between South Africa and Mozambique following xenophobic attacks in Kwa-Zulu Natal province. During this incident, a crowd of around 200-300 Mozambicans barricaded the N4 and began targeting trucks with South African license plates.
Targeting of state assets
Beyond broader political threats and the closure of borders, the logistics sector is often impacted by security-related incidents in which non-state actors target key state infrastructure assets. Such incidents may emerge during acts of militancy, labour unrest or sabotage.
The strategic importance of a country’s infrastructure – particularly its ports – often renders these assets prime targets for militant attacks and activity. This has been demonstrated repeatedly in conflict zones over the past 12 months, with attacks reported against sea and air ports in Somaliland (Bosaso Port), Somalia (Mogadishu International Airport), Libya (Ras Lanuf and Es Sider Ports, and Mitiga International Airport), Niger (Diffa Airport), and Mali (Sevare Airport). Militants may even attempt to seize such assets for political leverage. In March 2019 in the Central African Republic, a local rebel group stationed at the border post with Cameroon blocked cargo to impede commercial traffic in an attempt to force the government to include them in the newly formed government.
The economic importance of logistical infrastructure further incentivises established worker unions to target such assets during labour disputes and negotiations. In this instance however, disruptive events are not limited to conflict zones but can be found across all countries, including the major economies. In a 2019 survey on supply chain risk management in South Africa, all 20 participants identified socio economic factors, such as labour unrest, as a key source of vulnerability. South Africa has also been impacted by frequent incidents of sabotage within the logistics sector, with arson and derailment attacks having recently been carried out against both its passenger and cargo rail services.
Targeting of private entities
Political and security risks may also affect private commercial entities and their assets directly as well. One of the primary security threats in this regard is posed by piracy. While this threat is location and sector specific, its impact is significant – particularly considering that 90 percent of African imports and exports are moved by sea. According to the 2018 Oceans Beyond Piracy report, in East Africa alone, the annual cost of maritime piracy was estimated at USD 1.4 billion in 2017 (down from USD 7 billion in 2010) while in West Africa it was estimated at USD 818 million (up from USD 719.6 million in 2015).
Most concerning, according to the latest statistics released by the International Maritime Bureau, the threat from piracy is increasing in West Africa. Since 2014, there have been approximately 250 actual and attempted attacks in the Gulf of Guinea, with a 70 percent increase in incidents being reported between 2017 and 2018 alone. This surge is expected to result in associated rises in the cost of maritime business, particularly with regard to insurance. In 2017, the total costs of additional premiums incurred by ships transiting the Gulf was calculated at USD 18.5 million. Moreover, it was estimated that 35 percent of all ships now take out Kidnap & Ransom insurance, totalling USD 20.7 million.
Companies operating in the transport logistics sector are also frequently targeted by corrupt individuals. The sector remains particularly vulnerable to corruption given its close engagement with customs officials who are often underpaid and look to increase their wages through opportunistic facilitation payments. Extensive red tape and delays further amplifies this risk: according to the African Development Bank, the average customs transaction across the continent could involve 30-40 different parties. In addition to increasing commercial operating costs and affecting intraregional and international trade, such corruption at ports of entry and exit frequently facilities a range of illicit activities as well, such as the smuggling of people and goods, and tax evasion.
Despite these challenges, there remain sound opportunities for transport logistics in Africa. Egypt, Morocco, Algeria, Tunisia, Libya, South Africa, Nigeria, Ethiopia, Ghana, Tanzania, Uganda, Kenya, Mozambique, and Angola all featured within the Emerging Markets Top 50 Logistics Index last year.
Looking more closely at the data, Egypt and Ethiopia were identified as having made significant strides in the logistics sector. The improvement in business conditions in Egypt, including the reduction in business costs associated with crime, violence and terrorism, has been identified as one of the primary reasons for it jumping six places in the index last year – the most of any country. Similarly, Ethiopia’s goal to become a low-cost manufacturing and textiles hub along with the opening of Africa’s largest cargo terminal in Addis Ababa has attracted much attention. However, ongoing security concerns, especially the threats posed from ethnic conflicts and terrorism along border areas with Somalia and Kenya, were identified as setbacks.
