President Ramaphosa’s ANC is set to reverse a trend of electoral decline at general elections in three weeks, despite the party’s record of entrenched corruption, economic mismanagement, and political in-fighting. In this special report, we look beyond those elections and forecast the key drivers of political, security, and economic risk for Africa’s most developed economy in the post-elections climate.
The potential resolution of a years-long dispute over the world’s largest untapped iron ore resource does not immediately signal its development due to the project’s massive infrastructure costs. Despite a booming bauxite and gold sector, populist sentiment ahead of the 2020 elections will increase risk of contract frustration and industrial action.
Optimistic central bank forecasts show that Tanzania’s economy is picking up steam again. 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.
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
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’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
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
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
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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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
The governing ANC party will seek re-election this year by striking a balance between radical demands from its populist base and mounting investor concerns on debt and corruption. We outline indicators for the pre-election roadmap that should be closely watched over the next few months.
From Nigeria and Algeria, to South Africa and Mozambique – EXX Africa presents a risk snapshot of ten African elections in 2019 which you should not miss. Each election will bring new threats and opportunities well beyond the coming year.
In 2019, Africa will again witness a wave of democratic activity with more than 50 elections scheduled across local, provincial, legislative, and national levels. More than half of Africa’s 54 countries will hold some form of election next year, meaning that investors will be on the lookout for signs of political instability, security risks, contract alteration, and changes to economic policy, or even military interventions. The last few years have taught us that elections in Africa do matter!
Most eyes will be on the polls in Africa’s largest economies, including Nigeria’s presidential election in February and the general election in South Africa in May. Nigeria’s election is more hotly contested than initially anticipated, while shifting political dynamics in South Africa may make the upcoming vote one of the most interesting in years. Some of the most fascinating polls may take place in Tunisia and even Botswana, while the Algerian elections do not seem to augur much immediate political change.
While a number of African elections are not expected to be free and fair, several votes are set to trigger peaceful and democratic transitions of government. In this special report, EXX Africa lists the elections that you should not miss in 2019 as these are likely to make a lasting impact on the political risk outlook for many years to come. Over the course of next year, EXX Africa will continue to monitor all elections across the continent and to generate commercially relevant risk forecasts for our Insight Members.
NIGERIA, GENERAL ELECTIONS, FEBRUARY 2019
Africa’s most hotly anticipated election hits early in the year and the stakes are high! Incumbent President Muhammadu Buhari will face a stronger than anticipated challenge from main opposition candidate Atiku Abubakar. The Abubakar ticket is essentially a pro-business manifesto that is campaigning on implementing economic reform. Abubakar favours an economic liberalisation programme, freely floating the naira currency, and the partial privatisation of the state oil company. In response to the opposition’s pro-business platform, the embattled incumbent is leveraging a strong anti-corruption mandate as an electioneering tool, posing fresh contract risks to investors in key sectors and further uncertainty for oil sector reform.
In order to counter the opposition’s momentum following defections from his governing coalition and allegations of political bias in the Fulani herder-farmer killings, President Buhari is ramping up corruption investigations and prosecutions to convince voters of his probity and zeal for fighting corruption. This will exacerbate government inertia that has so far held up key legislation required to recover Nigeria’s ailing economy. Meanwhile, the government faces various resurfacing security crises, including a resurgence of unrest in the oil-producing Niger Delta, ethnic and sectarian fighting in Middle Belt states, and a continuing insurgence by Islamist militants in the northeast.
SENEGAL, PRESIDENTIAL ELECTIONS, FEBRUARY 2019
President Macky Sall looks set to gain a second term in office at elections in 2019. He has co-opted some opposition parties such as the PS into his governing BBY coalition, while eliminating others, most notably the imprisoned former Dakar mayor Khalifa Sall. The suspension of licenses for NGOs operating in Senegal is likely to trigger a coordinated response by activist groups and opposition parties in the form of protests and boycotts ahead of the February 2019 elections. While these gatherings are unlikely to generate momentum to foment a change in government, they may be disruptive to local business operations.
Despite growing intolerance of dissent and some concern over the electoral process, donors and investment partners remain focussed on Senegal’s record economic growth, forecast at 7% for 2018. The government is also seeking opposition support to amend the constitution to strengthen property and natural resource rights that will serve the planned development of the oil sector. The constitutional amendment will also serve the implementation of the ambitious ‘Plan Sénégal Emergent’, which will drive structural transformation and aims to cement the country’s status as a leading regional hub for business and trade in West Africa. The plan includes broad infrastructure improvements for the mining, tourism, and transport sectors.
