High profile land sales to foreigners are putting the government’s lack of progress on land reform in the spotlight just four months before national elections. While the government is not expected to be voted out, the ruling party will face a new challenge from an emerging leftist opposition that may impact succession politics within the ruling party. Meanwhile, the economy will make a tentative recovery this year, as the government seeks more external financing to plug its budget deficit and boost infrastructure development, especially from Chinese lending partners.
At best, a dispute over one of Zambia’s largest copper mining companies is a warning shot to prevent miners from suspending production and laying off workers in resistance to the new mining code and upcoming imposition of a sales tax. At worst, the government is planning to confiscate highly productive mining assets and to redistribute these to new investors in return for support on debt servicing. EXX Africa assesses the most likely scenarios for yet another high-profile commercial dispute.
Cyril Ramaphosa has achieved a reversal of his party’s electoral decline in May’s elections. In fact, he faced a greater challenge from rivals within his own party than from South Africa’s weak political opposition. His next challenge will be to balance fractious interests in the next cabinet to avoid a permanent party split, while building a platform for restructuring cash-strapped state-owned enterprises that could trigger a backlash from labour unions and other allies. Much of the ANC’s actual election manifesto will be shelved to ensure fiscal discipline.
The political stalemate between the new military establishment and the protest movement that is increasingly tilting in favour of Islamist ideology risks dragging a politically destabilised and economically weakened Algeria into a broader regional conflict that would put at risk contracts signed with key investment partners from across the Gulf and Europe.
On 4 May, Algeria’s new military leadership arrested three of the former regime’s highest profile leaders, namely Generals Mohamed Mediène and Athmane Tartag, both former heads of the powerful intelligence agency the Département du renseignement et de la sécurité (DRS) – later called the Département de Surveillance et de Sécurité (DSS) – as well as Saïd Bouteflika, the brother of former President Abdelaziz Bouteflika, who was forced to step down by the military last month.
The three men arguably posed the greatest resistance to the authority of General Ahmed Gaïd Salah, who as military chief of staff forced the ouster of president Bouteflika on 2 April. Even though Mediène was removed from the DRS in 2015 after serving as intelligence chief for 25 years and replaced by Tartag, he has remained an influential figure. Last month, Salah accused Mediène of trying to undermine the transition that is due to end with the presidential election on July 4. Meanwhile, Saïd Bouteflika was the primary gatekeeper to his brother, as the latter became infirm and wheelchair-bound, building up a vast business network and exceptional political influence.
The three arrests show the growing confidence of the new military leadership under Salah to strike against top figures of the ousted Bouteflika regime and culminate a series of military-ordered detentions over the past month.
Purging the elite
EXX Africa had accurately forecast the series of arrests of high-profile Bouteflika regime leaders following the removal of the former president. Immediately following the military intervention, soldiers arrested the head of business association Forum des chefs d’entreprises (FCE), Ali Haddad, who has been at the centre of the patronage bestowed for years on Algerian politically-connected businesses. Well-placed local sources then reported that the detention of Haddad and a dozen other businessmen on corruption charges was ordered by the military under the command of General Salah (See ALGERIA: THE MILITARY TAKES CHARGE IN AN APPARENT CONSTITUTIONAL INTERVENTION).
We subsequently assessed that Saïd and Nacer Bouteflika, the ousted president’s brothers, as well as former prime ministers Abdelmalek Sellal and Ahmed Ouyahia, along with others, would be prime targets of arrest. Almost all the names we mentioned last month are now facing corruption charges or have been imprisoned. Several businessmen, including the country’s richest man, Issad Rebrab, have been placed in custody pending completion of investigations of corruption allegations. Current Finance Minister Mohamed Loukal, former police chief Abdelghani Hamel, and former prime minister Ouyahia appeared in court last week on embezzlement charges.
