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.
Investor optimism in African mining is gradually recovering as indicated by companies’ growing exploration budgets. However, some of the continent’s most important mining countries are frustrating investments through arbitrary changes to taxation regimes and imposing politically motivated fines.
The annual Mining Indaba conference in Cape Town, South Africa, takes place this year with fresh optimism after a four year slump. As interest in base metals begins to rebound and clean technologies boost demand for niche battery ingredients, mining exploration budgets are again increasing.
A recent report by S&P Global Market Intelligence found that mining companies spent USD 8.4 billion last year to explore new metal deposits. This marks a 15 percent rise on exploration spending in 2016. The report also forecast that exploration spending, excluding iron ore, could increase again by 20 percent in the next year. Mining company restructuring, consolidation, and high-profile mergers & acquisitions have also renewed interest in the sector. This bodes well for mining, which dominates foreign exchange earnings, tax earnings, employment, and GDP in many African countries.
However, African mining remains exposed to various significant challenges that will determine the sector’s operating risk climate in 2019. In this compact report, EXX Africa identifies the top risks facing the mining sector in Africa this year and puts the spotlight on some of the countries where political and security risks remain a substantial obstacle to investment.
EXX AFRICA RISK MAP FOR TOP TEN AFRICAN MINING COUNTRIES
EXX Africa has developed a unique risk scoring system for 54 African countries to compare and contrast the business operating climates across the continent. The country risk numeration is a crucial aspect of our analysis and forecasting methodology.
The below Risk Map identifies the top ten African mining countries in terms of mineral value and their respective risk outlook.
KEY POLITICAL AND SECURITY RISKS IN 2019
EXX Africa has identified the top risks facing the African mining sector in 2019. Almost all of the continent’s mining countries are affected by some form of political risk, which is further explained in the table below. The risk of taxation changes and contract frustration are by far the most prominent threats facing African mining, as outlined in the below Country Risk Spotlight section.
COUNTRY RISK SPOTLIGHT
DEMOCRATIC REPUBLIC OF CONGO
PRESIDENT FELIX TSHISEKEDI
There will be great pressure from mining companies on newly inaugurated President Félix Tshisekedi to amend the changes to the mining code that were implemented by former president Joseph Kabila. Indeed, a suspected power-sharing agreement between Kabila and Tshisekedi may dilute some of the former administration’s controversial policies, such as recent revisions in the mining code. The new code has increased royalties on cobalt – for which the DRC accounts for as much as 60 percent of the global supply – from 2 percent to 10 percent. Another significant amendment is the imposition of a 50 percent tax on windfall profits – defined as income that is realised when commodity prices increase by more than 25 percent of the figure denoted in a mining project’s bankable feasibility study. The mining companies, which are united in the ‘G7’ lobby group, are likely to apply new pressure on the government to ensure a review of the mining code revisions. We assess that mining companies’ concerns will be treated on a ‘case-by-case basis’.
See Country Outlook: Democratic Republic of Congo
ZAMBIA
NCHANGA MINE IN ZAMBIA
Zambia’s new tax regime is causing smelters to close and motivating mining companies to lay off workers and scrap investment plans. Worse is to come as a harmful new sales tax is due to take effect, while massive VAT rebate arrears are arbitrarily written off. The new tax code increases the country’s sliding scale for royalties of 4 to 6 percent by 1.5 percentage points, introduces a fourth tier rate at 10 percent when the copper price exceeds USD 7,500 per tonne, and makes royalties on minerals non-deductible for tax purposes. The response from the country’s mining sector has been highly critical. Mining companies complain that the higher mineral royalties will cease to be deductible from corporate income tax, thus hurting profitability. The impact of the new sales tax in April will be even more damaging for the mining sector. Industry group, the Chamber of Mines, has forecast that copper output will be flat this year and will start declining from 2020 as a result of the tax increases.
See Country Outlook: Zambia
TANZANIA
PRESIDENT JOHN MAGUFULI
President John Magufuli’s belligerent stance against foreign-owned firms operating in the country has been prominently manifested in the important mining sector. Most notably, Tanzania’s foremost gold mining entity, Acacia Mining, has been accused of evading tax over the past two decades. Consequently, Magufuli’s administration is seeking an estimated USD 190 billion in reparations from Acacia coffers, which have already been reduced following Tanzania’s imposition of an export ban of mineral concentrates – a key revenue generating activity for the mining firm. To put that figure into perspective, according to a report by Quartz, the amount represents approximately 40 times Acacia’s total revenue for 2016, nearly two centuries worth of revenue, and is roughly four times the size of Tanzania’s GDP for 2016. Precedent suggests that the legal measures may be an extension of the administration’s antagonism to foreign-owned firms, which is seemingly based on ideological leanings and a bid to extract the greatest possible financial concessions. Already, the erratic policy environment and growing authoritarianism have seen investors lose favour with Tanzania.
See Country Outlook: Tanzania
SOUTH AFRICA
PRESIDENT CYRIL RAMAPHOSA
Low expenditure on exploration indicates a troubled South African outlook for its mining sector. Central to investor concerns is the ongoing amendment of the mining legislation. The latest 2018 Mining Charter, despite being an improvement on previous versions, still raises considerable fears in relation to the carried interest of communities and employees, as well the distribution of black economic empowerment in specific percentages. The Charter allows mining companies who complied with a 26 percent empowerment stipulation in the previous version to enjoy empowered status even if their empowerment partner has exited their investment in the company. Investors are also concerned by rising costs of mining, as employee costs are rising above inflation. Bulk commodities such as iron ore, coal, manganese, and chrome are performing fairly well. However, precious metals like platinum are struggling. Investors will look to President Cyril Ramaphosa and Mineral Resources Minister Gwede Mantashe to restore some optimism about the future of the South African mining industry at the Mining Indaba.
See Country Outlook: South Africa
For further information contact info@exxafrica.com
In this open access report, EXX Africa assesses the risk of internet shutdowns and online media restrictions in 2019, identifying the countries and operators most at risk of commercial disruption over the coming year.