In another promising development, South Africa, Nigeria, Egypt, and Kenya were identified within the pool of countries that have the most potential to grow as logistics markets within the next five years. However, sub Saharan Africa’s two largest economies – South Africa and Nigeria – each fell down the index, with Nigeria falling seven spots. Both countries were nevertheless identified as turning a corner, particularly with regard to corruption and political instability and uncertainty in 2019.
As demonstrated above, supply chain risks vary wildly from country to country across Africa. From isolated events that cause single points of impact (such as a militant attack), to ongoing events that generate a localised yet sustained impact (such as strikes), to all-encompassing events (such as a coup), companies in the transport logistics sector are advised to stay abreast of political and security dynamics to navigate and forecast their threat environment. In addition, transport logistics should consider using political risk insurance to insulate their operations against disruption.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
The political stalemate between the new military establishment and the protest movement that is increasingly tilting in favour of Islamist ideology risks dragging a politically destabilised and economically weakened Algeria into a broader regional conflict that would put at risk contracts signed with key investment partners from across the Gulf and Europe.
On 4 May, Algeria’s new military leadership arrested three of the former regime’s highest profile leaders, namely Generals Mohamed Mediène and Athmane Tartag, both former heads of the powerful intelligence agency the Département du renseignement et de la sécurité (DRS) – later called the Département de Surveillance et de Sécurité (DSS) – as well as Saïd Bouteflika, the brother of former President Abdelaziz Bouteflika, who was forced to step down by the military last month.
The three men arguably posed the greatest resistance to the authority of General Ahmed Gaïd Salah, who as military chief of staff forced the ouster of president Bouteflika on 2 April. Even though Mediène was removed from the DRS in 2015 after serving as intelligence chief for 25 years and replaced by Tartag, he has remained an influential figure. Last month, Salah accused Mediène of trying to undermine the transition that is due to end with the presidential election on July 4. Meanwhile, Saïd Bouteflika was the primary gatekeeper to his brother, as the latter became infirm and wheelchair-bound, building up a vast business network and exceptional political influence.
The three arrests show the growing confidence of the new military leadership under Salah to strike against top figures of the ousted Bouteflika regime and culminate a series of military-ordered detentions over the past month.
Purging the elite
EXX Africa had accurately forecast the series of arrests of high-profile Bouteflika regime leaders following the removal of the former president. Immediately following the military intervention, soldiers arrested the head of business association Forum des chefs d’entreprises (FCE), Ali Haddad, who has been at the centre of the patronage bestowed for years on Algerian politically-connected businesses. Well-placed local sources then reported that the detention of Haddad and a dozen other businessmen on corruption charges was ordered by the military under the command of General Salah (See ALGERIA: THE MILITARY TAKES CHARGE IN AN APPARENT CONSTITUTIONAL INTERVENTION).
We subsequently assessed that Saïd and Nacer Bouteflika, the ousted president’s brothers, as well as former prime ministers Abdelmalek Sellal and Ahmed Ouyahia, along with others, would be prime targets of arrest. Almost all the names we mentioned last month are now facing corruption charges or have been imprisoned. Several businessmen, including the country’s richest man, Issad Rebrab, have been placed in custody pending completion of investigations of corruption allegations. Current Finance Minister Mohamed Loukal, former police chief Abdelghani Hamel, and former prime minister Ouyahia appeared in court last week on embezzlement charges.
The purge of Algeria’s business tycoons is most significant from a commercial risk perspective, since their removal may augur contract reviews and cancellations. Other notable business tycoons who have been arrested or face charges include Chamber of Commerce chairman Mohamed Laïd Benamor and Condor group chief Abderrahmane Benhamadi. Together with Ali Haddad and Issad Rebrab, as well as other prominent tycoons such as the Kouninef brothers, these individuals represent the senior leadership of corporate Algeria that was firmly intertwined through the FCE with the political establishment of the Bouteflika family. As corruption proceedings unfold, pressure will mount on the new military leadership to redistribute the former Algerian oligarchs’ wealth among the new regime and their business backers.