MAURITANIA, PRESIDENTIAL ELECTIONS, MARCH 2019 (to be confirmed)
President Abdel Aziz is coming under mounting pressure from his own party following last year’s controversial referendum and he has agreed to step down at the 2019 presidential elections. However, many well-placed sources have refused to believe Abdel Aziz’s stated intentions and claim he is getting ready to purge his own party and to challenge the constitution in order to run for a third term next year. The success of this strategy will depend on maintaining the support of the military, which he is shoring up through support from the US, Algeria, and France in regional counter-terrorism cooperation and high-profile diplomatic outreach initiatives. If his strategy back-fires, the ruling UPR party will be more likely to wrest control away from Abdel Aziz and appoint a party stalwart as his successor.
Mauritania’s economy is making a strong performance on the back of investments in the mining sector and the development of natural gas projects. The country is expected to be 2019’s fastest growing African economy. Rising export revenues and tax collections are improving the fiscal outlook, despite lingering concerns over debt servicing in the longer term. In the hydrocarbons sector, the risk of contract reviews and cancellation is growing for projects that have been slow to develop.
ALGERIA, PRESIDENTIAL ELECTIONS, APRIL 2019
President Abdelaziz Bouteflika is likely to seek a fifth consecutive term in elections slated for April 2019. This indicates that Algeria’s political stakeholders have still not found a suitable successor to replace him. Algeria’s balance of power has been upset recently by a purge of party officials and a series of politically motivated corruption investigations ahead of the elections. Since the 2017 parliamentary elections, Army Chief of Staff Ahmed Gaïd Salah has formed a tentative alliance with Prime Minister Ahmed Ouyahia to hold together Algeria’s political and security establishment, in conjunction with the Bouteflika faction.
While Gaïd Salah is charged with upholding the security of the state, Ouyahia is seeking to repair the distressed oil-dependent economy. Their loyalty to President Bouteflika has allowed the latter’s faction to maintain its dominance, giving huge influence to the president’s brother Saïd Bouteflika and business associates such as Ali Haddad. Yet this alliance will face new pressures following the 2019 elections. Prime Minister Ouyahia’ s planned economic recovery may be undermined in the longer term by inflation and the depreciating value of the Algerian dinar, which would ultimately wreck his chances to succeed Bouteflika. In such a scenario, a succession by Saïd Bouteflika or General Ahmed Gaïd Salah would become more likely, thus posing higher risk of unrest and economic disruption.
SOUTH AFRICA, GENERAL ELECTIONS, MAY 2019
President Cyril Ramaphosa heads an unwieldy and fractious government, whose parliamentary majority is exposed to populist policy initiatives, such as radical land reform. He will struggle to maintain a semblance of unity within his governing ANC party ahead of the 2019 national elections, at which he will be expected to engineer a reversal of the party’s sliding electoral fortunes by boosting his appeal among middle class urban voters. Failure to keep the ANC’s share of the vote above 60% in 2019 will leave Ramaphosa exposed to removal and replacement by rival faction leaders, such as Deputy President David Mabuza who represents a more rural and radical constituency.
In the meantime, the Ramaphosa government will prioritise reining in state spending and restructuring distressed state-owned enterprises. A much vaunted anti-corruption campaign will be limited to high profile associates of former president Jacob Zuma, as Ramaphosa cannot afford to alienate his political backers. Despite fresh business confidence and renewed investor interest in South Africa since Ramaphosa became president in February 2018, many deep-seated structural problems remain, while much-needed economic reforms and other policy initiatives in key sectors like mining will be judged politically inexpedient.
MALAWI, GENERAL ELECTIONS, MAY 2019
Six months ahead of general elections, President Peter Mutharika faces a struggle to secure a second term. The governing Democratic Progressive Party (DPP) has been beset by a split between members aligned to President Mutharika and those backing his former deputy, Saulos Chilima, who have mobilised under the so-called United Transformation Movement (UTM). Meanwhile, former president Joyce Banda will contest the presidency on the ticket of her People’s Party (PP), which she created after breaking away from the ruling DPP in 2011. A third high profile opposition candidate is Lazarus Chakwera, who was the runner up to the 2014 election.
In the absence of any coalitions between the major opposition parties, the election is likely to be a four-horse race. Opposition entities may seek to capitalise on civic society grievances over the ruling administration by adjoining – and possibly catalysing – anti-government gatherings in the coming months. Yet whoever wins the vote, any new government will remain beholden to the IMF and donors to ensure political and economic stability in the longer term. Malawi is expected to stay heavily dependent on donor aid for some time to come, and therefore healthy donor relationships will be of great importance.