So far in 2019, there have been internet shutdowns in at least five African countries, most prominently in Zimbabwe, as well as in the Democratic Republic of Congo (DRC), Gabon, Cameroon, and Sudan. The rate of internet shutdowns has steadily increased over the past few years. According to global digital rights group Access Now, there were 21 shutdowns across Africa last year, up from 13 in 2017. Togo, Sierra Leone, Cameroon, Chad, Ethiopia, Uganda, Zambia, and Egypt were among the countries implementing connectivity restrictions over the past two years. Cameroon’s Anglophone regions spent 230 days without internet access between January 2017 and March 2018.
In this open access special report, EXX Africa assesses the circumstances of recent internet shutdowns and identifies the African countries where the risk of outages will be highest over the course of 2019. This report also assesses the commercial and economic impact of internet shutdowns and the technical processes involved in shutting down an entire country’s connectivity.
PRECEDENT AND LEGAL JUSTIFICATION
ECONET WIRELESS SHOP IN HARARE, ZIMBABWE
While the practice of shutting down the internet is nothing new in Africa, the frequency and duration of shutdowns is steadily increasing. During the 2011 Arab Spring, North African governments regularly orchestrated shutdowns of connectivity and social media. Between 2015 and 2016, most instances of internet shutdowns occurred in West and Central Africa, in countries such as Mali, Chad, Gabon, Republic of Congo, and DRC. Since 2017, the practice has become more common in East Africa and southern Africa.
Governments usually implement these shutdowns through order requests sent to Internet Service Providers (ISP) or telecommunications operators, some of which may be government-owned. Shutdowns are easier to achieve in countries with few ISPs, unlike South Africa which has more than a hundred internet providers. The legal basis of such order requests lies in the contracts that ISPs sign with the communication regulator in each country. Usually, the regulator will have the power to order ISPs to restrict access to the internet or block social media apps at the regulator’s request.
The implementation of such order requests may create a total internet blackout (as most recently in Zimbabwe), or a restriction of access to certain websites, specifically social media (as in Cameroon), or the throttling of bandwidth (as in Sudan). Sometimes, domain name servers can be manipulated to send traffic away from intended destinations and toward servers controlled by the government. African governments have depended on tested practices in China to censor the internet. China is heavily involved in Africa’s internet, with state-backed firms like Huawei and ZTE building internet backbones and other infrastructure for many African countries.
According to Access Now, the top three reasons given for internet shutdowns are public safety, stopping the spreading of illegal content, and national security. However, the legal justification for internet shutdowns is often vague or non-existent. Some governments have in the past denied issuing order requests to ISPs and have instead blamed technical problems, although ISPs are becoming more transparent in announcing government-ordered shutdowns. African governments increasingly link their orders to the necessity to protect the public order, particularly during election cycles or bouts of civil or military unrest.
While internet shutdowns may often violate domestic law, the international legal framework remains vague and relies on assurances protecting the right to freedom of expression or UN Guiding principles on Business and Human Rights. In 2016, the United Nations Human Rights Council released a non-binding resolution condemning intentional disruption of internet access by governments. The resolution reaffirmed that ‘the same rights people have offline must also be protected online.’ However, the non-binding nature of the UN resolution, as well as entrenched internet censorship by countries such as China, has hampered attempts to implement broader prevention of internet shutdowns by governments.
In the absence of a clear framework governing the right to internet access, African governments will maintain their responsibility to protect the public order or to curb ‘fake news’. The below case studies are aimed at finding patterns on internet shutdowns in Africa and to assess the commercial impact of shutdowns.
‘TOTAL’ INTERNET SHUTDOWN IN ZIMBABWE
RIOT POLICE IN HARARE
On 21 January, the High Court said Zimbabwe’s government exceeded its mandate in ordering an internet blackout during recent civilian protests and ordered mobile operators to immediately and unconditionally resume full services. Zimbabwe’s biggest mobile phone operator Econet Wireless subsequently restored all internet and social media services. The sporadic internet blackout was ordered by Security Minister Owen Ncube on 15 January following the start of often violent protests against high fuel prices (See ZIMBABWE: POLITICAL DIVISIONS TAKE HOSTAGE AN ALREADY DISTRESSED ECONOMY).
Many people were left without access to social media platforms and email amid accusations that the government wanted to prevent images of its heavy-handedness from being broadcast around the world. Zimbabwe’s millions-strong diaspora raised the attention of the world to the internet blackout through various social media campaigns that were picked up by traditional media and triggered criticism from foreign governments, such as the UK.
While some internet users sought out virtual private networks (VPN) to bypass the controls, Zimbabwe’s shutdown did cut off crucial access to electronic bank deposits. The cash-strapped government uses such transfers to pay public sector workers, such as teachers, who were already on strike. Moreover, electronic remittances from the large Zimbabwean diaspora were also affected, further exacerbating Zimbabwe’s economic and financial crisis.
Some estimates assess that the shutdown will cost the country USD 5.7 million per day in direct economic costs. However, the widespread international condemnation of the Zimbabwean internet shutdown and the judicial ruling that the service order to ISPs was illegal does mitigate further risk of internet restrictions in 2019.
See Country Outlook: Zimbabwe
SOCIAL MEDIA RESTRICTIONS IN DRC ELECTION CYCLE
RIOT POLICE IN KINSHASA
The government of DRC President Joseph Kabila shut down internet and text messaging services ahead of and following disputed elections in December, claiming to preserve public order after ‘fictitious results’ were circulated on social media. The government warned of ‘chaos’ in case unofficial results were published on the internet or social media. Diplomats from the US, European Union, Canada, and Switzerland criticised the internet shutdown. The shutdown heightened fears of electoral fraud in presidential and legislative elections that were already marred by delays and violence (See DRC: TENSE PROTRACTED ELECTORAL CYCLE FINALLY COMES TO CONCLUSION).
Data leaked from the state’s electoral commission unambiguously contradicted the official results, triggering a dispute over the election results. The leaked data covers over 80 percent of the votes cast in the 30 December general election and closely matches voting data gathered independently by a parallel vote tabulation held by the Catholic bishops’ organisation, as well as three recent polls.
Internet provider Global and telecom operator Vodacom said that they had cut web access on government orders, although some NGOs claim that interruption to connectivity was being carried out at the discretion of commercial operators. Congolese authorities specifically targeted social media platforms like WhatsApp, Facebook, YouTube, and Skype in order to hamper communication among protesters, while allowing businesses and banks to operate as usual. Nevertheless, disruption to mobile communications was widespread. The economic cost of a shutdown in DRC is estimated at USD3 million per day. The DRC’s restrictions on internet connectivity were similar to those that occurred in recent elections in Mali and Equatorial Guinea, as well as those that followed an attempted military coup in Gabon in early January.