The purge of Algeria’s business tycoons is most significant from a commercial risk perspective, since their removal may augur contract reviews and cancellations. Other notable business tycoons who have been arrested or face charges include Chamber of Commerce chairman Mohamed Laïd Benamor and Condor group chief Abderrahmane Benhamadi. Together with Ali Haddad and Issad Rebrab, as well as other prominent tycoons such as the Kouninef brothers, these individuals represent the senior leadership of corporate Algeria that was firmly intertwined through the FCE with the political establishment of the Bouteflika family. As corruption proceedings unfold, pressure will mount on the new military leadership to redistribute the former Algerian oligarchs’ wealth among the new regime and their business backers.
The same is true in the oil sector, where an extensive reform process has been halted following the removal of state energy company Sonatrach CEO Abdelmoumen Ould Kaddour. The military is reportedly preparing to also remove the company’s vice-president Abdelhamid Raïs Ali. Meanwhile, Algeria’s supreme court has started investigating cases of alleged corruption relating to Chakib Khelil, energy minister from November 1999 to May 2010. The cases include capital movements and contracts signed by Sonatrach with two foreign companies. This could mean that military courts are seeking the dismissal of the entire Sonatrach management board. Newly-appointed head Rachid Hachichi lacks the clout of his predecessors and is more open to political influence from the military.
Placating the protesters
The high-profile corruption crackdown is a typical post-coup strategy aimed at both eliminating former regime rivals to avoid a counter-coup, while also placating the civilian protesters whose obstinate demonstrations provided the impetus for the military intervention in the first place. While the Bouteflika regime has been decapitated and left powerless, the protesters have been less amenable to appeasement. On 3 May, after Friday Prayers, hundreds of thousands of protesters rallied peacefully in the capital Algiers calling for the resignation of interim president Abdelkader Bensalah, who is due to serve until the election slated for July, and Prime Minister Noureddine Bedoui, appointed by Bouteflika days before he stepped down as president. Many protesters also insist on the removal of General Salah, although the opposition is split on the role of the military in the transition.
While the protest movement has remained incorruptible and persistent in its daily and weekly turn-out, its leadership remains divided. Since Bouteflika’s resignation, many demonstrators have rejected military intervention in civilian matters, while others have been supportive of the army’s role in the transition. The military is now attempting to split the protest movement by co-opting some into their fold with promises of influence in an eventual political transition. Several prominent opposition leaders have backed the military intervention, perhaps viewing an opportunity to re-enter government with army support after the elections. Ali Benflis, a former head of the ruling FLN party who now leads the Talaie Al Houriyet party, said he prefers military stability than the ongoing political chaos. Benflis has been unsuccessfully scrambling for support among the protestors and may view his closeness to the FLN as a political advantage. Others, like Mustapha Bouchachi, a lawyer and protest leader, have rejected the caretaker government.
Over the next few weeks, the military is likely to co-opt some protest leaders and opposition parties, including the moderate Islamist Mouvement de la Société pour la Paix (MSP) led by Abderazak Makri, along with fragments of the governing FNL party under the leadership of newly-elected party chief Mohamed Djemai. They are also seeking international support for such a transition, particularly from France and the US. If they are successful, they will be able to split the protest movement and offer a mediated pathway out of the current crisis that would allow the military to retain some political and economic power. However, some of the protest leaders and opposition parties hold very divergent ideological views for the future of Algeria that would put them in conflict with the military and regional powers in the Middle East and Europe.
Regional partners such as Egypt and the UAE would favour a military-led transition in order to shore up their interests in the Maghreb region. Meanwhile, local sources report that rival regional powers, such as Qatar and Turkey, are seeking a stronger role for Muslim Brotherhood affiliate, the MSP, which would tilt the balance of power in North Africa in their favour. The prominent Islamist protest leader, Seif Islam Benatia has called for a six-month transition period under the leadership of Ahmed Taleb Ibrahimi, a conservative former minister who is perceived as outside of the Bouteflika elite and who retains close ties to Islamist groups. The struggle between Islamists and the military risks dragging in more regional powers and creating a political stalemate, resembling neighbouring Tunisia, or even Libya (See TUNISIA: POLITICAL INSTABILITY AND SECURITY THREATS IMPERIL ECONOMIC RECOVERY).