The same is true in the oil sector, where an extensive reform process has been halted following the removal of state energy company Sonatrach CEO Abdelmoumen Ould Kaddour. The military is reportedly preparing to also remove the company’s vice-president Abdelhamid Raïs Ali. Meanwhile, Algeria’s supreme court has started investigating cases of alleged corruption relating to Chakib Khelil, energy minister from November 1999 to May 2010. The cases include capital movements and contracts signed by Sonatrach with two foreign companies. This could mean that military courts are seeking the dismissal of the entire Sonatrach management board. Newly-appointed head Rachid Hachichi lacks the clout of his predecessors and is more open to political influence from the military.
Placating the protesters
The high-profile corruption crackdown is a typical post-coup strategy aimed at both eliminating former regime rivals to avoid a counter-coup, while also placating the civilian protesters whose obstinate demonstrations provided the impetus for the military intervention in the first place. While the Bouteflika regime has been decapitated and left powerless, the protesters have been less amenable to appeasement. On 3 May, after Friday Prayers, hundreds of thousands of protesters rallied peacefully in the capital Algiers calling for the resignation of interim president Abdelkader Bensalah, who is due to serve until the election slated for July, and Prime Minister Noureddine Bedoui, appointed by Bouteflika days before he stepped down as president. Many protesters also insist on the removal of General Salah, although the opposition is split on the role of the military in the transition.
While the protest movement has remained incorruptible and persistent in its daily and weekly turn-out, its leadership remains divided. Since Bouteflika’s resignation, many demonstrators have rejected military intervention in civilian matters, while others have been supportive of the army’s role in the transition. The military is now attempting to split the protest movement by co-opting some into their fold with promises of influence in an eventual political transition. Several prominent opposition leaders have backed the military intervention, perhaps viewing an opportunity to re-enter government with army support after the elections. Ali Benflis, a former head of the ruling FLN party who now leads the Talaie Al Houriyet party, said he prefers military stability than the ongoing political chaos. Benflis has been unsuccessfully scrambling for support among the protestors and may view his closeness to the FLN as a political advantage. Others, like Mustapha Bouchachi, a lawyer and protest leader, have rejected the caretaker government.
Over the next few weeks, the military is likely to co-opt some protest leaders and opposition parties, including the moderate Islamist Mouvement de la Société pour la Paix (MSP) led by Abderazak Makri, along with fragments of the governing FNL party under the leadership of newly-elected party chief Mohamed Djemai. They are also seeking international support for such a transition, particularly from France and the US. If they are successful, they will be able to split the protest movement and offer a mediated pathway out of the current crisis that would allow the military to retain some political and economic power. However, some of the protest leaders and opposition parties hold very divergent ideological views for the future of Algeria that would put them in conflict with the military and regional powers in the Middle East and Europe.
Regional partners such as Egypt and the UAE would favour a military-led transition in order to shore up their interests in the Maghreb region. Meanwhile, local sources report that rival regional powers, such as Qatar and Turkey, are seeking a stronger role for Muslim Brotherhood affiliate, the MSP, which would tilt the balance of power in North Africa in their favour. The prominent Islamist protest leader, Seif Islam Benatia has called for a six-month transition period under the leadership of Ahmed Taleb Ibrahimi, a conservative former minister who is perceived as outside of the Bouteflika elite and who retains close ties to Islamist groups. The struggle between Islamists and the military risks dragging in more regional powers and creating a political stalemate, resembling neighbouring Tunisia, or even Libya (See TUNISIA: POLITICAL INSTABILITY AND SECURITY THREATS IMPERIL ECONOMIC RECOVERY).
If the ongoing mediations fail, the military under Salah is likely to move towards further consolidation of political power and seek to contest the elections in the guise of a new political movement. The vote would then be less likely to be free and fair. As a result, protests would continue across Algerian cities, which would be more likely to trigger a violent crackdown from security forces. For now, the protests have remained relatively peaceful, yet hard-line elements would be likely to emerge in case the crisis draws out or security forces deploy more heavy-handed tactics. We have outlined the commercial implications of more violent unrest in previous briefings (See ALGERIA: DESPITE CONCESSIONS, THE POLITICAL ELITE DIGS IN FOR THE LONG HAUL).