See Country Outlook: DRC
TANZANIA CRACKS DOWN ON ONLINE MEDIA
TANZANIA PRESIDENT JOHN MAGUFULI
Some African countries have extended authoritarian practices to the online media sector by amending local legal frameworks. Tanzania’s government is a relevant case study since its implementation of the Electronic and Postal Communications Online Content Regulations Act in March 2018. The new law facilitates the government’s ongoing clamp-down on blogs, online content providers, and users alike with stringent regulatory requirements. These include a USD 924 licensing fee, the disclosure of ‘strategic’ information and the auditing of content by the Tanzania Communications Regulatory Authority (TCRA), failing which transgressors may be subject to severe penalties.
After dealing with the online media sphere, the Tanzanian government has turned its attention to broadcast media, especially foreign-owned companies. Last year, the TCRA threatened to suspend the operating license for the Multichoice and Simbanet television companies. This action follows a string of contentious media-related regulatory measures, beginning with the Media Services Bill and Cybercrime Act. The Act criminalises ‘defamatory’ remarks and content that is deemed ‘seditious’ while authorising greater government oversight. This, in an apparent bid to regulate publicly accessible information so as to manage the narrative on a problematic political and economic agenda.
In targeting such entities with rigid operating requirements and colouring its persecution with nationalist rhetoric such as the ‘my country first initiative’, the government of President John Magufuli stands to gain both politically and economically. This, through increased revenue, royalties and penal payments as well as an appreciation in political stock in a country where economic nationalistic sentiments are still prevalent.
Various other African governments are implementing strict regulations on online media, which may set the tone for future crackdowns on internet connectivity and mobile telecommunications. Last year, Uganda’s government passed a new tax on social media, under which users must pay USD 0.05 a day to use popular platforms like Twitter, Facebook, and WhatsApp. Both Tanzania and Uganda’s restrictive cybercrime and media laws were inspired by similar measures imposed in China.
Other than Tanzania and Uganda, countries where such authoritarian practices are most likely to be implemented over 2019 include Zambia, Zimbabwe, Togo, Senegal, DRC, Guinea, Algeria, and Egypt.
See Country Outlook: Tanzania
RISK OUTLOOK FOR INTERNET SHUTDOWNS IN AFRICA IN 2019
In 2019, a number of countries are likely to impose full or partial internet shutdowns that will pose severe risk of contract frustration to operators, as well as broad economic disruption to investors. Some of these countries will hold highly contested elections this year and have already been identified in EXX Africa’s recent Africa Elections Special Report. More than half of Africa’s 54 countries will hold some form of election next year (See SPECIAL REPORT: TEN KEY AFRICAN ELECTIONS IN 2019).
Other countries, like Tanzania and Uganda, are implementing restrictive cybercrime and media laws to crack down on dissent and protests. EXX Africa has selected the ten countries where the probability of internet shutdowns or other forms of connectivity disruption is highest and where the risk of commercial disruption is most severe.
INSIGHT
A 2016 study by the Brookings Institution revealed that shutdowns drained USD 2.4 billion from the global economy between 2015 and 2016. A 2017 report by the Collaboration on International ICT Policy for East and Southern Africa (CIPESA), estimated that sub-Saharan Africa lost up to USD 237 million to internet shutdowns since 2015. Given the rise in internet shutdowns and other forms of connectivity restrictions since then, particularly in Asia and Africa, this number is likely to be far higher in 2019.
The estimated cost of daily economic disruption varies from country to country: Ethiopia’s daily cost is USD 3.5 million, while Cameroon’s shutdown in Anglophone regions results in daily economic losses of USD 1.67 million. Since the shutdowns have become increasingly sophisticated, with governments targeting specific regions or communities, the broader economic costs may be mitigated. In Ethiopia 36 days of national and regional internet shutdowns between 2015 and 2017 cost the country USD 123 million, while Cameroon’s 93-day shutdown in Anglophone regions in 2017 made USD 38 million in total economic losses.
However, the cost would be different for economies with more developed media and IT sectors – a total shutdown in Kenya could potentially cost USD 6.3 million a day (CIPESA). As indicated in our 2019 risk ratings above, the threat of internet shutdowns in large and developed economies such as Kenya or Senegal, is rising. Shutdowns are no longer restricted to small and less developed economies, like those of Chad, Burundi, or DRC.
Activist groups Internet Society and NetBlocks have created a data-driven online tool, The Cost of Shutdown Tool (COST), to better measure the economic cost of internet shutdowns. Greater awareness of shutdowns in Africa, driven by media, governments, business, and NGOs, is expected to facilitate improved assessments of the economic costs, as well as enhanced risk mitigation strategies (like VPNs) to avoid commercial disruption in future.
African markets that are opening up to structural reform and painful liberalisation will offer a more favourable investment climate over the coming year, while governments advocating state interventionism and currency manipulation will pose higher risk to foreign investors in 2019.
Every year, EXX Africa selects five countries as its favourite destinations for investment based on commercial interest among our clients and perceptible improvement in the country risk ratings. This selection is based on our local source intelligence, proprietary forecasting methodology, and quantitative risk scoring calculations. The selection showcases some of our key risk forecasts for the year ahead and flags potential new investment and trade opportunities.
Our forecasts take into account drivers of political, security, and economic risk, as well as other key trends that are likely to determine a country’s one-year risk trajectory. We do not base our forecasts on short-term impact incidents such as a failed coup in Gabon, riots in Zimbabwe, or a terrorist attack in Kenya. Rather, we assess the longer term socio-economic and political trends that drive such incidents in the first place.
We also identify those countries where we expect a significant deterioration in the business climate based on political, security, and economic risk drivers. Some countries picked in this year’s report match our selection last year, although there will be some inevitable surprises in the new line-up for EXX Africa winners and losers in 2019.
We wish you a prosperous New Year and trust you may continue to value our Africa risk intelligence.