BOTSWANA, GENERAL ELECTIONS, OCTOBER 2019
President Mokgweetsi Masisi is unlikely to steer government policy into a significantly different direction until the October 2019 elections. However, he is expected to promote some of his political supporters within the governing Botswana Democratic Party (BDP). Masisi lacks a strong political support base and he may be replaced by his own party in case the BDP fails to achieve a perceived safe margin of victory at the 2019 elections. The BDP’s margin of victory is threatened by the rise of an opposition electoral alliance, the Umbrella for Democratic Change (UDC), which is picking up support among younger and urban-based voters.
The main issue that will concern the upcoming electoral campaign is the state of Botswana’s economy. The long-term difficulty will be to liberalise Botswana’s economy and integrate it into regional and global markets. Previous president Ian Khama’s tenure was marked by increasing protectionism, higher barriers to foreign investment, and immigration restrictions on skilled workers and foreign investors alike. These measures have taken their toll on the economy and employment and flown in the face of advice in favour of diversification and liberalisation. A massive state spending increase on rural economic projects, as envisaged by Masisi, would also have an impact on the budget deficit, which has remained relatively healthy over the past few years.
NAMIBIA, GENERAL ELECTIONS, OCTOBER 2019
President Hage Geingob and his ruling SWAPO party are all but assured of re-election in 2019, as the opposition remains fractious and weak. The implication of this near-complete political dominance is that it allows for the administration to take a longer-term approach to policy-making. A more significant political challenge to Geingob comes from within SWAPO itself. Party policy will be increasingly influenced by populism in the lead up to the 2019 general elections. This is especially the case amid the rise of land activism and the politicisation of the issue by prominent left-leaning politicians.
Namibia’s tentative economic recovery will continue to be suppressed by policy uncertainty over the next year due to confusing political rhetoric on land ownership and local content regulations. While ongoing improvements to the business environment will be welcomed, clarity on land reform and black economic empowerment is not imminently anticipated. Moreover, mounting concerns over debt sustainability and rising fuel prices are likely to mar Namibia’s economic recovery in 2019.
MOZAMBIQUE, GENERAL ELECTIONS, OCTOBER 2019
President Filipe Nyusi will be seeking a second term in office at the October 2019 elections and he is consolidating his power base both within the government and his governing FRELIMO party. He will need to conclude a peace deal with the armed opposition RENAMO before these elections to avoid another outbreak of violence. Yet Nyusi is being challenged by loyalists to his predecessor who seek to undermine negotiations with RENAMO. There is also no immediate hope for a sustained economic recovery as long as there is no resolution on the undisclosed debts scandal.
The IMF expects the economy to grow by only 3% in 2018, and has little confidence that the government will cut spending, while domestic debt continues to rise. Many state-owned enterprises are close to collapse, while the government is failing to pay public salaries. The main hope for Mozambique’s bondholders is the eventual revenues from the nascent natural gas sector, despite the weakness of gas prices and long lead time for liquefied natural gas capital works. The state may only begin to benefit from gas revenues in the 10 or 15 year outlook. Meanwhile, an intensifying Islamist insurgency in the gas-rich North is derailing such plans and causing a regional security emergency.
TUNISIA, PRESIDENTIAL ELECTIONS, DECEMBER 2019
A political stand-off within the ruling coalition is expected to exacerbate the polarisation between partisan supporters ahead of the 2019 elections. At the centre of the dispute is a power struggle between President Essebsi and Prime Minister Chahed, with whom the president shares power in Tunisia’s hybrid political system. Political polarisation is only expected to worsen in the lead up to the presidential elections, in which Essebsi is likely to seek re-election on the Nidaa Tounes party ticket, possibly against the moderate Islamist Ennahda-endorsed Chahed. Preparations for the elections are expected to further distract policy-making and exacerbate efforts to soothe grievances of marginalised communities where the majority of protests have broken out.
Meanwhile, the erosion of foreign reserves to a 15-year low will put at risk Tunisia’s imports of food, energy, and medicines. The government’s ability to service its debt has also been weakened. As fragmentation of the coalition government continues ahead of the elections, the Essebsi administration will be constrained in implementing any meaningful socio-economic reforms until at least after the ballot. Institutional weakening and policy inertia may be viewed by an expectant electorate as ambivalence by the elite towards what are considerable economic grievances, heightening the risk of an extensive protest campaign closer to the polls.
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Six months ahead of the next national elections, any previous opposition momentum is drifting, while the governing ANC will seek to delay the president’s reform agenda to avoid any serious political backlash at the polls. With South Africa just about pulling out of recession, this short-minded tactic might just pay off.
The government is failing to accomplish economic growth and fiscal consolidation, yet the prospect of post-electoral policy changes and broad institutional reform should be sufficient to stave off another credit ratings downgrade.