The power struggle between the military and hard-line elements in the protest movement risks dragging out well beyond the elections slated for July. The subsequent disruption to commercial activity is likely to further drag down Algeria’s economic outlook, particularly as oil export revenues drop. Algeria’s first quarter energy earnings fell 1.68 percent year on year, from USD 9.153 billion from USD 9.310 billion. As a result, the country’s trade deficit has increased over the same period by 11 percent to USD 1.37 billion. Oil and gas account for 94 percent of Algeria’s total exports and 60 percent of the state revenues.
In its latest updated forecasts, the International Monetary Fund (IMF) expects the Algerian economy to grow by just 2.3 percent this year and then fall well below 2 percent growth in the coming two years. The Fund also expects inflation to shoot up in the one-year outlook and beyond, while the current account deficit could exceed 12 percent this year. Last month, the IMF said the government should carry out reforms to help cut the deficit and reduce reliance on oil and gas. The government last year started implementing changes that allow the central bank to lend directly to the treasury to fund internal public debt. The budget deficit is projected at 9.2 percent of GDP for this year, up from 9 percent in 2018.
The economic outlook is further impacted by the spree of politically motivated corruption charges against the country’s most senior public officials and business tycoons. The liberalisation and privatisation reform agenda of former prime minister Ouyahia has been scrapped, while the military is taking an ever more prominent role in Algeria’s economy. This bodes well for contract stability in terms of agreements signed with regional allies of General Salah and other generals, especially the UAE. Dubai’s DP World has jointly operated the Port of Algiers since 2009 and runs port operations at Djen-Djen under a 30-year concession. Gulf monarchies have long backed the Algerian military. In the 1990’s, Saudi Arabia persuaded the US and other allies to support Algeria’s military after its army intervened to cancel the 1991 legislative elections that were won by Islamists.
Contracts signed with French businesses and the French government and military are also looking more secure if the military remains in charge given French support for the Algerian military over recent years. However, Italian firms may struggle to remain in favour with the Algerian military establishment, given Italy’s vocal support for the Islamist government in neighbouring Libya, which is currently engaged in a war against eastern forces supported by France, Egypt, and the UAE. While supply contracts with Italy’s Eni were recently renewed, Italian firms would be more likely to face discrimination unless they express their firm support for the Algerian military-led transition.
However, the ongoing mass demonstrations are becoming a growing concern for political stability and are shifting the popular mood increasingly towards supporting Islamist groups, especially Muslim Brotherhood affiliates such as the MSP. Gulf monarchies now fear that an anti-status-quo Islamist political order supported by Qatar and Turkey could emerge in Algeria driven by street protests, reminiscent of Egypt in 2011/2012. The MSP and other Islamist parties are already capitalising on growing anti-Israel sentiment by criticising the US and Arab states for supporting a rapprochement with Israel and the Trump Administration’s so-called ‘Deal of the Century’ Arab-Israeli peace plan.
If Islamists gain the upper hand in the political transition, contracts signed with the UAE and perhaps even France could face greater risk of frustration or even cancellation. For DP World this would continue a trend of licence revocations across the region as the geopolitical balance is shaken. In the meantime, the primary fear is that Algeria risks becoming a new theatre of conflict between rival regional powers, like the political stalemate in Tunisia and the military conflict in Libya.
SEE COUNTRY OUTLOOK: ALGERIA
Algeria’s military has forced the resignation of the president and will seek a continuation of its power base following elections due by the end of June. The army’s ability to negotiate a new political agreement with the opposition and protest leaders will be key in its success to ensure stability and mitigate further commercial disruption.
After five weeks of mass demonstrations, the embattled political elite is showing no signs of giving into the protestors’ demands. The next five weeks will prove crucial in determining Algeria’s political, security, and economic outlook for years to come. EXX Africa assesses the main pathways on how the crisis is likely to unfold and what this means for foreign investments and key sectors.
Facing the most significant outbreak of unrest in almost a decade, the Algerian government is under pressure to part ways with its long-standing president. In light of the enduring state of political paralysis and with no credible opposition as an alternative, we assess the possible trajectory of the protest movement and the potential for violent escalation.
Ten days of intensifying protests in Algeria’s urban centres have rattled the country’s elite and thwarted carefully calibrated political transition plans. Although the protests remain unorganised and leaderless, there are several indicators that might lead to escalation ahead of and following the April elections.
The misreporting of economic data and indicators is becoming increasingly apparent across some African countries. EXX Africa assesses the political motivations involved in the manipulation of economic statistics and the likely repercussions for investors and nascent continental trade agreements.