2019 TOP FIVE INVESTMENT COUNTRIES
It may or may not be surprising that Africa’s largest economies, Nigeria, South Africa, and Egypt, do not feature in our Top Five selection this year. These African economic giants were featured in previous years and all three countries have indeed made significant headway since the recessions of 2016. But hotly contested elections in South Africa and Nigeria have put policy-making on hold. Meanwhile Egypt is already reaping the benefits of relative political stability and steady economic recovery, despite re-emerging security threats. Cote d’Ivoire has also dropped out of our selection, as its economy faces new fiscal pressures and shifting political dynamics. Yet, Angola and Ghana remain firmly in our favourites’ list for this year, while we also take two bets on perhaps more ‘risky’ locations.
1) ETHIOPIA
ETHIOPIA COFFEE EXPORTS
Last year, Ethiopia was in our bottom five selection while the country was in the midst of violent ethnic unrest, hard currency shortages, and dwindling economic momentum. This year, the East African nation has shot up the rankings to become our favourite investment destination for 2019. The new administration of Prime Minister Abiy Ahmed has made a symbolic break from perceived past repression, graft, and public mismanagement. The ongoing political transition marks a shift in influence dynamics within powerful state-controlled holding companies and industrial-military conglomerates that have dominated the Ethiopian economy for over 30 years.
However, the success of the Ethiopian political transition will depend on the new government’s ability to seek compromise between established business and security interests and mounting calls for broad political and economic reform. Ongoing hard currency shortages, high inflation, and below target exports will remain key concerns at a time of continued fiscal expansion and dwindling economic momentum. The government seeks private sector participation and foreign investment to stimulate the economy, opening up significant new opportunities. World Bank growth forecasts indicate stabilisation in the next two years just below the 10 percent mark, which keeps Ethiopia among the globe’s top performers. While the business environment remains challenging, the reform-orientated policy agenda suggests potential improvements are likely. The country is also likely to use its expanding goodwill to acquire condition-free multilateral funding to replace expiring Chinese credit lines.
2) ANGOLA
OIL PRODUCTION OFFSHORE ANGOLA
As our favourite investment country of 2018, Angola remains in the Top Five selection this year. Angola’s economy will recover in 2019 on the prospect of rising oil production levels and IMF credit support. The IMF’s recent loan approval will add further legitimacy to the economic reformist trajectory that has been ongoing since President João Lourenço took office in September 2017. With greater observation of macroeconomic fundamentals and policy anchorage, market optimism on an already promising Angolan economy is likely to firm up. An Angolan real economy that is at the early stages of recovery will also benefit from the IMF’s presence via pro-market policies that help facilitate an environment conducive to investment and general expansion. There are immediate opportunities for the Angolan oil and gas sector such as the 2019 bid rounds for onshore and offshore blocks, as concrete steps to reverse the production downward trend.
Yet massive debts at state oil firm Sonangol and the banking sector’s political exposure remain key risks in the medium term. The country’s banks urgently require a round of consolidation to improve asset-quality and foreign-exchange risks. As public debt approaches 70% of gross domestic product, domestic credit is now crucial for state financing. While the new government’s highly popular anti-corruption and economic liberalisation platform is aimed at further diluting the former elite’s political and economic dominance, infrastructure projects will be at heightened risk of cancellation or review.
3) GHANA
THE CITY OF ACCRA
Ghana will be one of the fastest growing economies in Africa in 2019. The country seeks to replace its dwindling foreign aid receipts as it consolidates its status as a lower-middle income economy. The government will seek to replace these sources of financing by improving revenue collection and raising new debt. With the termination of the IMF programme, Ghana will be able to access debt markets more freely to fill this void. Most of the recent growth is driven by increased output from Ghana’s oil fields, rather than from a more diversified base. The objective is seeking economic diversification through broad-based industrialisation, specifically agro-processing and light manufacturing.
However, a major challenge for Ghana remains its high level of indebtedness. With the debt ratio at around 70% of GDP, the government’s prudence with debt management remains key to the country’s economic prospects. The energy sector, in particular, is heavily burdened by debt, yet long-term energy sustainability is needed to meet growing demand and to facilitate economic growth. Nonetheless, given the apparent recovery and ongoing political stability, investor sentiments are unlikely to change. The absence of key electoral cycles for at least another two years also suggests that fiscal imprudence is unlikely during this period. That said, failure to narrow the deficit and public wage bill discipline, in addition to possible debt accumulation by an expansion-oriented Ghana, could stoke investor anxiety.
4) MAURITANIA
CITY OF NOUAKCHOTT, MAURITANIA
Our little surprise for this year’s Top Five – Mauritania is set to emerge as a new economic player in the West African region. Mauritania’s economy is making a strong performance on the back of investments in the mining sector. Iron ore exports and fishing dominate export revenue and the economy is set to grow over the next few years on the back of investments in the mining sector and important gas discoveries. The development of natural gas projects also augurs longer-term sustained growth. Rising export revenues and tax collections are improving the fiscal outlook, despite lingering concerns over debt servicing in the longer term. The current account is strengthening and foreign exchange levels are comfortable as iron ore prices rise. Initial concerns over foreign exchange speculation and inflation have mostly subsided. The IMF predicts a real GDP growth at 8.0%, 8.4% and 7.2%, respectively for 2018 to 2020, along with sizable policy adjustment and favourable commodity price developments.
The looming economic bonanza may still be spoiled by political instability. The upcoming 2019 elections are unlikely to be free and fair, while a heavy-handed security deployment is expected against opposition and activist demonstrations. While the political momentum is shifting in favour of the Islamists and Haratin ethnic group, the military is expected to act to preserve the status quo. As such, underlying political risks may emerge to frustrate contracts signed in the booming extractive sectors.
See Mauritania Country Outlook
5) MOZAMBIQUE
LNG EXPLORATION OFFSHORE MOZAMBIQUE
Perhaps we are calling it too early, but Mozambique has made significant headway since its economic and financial collapse in 2016. President Filipe Nyusi will have to meet three key objectives before elections due at the end of the year in order to turn around the country’s fortunes. Firstly, he will need to implement a peace deal with the armed opposition RENAMO to avoid another outbreak of violence following the vote. Secondly, his government will need to improve its intelligence capability and security response to an intensifying Islamist insurgency in the gas-rich North. Even though militants are targeting rural and remote civilian and security targets in Cabo Delgado province, the prospect of disruption to the nascent natural gas sector is undermining development plans.