Ahead of next year’s elections, the government will maintain the political status quo and boost welfare spending in order to curb any outbreaks of unrest; yet falling foreign exchange reserves will determine longer term succession scenarios and pose a nascent threat to repayment schedules as debt balloons.
On 28 October, the head of the governing Front de Libération Nationale (FNL) party, Djamel Ould Abbes, announced that President Abdelaziz Bouteflika will seek a fifth consecutive term in elections slated for April 2019. The 81-year old and frail Bouteflika, whose last public address dates to more than six years ago, has yet to officially announce his candidacy. Several months ago, there were mounting rumours that the head of state may already have passed away or has been further incapacitated since a previous stroke. All major players in Algeria have since called on Bouteflika to stand for a fifth presidential term next year, indicating that they have still not found a suitable successor to replace him.
Presidential brother Saïd Bouteflika has been most vocal in his support for his brother’s fifth term, which has triggered rumours that he still seeks to succeed his brother, despite his lack of popularity by the military and the public. Other contenders for the succession, such as Vice-Minister of Defence and Army Chief of Staff Lieutenant General Ahmed Gaïd Salah, have also fallen into line to support the continuity of power for the next year. Prime Minister Ahmed Ouyahia, who harbours similar succession ambitions, has also supported a fifth term in office for Bouteflika, alongside other senior politicians, union leaders, and generals.
Algeria’s balance of power has been further upset recently by a purge of party officials and a series of politically motivated corruption investigations ahead of next year’s elections. According to local source reports, the judicial and security sector reshuffle was instigated by Saïd Bouteflika and his political and business allies, such as the Forum des chefs d’entreprise (FCE) head Ali Haddad. It seems that key Bouteflika allies are fearing political upheaval next year around the elections and the threat of prosecution against themselves, should President Bouteflika be incapacitated or die in office. A Haddad ally, advertising mogul Mourad Hadj-Saïd is already under investigation for abusive business practices.
The balance of power
Since the 2017 parliamentary elections, Army Chief of Staff Ahmed Gaïd Salah has formed a tentative alliance with Prime Minister Ahmed Ouyahia to hold together Algeria’s political and security establishment, in conjunction with the Bouteflika faction. Prime Minister Ouyahia’s smaller Rassemblement Nationale Démocratique (RND) party has taken up the mantle as the pro-business party in the Algerian parliament. Prominent business leaders and elected RND lawmakers have been pleading for the lifting of export restrictions.
While Gaïd Salah is charged with upholding the security of the state, Ouyahia is seeking to repair the distressed oil-dependent economy. Their loyalty to President Bouteflika has allowed the latter’s faction to maintain its dominance, giving huge influence to the president’s brother Saïd Bouteflika and business associates such as Ali Haddad. These figures have over the past few years taken a cautious embrace of public-private partnerships and lobbied for the partial liberalisation of the country’s economy.
It is therefore unsurprising that the principal influence brokers in Algeria’s power balance have been reluctant to disrupt the status quo by seeking a replacement as head of state. The main arbiter of power between the various factions remains Minister of State and Presidential Counsellor Boualem Bessaieh. Bessaieh, who is likely to play a crucial role in the eventual transition, will have to manage the negotiations for a transfer of power between influential factions. This power play seems to be on hold until at least after the 2019 elections.
As a result of the apparent political stability, Algeria’s economy has benefited from a relative period of political stability. The economy has recently benefited from increased gas output, a relative recovery in the Eurozone, and higher oil prices. State oil company Sonatrach’s chief executive Abdelmoumen Ould has also encouraged improved relations with international oil companies, which has advanced foreign investment. Last month, Italian oil major Eni struck a deal to team up with French major Total to explore oil and gas in Algeria.
Algeria is seeking to increase oil output to boost revenues following a crash in prices in 2014. The recent rebound in prices has allowed Sonatrach to invest in petrochemicals, unconventional, and offshore exploration. Eni has also agreed with Sonatrach to take a 49 percent stake in three oil blocks in the North Berkine basin which are estimated to hold 145 million barrels of oil. France’s Total has also signed a USD1.5 billion petrochemical deal with Sonatrach, recently stating that its confidence in Algeria’s oil industry had been restored.