On 20 February, Tanzania’s National Bureau of Statistics rebased the country’s economy in order to recalculate growth in gross domestic product (GDP) over the past few years. The rebasing practice is commonplace and many African countries have rebased their economies over the past few years. Most notably, Nigeria overtook South Africa as Africa’s largest economy after a rebasing calculation in 2014 that almost doubled its GDP to more than USD 500 billion. The rebasing of Ghana’s economy last year meant that economy expanded by 24.6 percent in 2018.
However, the timing of rebasing economies is often politically motivated. In Tanzania’s case, the GDP rebasing shows a 3.8 percent expansion of the economy in the year that President John Magufuli came to power, even though there are signs that the economy has slowed since he was elected. Magufuli will seek re-election in 2020 based on a campaign pledge to broaden Tanzania’s economic growth through state-led interventionist policies.
In Zimbabwe, the statistics agency rebased some of its economic statistics last October in an unexpected move that the government said increased the nominal size of its struggling economy by more than 40 percent in 2018, which seems highly unrealistic given the country’s ongoing economic crisis. In neighbouring Zambia, the finance minister is planning to rebase the country’s GDP in 2019, which should see a sudden spike in economic growth this year, even though the economy is mired in debt and heavily impacted by falling export values.
Misreporting of national statistics
It is obvious, that the rebasing of a country’s GDP can be manipulated in order to serve political means, particularly to boost an incumbent in an election year or to deny an economic slowdown. Moreover, there have been numerous recent instances in which governments have failed to properly disclose publicly-guaranteed loans or have manufactured economic statistics, such as inflation, public debt, and GDP numbers.
This leads to a broader argument that the misreporting of statistics is commonplace in many African countries. In 2014, the Centre for Global Development (CGD) argued in a report that the misrepresentation of national statistics does not occur merely by accident or due to a lack of analytical capacity – at least not always – but rather that systematic biases in administrative data systems stem from the incentives of data producers to overstate development progress.
The CGD report argued that there are significant inaccuracies in the data being published by national and international agencies. These inaccuracies appear to be due in part to perverse incentives created by connecting data to financial incentives without checks and balances, and to competing priorities and differential funding associated with donor support. These inaccuracies, perverse incentives, and lack of functional independence mean that public and private investment decisions based on poor data can be deeply flawed, with major implications for well-being and public expenditure efficiency.
COUNTRY CASE STUDIES
In this report, EXX Africa assesses a number of African countries where there are strong indications or past precedents of manipulation of economic and financial statistics. Our case studies vary from suspected manipulation of economic growth and inflation numbers to suit political ends, to a lack of disclosure of publicly guaranteed loans. These case studies do not provide a definitive list of countries that have misreported on indicators, but do illustrate a broader problem across African economies that is likely to have a major impact on foreign investors’ risk exposure and the future of hallmark African trade agreements.
TANZANIA – EXAGERATING GROWTH NUMBERS
Optimistic central bank forecasts show that Tanzania’s economy is picking up steam again. The rebasing of GDP also ‘magically’ increases the size of the country’s economy since current President Magufuli came to power. However, falling foreign direct investment, partial donor suspensions, and a tarnished investment reputation, as well as an unfolding scandal into massive public accounting discrepancies, paint a different picture.
Tanzania’s central bank projects that the country’s real GDP would grow by 7.2 percent in 2018 and 7.3 percent in 2019, supported by public investment, particularly the implementation of mega infrastructure projects. The economy has been growing at around 7 percent annually for the past decade, but slowed to 6.6 percent in 2017.
However, Tanzania has been struggling to secure financing to fund its Five-Year Development Plan. Local sources report that a lack of public spending and private sector concerns over policy uncertainty are actually curtailing growth, rather than boosting the economy. Investor confidence has collapsed, driven by the government’s disputes with investors. As a result, foreign investment has dropped by more than 30% since 2015 when President Magufuli was elected.
Moreover, subdued government revenue collection and delays in securing financing for projects have held back development spending and hurt economic growth. A sharp fall in lending to the private sector, prompted by high non-performing loans, point to a continued slowdown in growth. Additionally, the institutions of the Tanzanian state are weakening and increasingly exposing public revenue to embezzlement and corruption. Tanzania’s public finances are in poor shape and efforts to ensure effective financial oversight face mounting obstacles.