Eventual gas revenues will be crucial for the government’s third objective, i.e. ensuring a lasting resolution of the undisclosed debts scandal. Momentum on natural gas development is increasingly motivating debt restructuring and donor reengagement. Mozambique is seeking to extend maturities and share future revenue from offshore gas projects to provide some relief for the budget. A proposed deal with creditors is being motivated by a stronger desire by the Mozambican government to reengage with the IMF, because the state needs billions of dollars in loans to fund its own participation in the gas concessions. Meanwhile, the IMF is considering giving Mozambique a shadow programme, which would be a step towards securing financing from the Fund after the freeze in 2016.
See Mozambique Country Outlook
AFRICA’S BIGGEST POTENTIAL LOSERS IN 2019
While we were arguably wrong to include Ethiopia in our Bottom Five country investment selection last year, the investment climate in DRC, Tanzania, and Zambia did significantly deteriorate as we predicted. Indeed, both Tanzania and Zambia retain their least favourable investment rating for 2019, with further deterioration in their political risk climate likely over the next year. Elsewhere, we are particularly concerned that ongoing economic and political crises in Sudan, Zimbabwe, and Gabon may be unsustainable, thus driving heightened risk of political instability, insecurity, and economic collapse. Other countries on our risk indicator watch list for this year include cash-strapped Central African economies and various southern African states that are less likely to benefit from a broader economic recovery elsewhere on the continent.
1) SUDAN
PROTESTS IN SUDAN
Since mid-December, violent protests have erupted in Sudanese cities in scenes of unrest that resemble the 2011 ‘Arab Spring’ regional uprisings. What started as an agitation against dire socio-economic conditions, which is attributed to maladministration on the part of President Omar al-Bashir and the governing National Congress Party (NCP), activists have since called for the resignation of the government and the election of a transitional authority. However, President al-Bashir remains steadfast in his pursuance of a fifth term in office at elections 2020 despite mounting resistance both from within the NCP and the opposition.
The lead-up to these elections comes at a time of economic and financial crisis. Depreciated oil prices, in addition to a downturn in production at major refineries, have seen government revenues garnered from its mainstay economic activity plummet. Equally, a decrease in oil production and revenues have left the state with a lack of foreign currency to import fuel and basic commodities, leaving few avenues of respite for a government that is facing an increasingly desperate and agitated population. However, Bashir continues to enjoy the endorsement of the powerful National Intelligence and Security Service which is the guarantor of executive power in Sudan. NISS support may provide a lifeline for al-Bashir through 2019, unless the military or NCP drastically shift their support away from the incumbent. In the meantime, investors will face heightened risks of political instability, widespread insecurity, and non-payment on contracts.
2) TANZANIA
PRESIDENT JOHN MAGUFULI
As a result of President John Magufuli’s self-styled ‘economic war’, investor confidence has collapsed driven by the government’s disputes with some of its largest investors. Some aggrieved investors have gone to arbitration to protect their interests under existing contracts. As a result, foreign investment has dropped by more than 30% since 2015 when President Magufuli was elected. Subdued government revenue collection and delays in securing financing for projects have held back development spending and hurt economic growth. Moreover, a sharp fall in lending to the private sector, prompted by high non-performing loans, point to a continued slowdown in growth. Infrastructure projects are likely to be delayed due to subdued government revenue collection and delays in securing financing.
Meanwhile, the president’s allies in the intelligence services are suppressing any form of political opposition to his government’s nationalist policies. President Magufuli has also stacked the key institutions governing the economy with ideologically-aligned loyalists, thus allowing him to stake out his own political turf, separate to the governing party’s interests. All risk indicators are set to deteriorate even further in 2019, as the impact of the new interventionist policies begins to bite. Already a lack of public spending and private sector concerns over policy uncertainty are curtailing growth. The economy will slow in 2019, although Tanzania will still remain one of the fastest growing economies in Africa over the next few years driven by long-term infrastructure commitments.
3) ZAMBIA
ZAMBIA COPPER MINING
As President Edgar Lungu focusses on his power extension ambitions, investors are assured long-term policy continuity. However, his government’s authoritarian slide is being replicated in populist economic policy that is rooted in rigid economic nationalism and protectionism. Political in-fighting and legal battles have distracted the government from making the necessary decisions to stimulate the economy and take steps to resolve the critical debt crisis. The role of the IMF lies at the heart of a political power struggle within the PF party-led government. Many Treasury officials have recognised the urgent need for a lending deal with the IMF, yet their plans have been thwarted by presidential advisers who reject the austerity and unpopular subsidy cuts involved in an IMF deal.
Meanwhile, the concerns over Zambia’s debt remain prominent and are frustrating negotiations with the IMF, as well as other creditors including China. The government has maintained a debt-financed infrastructure expansion programme that seeks to run projects in politically important regions of the country. Many recent road, healthcare, and power projects have been politically motivated to ensure local support for Lungu’s power extension ambitions. Such overspending on infrastructure expansion and other politically motivated budgetary items have also triggered allegations of embezzlement and corruption. In the crucial mining sector, a new tax regime is causing smelters to close and motivating mining companies to lay off workers and scrap investment plans. Worse is to come as a harmful new sales tax is due to take effect, while massive VAT rebate arrears are arbitrarily written off.
4) GABON
PRESIDENT ALI BONGO ONDIMBA
A failed military coup at the start of the year is indicative of broad socio-economic and political frustration with Gabon’s leadership, which has been weakened by the suspected incapacitation of its strongman president. Even though the military intervention on 7 January failed for all its intent and purposes, there remains a heightened risk of military and civil unrest as long as there is no clarity on the condition of President Bongo and the government does not initiate constitutional provisions for the presidential succession. Opposition leaders in particular may seek to capitalise on the government’s perceived weakness by mobilising their supporters back to the streets. Given the unresolved coup motivations, the prospect of military unrest including mutinies and further coup attempts remains likely. However, the probability of a successful coup remains moderate.