Algeria’s economy has therefore been making a steady recovery from its near-collapse in 2014. Annual inflation fell to 4.7 percent in September from 4.8 percent the previous month after a slight decline in price of some foodstuffs. 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 rose 14.86 percent in the first nine months of 2018 from the same period a year ago, reducing the country’s trade deficit by 56.71 percent. Oil and gas exports, which accounted for 93.08 percent of total sales abroad, reached USD27.93 billion, up from USD24.32 billion in January-September 2017. The overall value of exports reached USD30.012 billion against USD25.697 billion in the first nine months of 2017, while imports fell 1.52 percent to USD33.703 billion. The government has imposed import restrictions for some products in a bid to cut spending on purchases from abroad. In addition to import controls, the ‘51/49 rule’, which limits foreign participation in any energy project’s equity, is expected to remain in place.
The threat of political uncertainty over the succession and the upheaval caused by the reshuffles and corruption probes are likely to be intensified by socio-economic grievances which are again rearing their head. Frustrated young urban populations are becoming increasingly critical of the political power play, corruption, and cronyism in Algeria’s elite. Meanwhile, the economic recovery has failed to take hold among Algeria’s urban youths, threatening liberalizing reforms pushed through by Ouyahia’s government over the past year.
Algerians complain of the erosion of their purchasing power as prices have risen and their currency has depreciated, recalling the strikes staged this year by thousands of doctors and teachers for better pay and working conditions. As to Algeria’s economic liberalization, it remains selective, tightly managed and potentially reversible if oil prices rise or if Bouteflika is no longer president. It is likely that the country’s efforts and commitment to diversify its economy will weaken if oil prices continued to rise in the global market.
The government will seek to avoid any policies that would risk triggering fresh anti-austerity protests. Therefore, Prime Minister Ouyahia is unlikely to implement the spending cuts required by the International Monetary Fund (IMF). Instead, he will continue to fund the ballooning budget deficit with quantitative easing by the central bank. Nevertheless, spontaneous riots and protests over issues like unemployment or proposed subsidy reform remain a present risk. The government remains deeply wary of social unrest threatening the stability of the state and of Islamist influence, and is proactive in using public expenditure and highly capable security forces to discourage protests.
If protests did escalate and become co-ordinated in major cities – involving tens of thousands of people or shutdown of key infrastructure such as ports – the army would have to decide whether to use force to suppress them, potentially inflaming the situation and leading to a popular rejection of the army, or to oust the civilian leadership and call fresh elections. We consider such a scenario unlikely for 2018/19.
It is unlikely that civil unrest will pose a serious threat to political stability ahead of the elections. Instead, such unrest may become more prevalent following any eventual transition from President Bouteflika. For Prime Minister Ouyahia, implementing a successful and broad-based economic recovery will be crucial for his succession ambitions. A succession by Ouyahia under a revived economy would be the lowest risk scenario following next year’s elections. However, there remain serious challenges ahead.
The government has reversed plans to cut the budget and will continue high-level spending in the upcoming election year. In September, The government released a draft budget of USD71.9 billion for 2019, which would finance free housing programmes, agricultural and water development, infrastructure and subsidies on consumer goods. It would result in a deficit equal to 9.2% of GDP.
The rise of oil prices has been a boon to Algeria’s economy, emboldening the government to keep up its high spending. Algeria’s government adopted what is known as an “easy money” approach, using the Central Bank to buy assets, including government debt with long-term maturity, to finance the deficit and high spending of 2018.
However, continued high spending into next year is likely to fuel an increase in imports, causing the country’s foreign currency reserves to shrink and prompting it to borrow from abroad, a trend the government has struggled to avoid so far. The Finance Ministry said it expects current account deficits of USD17.9 billion in 2019, USD14.5 billion for the year after and USD14 billion in 2021. However those estimates seem unrealistic as foreign exchange reserves shrink due to the continued high social welfare spending.
Based on independent estimates, foreign currency reserves will fall to USD62.5 billion in 2019, then USD47.8 billion for 2020, and USD33.8 billion for the following year. The government has previously vowed to keep foreign currency reserves lower than USD100 billion, which now seems effectively impossible. As a result, the Algerian government is expected to seek additional foreign debt to finance next year’s election budget, as well as future sending commitments.
The Central Bank of Algeria allocated loans of more than USD 80 billion to public and private sectors in the first half of 2018, a 6 percent increase compared with a year ago. More than 54 percent of the loans are long-term credits allocated to state-run companies in the hydrocarbons sector. Loans allocated to the private sector amounted to some USD40 billion, with an increase of 4.3 percent over the same period last year.
As a result, Prime Minister Ouyahia’ s planned economic recovery may be undermined in the longer term by inflation and the depreciating value of the Algerian dinar, which would ultimately wreck his chances to succeed Bouteflika. In such a scenario, a succession by Saïd Bouteflika or General Ahmed Gaïd Salah would become more likely, thus posing higher risk of unrest and economic disruption.
SEE COUNTRY OUTLOOK: ALGERIA
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