Our recent analysis and local intelligence contradicts the Tanzanian central bank’s forecast. Last year, the government imposed criminal sentences for organisations and individuals that contradicted Tanzania’s official statistics. We laid out the arguments contradicting Tanzania’s official forecasts in a recent briefing (See SPECIAL REPORT: IS TANZANIA MANIPULATING ITS ECONOMIC GROWTH FIGURES?).
ZAMBIA – LACK OF DEBT DISCLOSURE
The budget deficit and pace of debt-accumulation are more likely to be higher than previously forecast by the Zambian government. This follows a contentious revision of the 2017 fiscal deficit by the Zambian government to factor in capital expenditures that had not been properly recorded in the previous years’ financial statements. The IMF remains the foremost remedy for the ailing Zambian economy. Anchorage from the lender of last resort and the prospect of a restoration of macro-economic fundamentals should aid in narrowing the trust deficit, plugging the funding shortfall, and unlocking the desperately needed investment inflows.
The elevated debt has also placed interest payments under scrutiny, with concerns that they may tend towards 27 percent of revenue in 2019. Disconcertingly, with the local kwacha currency rapidly ceding to the USD and the outlook on the mainstay copper industry appearing highly speculative, there is the feeling that the worst is yet to come for the externally vulnerable market. Indeed, further bullishness from the US Federal Reserve Bank or tariffs on the commodity could see the Kwacha depreciate more, revenue streams dry-up, and foreign short-term payment requirements tread further into default territory as portended by recent ratings downgrades.
Beyond the arithmetic, the downgrades, and belated disclosure of the capital expenditure also call into question Zambia’s transparency amid ongoing suspicions that the country is withholding the disclosure of its true financial position. EXX Africa has taken a strong position on Zambia’s debt disclosure since early 2018, which conflicts with official government accounts.
Unofficial accounts say that total external and domestic debt stands at USD19 billion, accounting for over 90 percent of GDP. Since early 2018, Zambia has signed more than USD1 billion in new loans, indicating that total debt could now be nearing 100 percent of GDP. External debt could be as high as USD15.6 billion, while local debt seems almost incalculable given lack of clarity in lending by state-owned entities from local banks. The argument over debt calculations centres on whether undisbursed contracted loans (mostly Chinese project finance) should be counted (See ZAMBIA: AUTHORITARIANISM AND ECONOMIC NATIONALISM GAIN FURTHER GROUND).
SUDAN – DENYING AN ECONOMIC CRISIS
The Sudanese economy is showing further deterioration as anti-government protests continue. The Sudanese pound has fallen to a record low on the black market, selling for 70 Sudanese pounds for cash transactions in recent weeks, as the gap with the official rate of 47.5 pounds continued to widen. The price of the dollar for cheque transactions stood at 83 pounds. Due to the lack of liquidity in the banks, US dollar carries two prices on the black market. The purchase price through checks is usually higher than the cash price.
The sudden depreciation over the past few weeks has been triggered by cash shortages following a run on the banks, as depositors fear the protests are gaining momentum since the opposition’s stated intent to unite against the embattled government. The Sudanese central bank sharply devalued the currency in early October to 47.5 pounds from 29 pounds to the dollar, and established a new system under which a group of banks and money changers set a daily rate. However, the official rate has barely moved, while the black market rate continues to depreciate against major currencies.
The economic crisis is being denied by the government, which recently released figures claiming that inflation was actually slowing. On 10 February, the state statistics agency said that Sudan’s inflation dropped to 43.45 percent in January year-on-year, from 72.94 percent in December led by slowing prices of food, beverages, and transport. Such figures have been widely ridiculed by both Sudanese and international economists as state propaganda.
The underlying economic and financial weaknesses remain in place and indicators such as cash shortages and currency depreciation suggest rampant inflation. A more likely forecast for January inflation would be around 85 percent, suggesting that Sudanese authorities are manipulating the statistical reports.