Another factor that has put pressure on Gabon’s political stability is the country’s ongoing economic and financial crisis. Gabon’s economy slowed to 2.1% in 2016, from 3.9% in 2015, while public debt soared and the current account deficit swelled to more than 10% of GDP from a surplus just two years earlier. Growth has since rebounded to a forecasted 2 percent-plus in 2018, from near-zero growth as a result of suppressed oil prices in recent years. However, a sustainable economic recovery seems unlikely, despite assistance from the IMF. The lack of clarity over Bongo’s condition and the succession process have cast doubt over the commitment to reform criteria as set out by the IMF bailout programme.
5) ZIMBABWE
RIOTS IN HARARE
After an initial period of optimism over Zimbabwe’s political transition over the past year, investors will again face a notable deterioration in risk indicators in 2019. The aftermath of disputed and tainted elections, Zimbabwe’s massive debt burden, and its severe foreign exchange and monetary crisis remain the major obstacles to unlocking substantive flows of private and foreign government finance. Deadly urban protests in January have unearthed the widening political divisions and systemic economic malaise, which the current administration lacks the political clout to resolve. Another military intervention to remove embattled President Emmerson Mnangagwa is increasingly likely this year.
Despite the confidence-inspiring appointment last year of new Finance Minister Mthuli Ncube, he seems out of his depth in the current cash shortage crisis and he lacks the political clout to implement real structural change to the distressed economy. In response to cash shortages, Ncube has pledged to introduce a new currency within 12 months. Such a move will offer little support for businesses struggling to import raw materials and equipment. While the previously forecast 2.4 percent growth rate by the IMF is not out of reach, it will be difficult to attain amid prevailing low-demand, low-investment and high-debt conditions. Debt is particularly concerning given its escalation to over 70 percent of GDP in 2018 and the difficulty associated with clawing back on the figure.
For further comment on these risk forecasts please contact Insight@exxafrica.com
Despite recent government claims to the contrary, the threat of terrorism in Egypt has not subsided. The withdrawal of security assets from terrorism-embattled regions is providing Islamist militants a chance to recuperate and recalibrate their armed insurgency.
Some of Africa’s largest oil producers are in a much stronger position to deal with price volatility than five years ago. Conversely, many African fuel importers are less likely to reap the economic benefits from lower oil prices in 2019.
Crude oil prices have started 2019 under pressure from rising output and an economic slowdown that could weaken demand. Oil prices fell in 2018 for the first year since 2015. The fourth quarter was marked by severe price volatility. Prices dropped nearly 25 percent in November 2018 alone, the biggest monthly loss in a decade, due to concerns over a possible glut in global supplies.
In terms of supply, record oil production in the world’s largest producers such as the United States, Russia, and Saudi Arabia has helped plummet oil prices to their lowest levels since October 2017. Demand-wise, a stronger US dollar has made crude more expensive for global importers, weighing on usage. And concerns over global economic growth and therefore oil demand have created a bear market.
How much will oil cost in 2019?
The key question is whether the oil price will continue to fall in 2019. Just a couple of months ago, major oil trading houses were predicting the return of USD 100 crude, yet oil prices are now standing at half that level. Oil prices began 2019 at USD 54 per barrel for Brent crude and USD 45 for U.S. West Texas Intermediate crude oil futures. However, prices are still expected to rise as OPEC-led supply cuts come into effect in January, while US supply growth is expected to slow.
Nevertheless, an average oil price below USD 60 in 2019 now seems a more realistic scenario than a few months ago. Even though most major investment banks have upgraded their forecasts above USD 60 over the past few weeks, the banks agree that unexpected volatility could still throw their expectations way off balance. It is this price volatility that will determine the impact on the world’s economies.
What implications does this scenario have for African oil producing countries and Africa’s largest importers of crude oil? This special report picks five countries of each category to assess their political and economic outlook for 2019.
IMPACT ON MAJOR AFRICAN OIL PRODUCERS
Africa’s largest oil producers are in much better stead to cope with price volatility than in 2014. Nigeria is betting on output increases in 2019 to soften the impact of an oil price drop below the 2019 budget benchmark. Angola will depend on IMF for support as it implements tough oil sector restructuring. Algeria and Egypt are counting on new revenues from shale reserves and natural gas respectively to cushion the blow of any drop in oil prices. However, unreformed oil sectors such as those in Sudan and South Sudan, as well as Libya, Equatorial Guinea, Gabon, and Republic of Congo, would again be in a weaker position to cope with price volatility in 2019, triggering balance of payment shortfalls and political instability with associated unrest risks.
NIGERIA
EGINA NIGERIA OIL PRODUCTION
Output increases are likely to soften the impact of an oil price drop below the 2019 budget benchmark.
Nigeria’s 2019 budget has adopted USD 60 per barrel as its benchmark, which has been criticised as too ambitious by many local economists. The USD 23.6 billion budget was based on a USD 60 benchmark at a time the international oil price was around USD 75. Critics say government projections, especially total revenue projection and expenditure in the budget, may not be realised should volatility continue in the market. The Director-General of Nigeria’s Budget Office has since said that the government might consider lowering the benchmark. Yet such a budget revision seems unlikely given the tense political climate in the lead-up to the February 2019 elections.
Moreover, steady output increases are expected to match any concerns over price volatility. Nigeria has a targeted oil production of 2.3 million barrels per day (bpd) in 2019, up from 2.1 million bpd in 2018. Crucial to the production ramp-up is the flow of the Egina oil grade, which is expected to add an additional 200,000 barrels per day to Nigeria’s output. The first cargo of the Egina grade will be lifted in February 2019 by French major Total, the Nigerian National Petroleum Corporation (NNPC) and the China National Offshore Oil Corporation (CNOOC). Following the February elections, major changes are being lined up for Nigeria’s oil sector, including partial privatisations and asset sell-offs, which should further boost the 2019 budget.
See Nigeria Country Outlook: NIGERIA
ANGOLA
OIL PRODUCTION OFFSHORE ANGOLA
IMF support and non-oil sector asset sell-offs will provide a buffer against further fiscal slippages.
While a bourgeoning oil market shielded the country’s structural deficiencies for decades, these were laid bare by the 2014 oil crash from which the country has yet to recover. For a country that derives approximately 95 percent of its export revenue from oil, the reduced productivity and diminished revenue has left Angola exposed to fiscal slippages and balance of payments shortfalls. Not only do the productivity losses undermine efforts to trim the fiscal deficit down from its high of 7 percent to 3.4 percent – and debt from approximately 60 percent to around 55 percent – but they also weigh on the country’s ability to finance regular expenditures.