If the ongoing mediations fail, the military under Salah is likely to move towards further consolidation of political power and seek to contest the elections in the guise of a new political movement. The vote would then be less likely to be free and fair. As a result, protests would continue across Algerian cities, which would be more likely to trigger a violent crackdown from security forces. For now, the protests have remained relatively peaceful, yet hard-line elements would be likely to emerge in case the crisis draws out or security forces deploy more heavy-handed tactics. We have outlined the commercial implications of more violent unrest in previous briefings (See ALGERIA: DESPITE CONCESSIONS, THE POLITICAL ELITE DIGS IN FOR THE LONG HAUL).
The power struggle between the military and hard-line elements in the protest movement risks dragging out well beyond the elections slated for July. The subsequent disruption to commercial activity is likely to further drag down Algeria’s economic outlook, particularly as oil export revenues drop. Algeria’s first quarter energy earnings fell 1.68 percent year on year, from USD 9.153 billion from USD 9.310 billion. As a result, the country’s trade deficit has increased over the same period by 11 percent to USD 1.37 billion. Oil and gas account for 94 percent of Algeria’s total exports and 60 percent of the state revenues.
In its latest updated forecasts, the International Monetary Fund (IMF) expects the Algerian economy to grow by just 2.3 percent this year and then fall well below 2 percent growth in the coming two years. The Fund also expects inflation to shoot up in the one-year outlook and beyond, while the current account deficit could exceed 12 percent this year. Last month, the IMF said the government should carry out reforms to help cut the deficit and reduce reliance on oil and gas. The government last year started implementing changes that allow the central bank to lend directly to the treasury to fund internal public debt. The budget deficit is projected at 9.2 percent of GDP for this year, up from 9 percent in 2018.
The economic outlook is further impacted by the spree of politically motivated corruption charges against the country’s most senior public officials and business tycoons. The liberalisation and privatisation reform agenda of former prime minister Ouyahia has been scrapped, while the military is taking an ever more prominent role in Algeria’s economy. This bodes well for contract stability in terms of agreements signed with regional allies of General Salah and other generals, especially the UAE. Dubai’s DP World has jointly operated the Port of Algiers since 2009 and runs port operations at Djen-Djen under a 30-year concession. Gulf monarchies have long backed the Algerian military. In the 1990’s, Saudi Arabia persuaded the US and other allies to support Algeria’s military after its army intervened to cancel the 1991 legislative elections that were won by Islamists.
Contracts signed with French businesses and the French government and military are also looking more secure if the military remains in charge given French support for the Algerian military over recent years. However, Italian firms may struggle to remain in favour with the Algerian military establishment, given Italy’s vocal support for the Islamist government in neighbouring Libya, which is currently engaged in a war against eastern forces supported by France, Egypt, and the UAE. While supply contracts with Italy’s Eni were recently renewed, Italian firms would be more likely to face discrimination unless they express their firm support for the Algerian military-led transition.
However, the ongoing mass demonstrations are becoming a growing concern for political stability and are shifting the popular mood increasingly towards supporting Islamist groups, especially Muslim Brotherhood affiliates such as the MSP. Gulf monarchies now fear that an anti-status-quo Islamist political order supported by Qatar and Turkey could emerge in Algeria driven by street protests, reminiscent of Egypt in 2011/2012. The MSP and other Islamist parties are already capitalising on growing anti-Israel sentiment by criticising the US and Arab states for supporting a rapprochement with Israel and the Trump Administration’s so-called ‘Deal of the Century’ Arab-Israeli peace plan.
If Islamists gain the upper hand in the political transition, contracts signed with the UAE and perhaps even France could face greater risk of frustration or even cancellation. For DP World this would continue a trend of licence revocations across the region as the geopolitical balance is shaken. In the meantime, the primary fear is that Algeria risks becoming a new theatre of conflict between rival regional powers, like the political stalemate in Tunisia and the military conflict in Libya.
SEE COUNTRY OUTLOOK: ALGERIA
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.
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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.
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