The most recent International Monetary Fund (IMF) report indicated that Sudan’s gross international reserves remained very low in 2017 at just USD 1.1 billion, equating to 1¾ months of import cover. Local sources report that reserves have fallen to a new low over the past three months and are fast depleting, posing sever risk of non-payment and default on loans. In EXX Africa’s most recent analysis, we considered that Sudan is firmly in debt distress and poses highest risk of debt unsustainability (See SUDAN: PROSPECT OF A ‘SUDANESE SPRING’ LOOMS AS OPPOSITION UNITES).
REPUBLIC OF CONGO – PLAYING HIDE AND SEEK WITH THE IMF
A prevailing economic crisis in the Republic of Congo – manifest in the country’s debt accounting for 110 percent of its GDP – is increasing concerns regarding the country’s short-to-medium trajectory and President Sassou Nguesso’s longevity in implementing the necessary reforms to escape the malaise.
President Sassou Nguesso says his government is negotiating “on a basis of trust” with the IMF on the country’s financial problems. However, in 2017 the IMF accused Congo of having hidden part of its debt from the organisation by claiming it was 77 percent of GDP. According to the IMF’s own calculation, the ratio is 117 percent. Last year, French media claimed that the Congolese government had skirted requirements of the IMF through a financial contrivance created by French oil giant Total.
The IMF insists that the Congolese government first needs to restructure its USD 9.14 billion in debt, which at 117 percent of GDP the Fund deems unsustainable. The permitted debt threshold in the regional Communauté Économique et Monétaire de l’Afrique Centrale (CEMAC) organisation is 70 percent. Congo is seeking to restructure its debt with commodities trading houses after borrowing USD 2 billion from merchants. However, the bulk of its external debt is owed to Chinese entities.
Without regaining access to international financial institutions and markets, Congo faces an imminent cash-flow crisis. As it is, the government has had to resort to loans from China and short-term advances from its central bank. Rescheduling Congo’s debt will be extremely difficult because of the opacity and complexity of many of its deals, such as loans-for-oil with China. France and the US seem unwilling to deliver a bail-out, which increases the probability of a regional currency devaluation. The IMF seems adamant to avoid such a regional currency devaluation.
Foreign, especially French, companies also resist a devaluation as the pegged exchange rate has assured low inflation and a French guarantee of fixed-rate convertibility to the euro. When France devalued the CFA franc by 50 percent in 1994, the result was high inflation and outbreaks of popular unrest. Therefore, all CEMAC members are opposed to resorting to devaluation. However, France will be unwilling to lend money directly to distressed and unreformed economies such as Republic of Congo. This means that a currency devaluation may become the only option left to mitigate the debt crisis, unless the IMF intervenes
MOZAMBIQUE – THE ‘HIDDEN’ LOANS SAGA CONTINUES
In early January, Mozambique’s attorney general indicted 18 nationals for their involvement in fraud involving USD 2 billion in loans to state-owned companies. The indictment includes ‘charges of abuse of power, abuse of trust, swindling and money laundering.’ The country’s Parliament and attorney general’s sudden action demonstrate growing panic inside the Mozambique government and renewed pressure to deal with the three-year old scandal that prompted the IMF and foreign donors to cut off credit support in 2016, thus triggering a currency collapse and a debt crisis from which the country is still trying to recover.
Former Mozambique finance minister Manuel Chang was among those indicted. Chang, who denies wrongdoing, has been detained in neighbouring South Africa since 29 December in a case brought by US prosecutors related to the fraudulent loans. Four days after Chang’s arrest, three former Credit Suisse bankers – Andrew Pearse, Surjan Singh, and Deletina Subeva – were detained in London. A fifth accused, Jean Boustani was arrested in the US. Boustani is alleged to have negotiated a round of bribe and kickback payments by his company shipbuilder Privinvest in order to ensure Mozambique government approval for projects to develop a coastal protection system for Mozambique’s 2,470 km coastline.
One of the projects was contracted by Mozambican state-owned company ProIndicus, which solicited USD 622 million in loans from Credit Suisse and Russian state-owned bank VTB Capital. Another project, to build a fleet of tuna fishing vessels, was housed under state-owned company Ematum, which gained USD 850 million in financing from Credit Suisse and VTB Capital. A third project involving Privinvest, nominally to build a shipyard, provide additional naval vessels, and upgrade two existing facilities to service Proindicus and Ematum vessels, fell under a third state-owned company, Mozambique Asset Management (MAM), which secured loans worth USD 500 million.