Nevertheless, IMF financing is expected to compensate for immediate funding shortfalls in an indeterminate global oil environment. In December 2018, the IMF approved a three-year USD 3.7 billion credit facility. Moreover, broad-based structural reforms in the oil sector have improved productivity. Greater observation of macroeconomic fundamentals and policy anchorage under the IMF programme indicate that market optimism on an already promising Angolan economy is likely to firm up in 2019. State-owned oil company Sonangol plans to exit 52 of more than 100 companies not related to the production or sale of crude, which should further buffer the budget.
See Angola Country Outlook: ANGOLA
ALGERIA
SONATRACH OIL REFINERY IN ALGERIA
Oil sector reform and recent unconventional exploration should cushion against any oil price shocks.
Algeria’s economy has recently benefited from increased gas output, a relative recovery in the Eurozone, and higher oil prices. The country has been trying to boost domestic output and cut imports in an attempt to cope with financial pressures caused by a fall in energy earnings since 2014. Energy earnings have risen in 2018, reducing the country’s trade deficit by more than half. Yet a sudden oil price fall in 2019 could undermine Algeria’s economic recovery and thus raise associated risks of civil unrest and political instability in a crucial election year. However, a number of factors indicate that Algeria is better prepared than previously for any oil price volatility.
State oil company Sonatrach’s chief executive Abdelmoumen Ould has encouraged improved relations with international oil companies, which has advanced foreign investment. Italian oil major Eni has struck a deal to team up with France’s Total to explore oil and gas in Algeria. A new hydrocarbon law will allow for a bigger variety of contracts – in addition to currently used production sharing agreements, concessions and risk service agreements will also become feasible, while new tax remissions are also being considered. Moreover, the recent rebound in prices has allowed Sonatrach to invest in petrochemicals, offshore exploration, and develop Algeria’s heretofore off-limits shale gas deposits.
See Algeria Country Outlook: ALGERIA
EGYPT
ZOHR GAS FIELD PRODUCTION
Gas self-sufficiency and gradual subsidy cuts are likely to mitigate the impact of lower oil revenues.
Egypt has budgeted its 2018/2019 finances assuming oil prices at USD 67 a barrel, which no longer seems realistic under the current climate of price volatility. The IMF has provided a USD 12 billion credit facility, yet disbursements will depend on continued progress on implementing economic reforms, such as subsidy cuts and tax hikes. The main threat to the government lies in Egypt’s systemic economic imbalances, austerity policies, and subsequent risks of civil unrest. To mitigate unrest risks the government is delaying some subsidy cuts and increasing interest rates to calm consumer price inflation.
In 2018, Egypt became self-sufficient in liquefied natural gas (LNG), thus shoring up its budget by saving around USD 2 billion a year from natural gas imports. The country continues to depend on imports for gasoline and diesel, although lower oil prices would mean that the government will be spending less on fuel subsidies this fiscal year through June 2019, when it plans to have phased out the support for fuel prices. The monthly import bill for fuel and natural gas has declined to about USD 550 million during the current fiscal year compared to an average of USD 700 million previously. The lower import bill will underpin Egypt’s continued economic recovery through 2019, even if oil price volatility continues.
See Egypt Country Outlook: EGYPT
SUDAN & SOUTH SUDAN
SOUTH SUDAN UNITY OIL FIELD
While South Sudan is attracting fresh oil sector investment, dependency on Sudan undercuts stability.
South Sudan’s oil production remains dependent on Sudan’s export terminals, underscoring the interlinkages between the two countries’ oil sectors. South Sudan is targeting oil output of 200,000 bpd, from a current 155,000 barrels, after the restarting of the country’s northern Unity field in December 2018. The country is also attracting fresh foreign investment from new and traditional sources as its fragile peace process begins to take hold. However, dependence on Sudan undercuts some of these recent gains. Disruptions in oil production, disputes over oil revenue sharing, and lower oil prices have had a negative effect on the economies of both Sudan and South Sudan.
Sudan is already facing an economic and financial crisis. Depreciated oil prices, in addition to a downturn in production at its major refineries, have seen government revenues garnered from its mainstay economic activity plummet. Equally, a decrease in oil production and revenues have left the state with a lack of foreign currency to import fuel and basic commodities, leaving few avenues of respite for a government that is facing an increasingly desperate and agitated population. Violent protests have raged over December in large parts of the country, which would be further aggravated in case of even lower oil prices in 2019.
See Sudan and South Sudan Country Outlook: SUDAN, SOUTH SUDAN
IMPACT ON MAJOR AFRICAN FUEL IMPORTERS
Unreformed African economies that depend on fuel imports will see negligible benefit from lower oil prices in 2019, due to currency volatility, entrenched external imbalances, and rising debt concerns. Countries like South Africa will not see an immediate economic recovery as fuel prices drop, while Kenya’s trade deficit may only be narrowed once a pipeline for crude oil exports is complete. Ethiopia is in a better position in 2019 to pay its fuel import bill than last year, despite ongoing hard currency shortages. Other large fuel importers like Morocco will need to depend on export growth to balance the import bill, even if international oil prices fall.
SOUTH AFRICA
SOUTH AFRICAN MOTORISTS
A falling import bill is insufficient to turn around the struggling economy, as debt concerns mount.
Falling international oil prices have recently outweighed the impact of the weakening rand. The country’s department of energy has already announced a sharp drop in fuel prices for January 2019 after surging to a record high in October 2018. This will boost the governing ANC party’s re-election chances towards the middle of the year, while also offering some much-needed budgetary relief. It should also boost South Africa’s chances of retaining its debt assets within Citi Group’s prestigious World Government Bond Index (WGBI) and with that the trajectory of South Africa’s investment inflows.