All loans were secured by Mozambique government guarantees and began to default on repayments around 2017. According to the US indictment, large bribes and fraudulent payments were made to the various accused bankers and Mozambique government officials. All accused have so far denied the allegations.
However, Mozambique’s Attorney-General has said she will seek to have those charged in the US and elsewhere face justice in Mozambique. Further arrests are expected as a number of names in the US indictment have not been disclosed. EXX Africa was one of the first risk advisories in early 2016 to flag substantial undisclosed debts, which was eventually confirmed by the Mozambique government, subsequently prompting the IMF and foreign donors to cut off support, triggering a currency collapse, and a default on sovereign debt.
Mozambique’s government is currently seeking to restructure the loans and in November struck an initial agreement with the bulk of its creditors to restructure a USD 726.5 million Eurobond. The agreement includes extending maturities and sharing future revenue from offshore gas projects. The agreement confirms EXX Africa’s longstanding forecast that creditors would not seek punitive measures against Mozambique, but would rather restructure debts while leveraging gas revenues as collateral. The agreement is the first in a set of steps that will be required to restore Mozambique’s relations with creditors and international financial institutions, especially the IMF.
We recently also assessed the threat of the Mozambique debts scandal spilling over into Angola, which we continue to monitor (See SPECIAL FEATURE: FALL-OUT OVER MOZAMBIQUE DEBT SCANDAL RISKS SPILL-OVER INTO ANGOLA).
Our analysis and economic forecasts show noticeable discrepancies between national official statistics and forecasts made by international agencies. The manipulation of economic data and the lack of full disclosure of publicly guaranteed loans will weigh on many African countries economic outlook this year and in the longer term.
In January, the IMF downgraded its 2019 sub-Saharan Africa growth projections from 3.8 percent to 3.5 percent. The World Bank is also rather subdued in its assessments, projecting that the sub-Saharan region will grow by no more than 3.4 percent this year. These projections are pushed downward by the muted economic recoveries in some of the continent’s largest economies, including Nigeria and South Africa. Meanwhile, the African Development Bank (AfDB) projects 4 percent growth across Africa, boosted by 4.4 percent growth in the North African region.
The highest growth levels will continue to be located in Anglophone East African countries, alongside the record growth tempo in Ethiopian. The fast developing Francophone West African countries, as well as Ghana, will provide a counter-balance on the other side of the continent, despite Nigeria’s more subdued growth rates. A post-election economic revamp could lift South Africa’s economy with beneficial effects for neighbouring states. In the meantime, the southern African region is expected to remain the continent’s worst performing economy.
A modest recovery in central Africa is unlikely to be sustained and is underpinned by IMF lending facilities to countries like Cameroon and Chad. The North African region is facing a decline as growth slows in Tunisia and remains stagnant in Algeria. Out of Africa’s five biggest economies, only Egypt will see growth rates of over 5 percent, again boosted by sizable loans from the IMF, World Bank and, Gulf states.
Debt sustainability will remain a key concern in Africa in 2019. The IMF warned last year that Africa’s debt-refinancing risks could be substantial over the next two years. The World Bank forecasts at least USD 5 billion in international debt redemptions in sub-Saharan economies this year and over USD 8 billion next year. These figures do not include domestic debt or substantial interest payments on both external and domestic debt.
Proper disclosure of debts and accurate and accountable reporting of economic and financial indicators will be crucial in determining African countries’ balance of payments and their longer term economic outlook. Investors will face higher risks in countries that are suspected of borrowing recklessly or manipulating economic indicators. Moreover, large trade deals, such as the nascent African Continental Free Trade Agreement (ACFTA), could be spoiled if all participating countries do not accurately and transparently disclose all their financial obligations and economic growth numbers.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
Political rivalries have been put on hold until after the April elections, while fresh welfare spending should curb outbreaks of unrest. Yet the post-elections economic outlook remains marred by falling foreign exchange reserves and poor repayment schedules as debt balloons.
Ahead of the expected ratification of the world’s largest free trade agreement, we assess the divergent economic trajectory on the African continent, as well as persistent concerns over debt sustainability and political risk in some countries.
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