However, a falling import bill is unlikely to spur a broader economic upswing. Growth projections for 2018 have already been revised downwards from 1.5 percent to 0.7 percent. Fiscal consolidation is similarly off the mark. Contrary to expectations, the deficit is forecast to widen to 4 percent and 4.2 percent in 2019/20, while debt will peak at a high of 59.6 percent a year later than expected in 2023/2024. Finance Minister Tito Mboweni has warned that should the country’s debt reach the 60 percent mark, it would be forced to turn to the IMF for assistance. Associated servicing costs are also scheduled to escalate from the current 13.9 percent to 15.1 of revenue by 2020/21, adding further pressure to the country’s limited fiscus.
See South Africa Country Outlook: SOUTH AFRICA
KENYA
KENYA PETROL STATION
Long term weakening of Kenya’s external position will not be reversed by lower oil prices in 2019.
In June 2018, Kenya began its first ever crude oil exports from the northern Turkana region. However, until a planned pipeline allows for larger-scale commercial oil exports, Kenya will not be able to offset its sizable fuel import bill with crude exports. For most of 2018, Kenya’s oil import bill has eaten into the country’s export earnings, exerting pressure on the local currency. Kenya’s deteriorating external position is underlined further by the price stability in its soft commodity export, despite remarkable volatility in the oil price. The amount of money spent by Kenya on oil has risen by 70 per cent from 2016 to 2018, while exports increased by six per cent.
The recent fall in crude oil price bodes well for Kenya’s inflation outlook and eases the pressure on the shilling. Petroleum products account for about 16 percent of Kenya’s import bill, and thus are a significant driver of dollar demand in the domestic market. The Central Bank of Kenya believes overall inflation will remain within the target range in the near term. However, Kenya’s lack of refining capacity remains a serious drag on the budget – the country closed its only refinery in 2013. Lower fuel prices will however make the recent imposition of a petroleum tax more palatable, despite heavy opposition the levy was approved in October.
See Kenya Country Outlook: KENYA
ZAMBIA
LUSAKA PETROL DEPOT
A depreciating local currency counter-acts lower oil prices with little benefit to deficit reduction.
Despite lower oil prices, Zambia’s Energy Regulations Board has planned no adjustment of fuel prices. This is due to the depreciation of the kwacha currency, which has left the country’s import bill effectively unchanged. In November, Zambia’s total fuel import bill stood at USD 152 million. During the period of importation, the kwacha was still depreciating while international oil prices were still relatively high. Yet the prospect of lower fuel prices remains remote even if the kwacha stabilises and the oil prices remain relatively low as Zambia’s government implements austerity measures for deficit reduction.
Disconcertingly, with the kwacha 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 copper 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. A lower fuel import bill might alleviate some budgetary pressure, but is highly unlikely to reverse Zambia’s economic decline.
See Zambia Country Outlook: ZAMBIA
ETHIOPIA
PORT OF DJIBOUTI
Ongoing economic reforms and a stabilising currency mitigate risk of non-payment on fuel imports.
Landlocked Ethiopia imports all of its petroleum products, which are critical for transportation, industrial, and household uses. The Ethiopian Petroleum Supply Enterprise (EPSE) therefore plays a crucial strategic role for the economy. Ethiopian fuel imports have been growing at a rate of 10 percent every year and now amount to three million metric tons valued at over USD 3 billion. Fuel imports are so important to Ethiopia that it continues to seek greater diversification of supply. Capacity limitations at the Djibouti oil terminal have prompted the Ethiopian government to start planning to build an oil terminal at the Port of Djibouti. The Ethiopian government, which fully funds EPSE’s import bill, is unlikely to risk any disruption to the strategically important fuel supply.
Ongoing hard currency shortages, rising inflation, and below target exports are key concerns at a time of continued fiscal expansion and dwindling economic momentum. This has raised concerns over non-payment of Ethiopia’s fuel import bill. However, lower oil prices, a stabilising currency, broad-based economic reforms indicate an improved balance of payments position for 2019. Moreover, syndicated credit facilities with multilateral participation are being prioritised for payment by the Ethiopian government. Ethiopia is also using its expanding goodwill to acquire condition-free multilateral funding, which should further ensure timely payment on the country’s fuel imports.
See Ethiopia Country Outlook: ETHIOPIA
MOROCCO
TRANSPORT WORKERS STRIKE IN MOROCCO
Liberalisation has not brought lower fuel costs, yet longer term diversification plans are underway.
The deregulation of fuel costs has backfired on the Moroccan government amid falling oil prices in the international market. The Moroccan government liberalised fuel prices in December 2015, leaving them to be determined by market forces. However, the country’s sole oil refinery ceased operations in 2015. Additionally, high taxes keep the fuel price artificially high. Taxes represent around 46 percent of the final price of the litre of fuel in Morocco. Subsequently, consumers have been prevented from taking advantage of the benefits of liberalisation.
Over the past few months transportation workers have gone on strike to protest soaring fuel prices, which disrupted fruit and vegetable supplies, forcing an increase in food prices. The last time oil prices crashed in 2014, Morocco’s government took advantage to wean its economy off fuel subsidies. Yet, incomplete sector liberalisation have not allowed Morocco to reap the benefits of lower oil prices. Longer term plans are being laid out to reduce Morocco’s dependence on foreign oil and coal. The government is inviting bids for a liquefied natural gas project in Jorf Lasfar worth USD 4.5 billion. Meanwhile, booming exports of vehicles, phosphates, aeronautics, and agricultural products are set to underpin export growth in 2019. Morocco’s account deficit is set to shrink to 3.3 percent of GDP in 2018 and 2.2 percent in 2019, down from 3.6 percent in 2017.
See Morocco Country Outlook: MOROCCO
For any questions about this report or any further information regarding EXX Africa Insight risk intelligence, please email Insight@exxafrica.com
Mounting concerns over Africa’s debt sustainability are frustrating key investment decisions and infrastructure financing. In this special report EXX Africa identifies the countries in best and worst position to attract further debt.
Egypt’s economy is firmly on a positive trajectory following two years of structural adjustment, yet non-oil sector growth, low domestic consumption, and high youth unemployment remain key challenges that can offset the progress.
The low capability of recent attempted terrorist attacks on Cairo’s diplomatic and government assets indicate the curtailed threat of local militant groups, although an expected drawdown of counter-terrorism offensives could provide terrorism groups the opportunity to recuperate.
Egypt’s new government is unlikely to steer the economic recovery off course, although it is seeking to centralise more political authority within the Presidency and to dilute the influence of the military.
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