In a three-part analysis briefing series, EXXAfrica explores specific threats to the aviation sector in Africa. In part one, we examine how the risks of war and terrorism may manifest via an explosive device attack, assault on an airport, or shoulder to air missile attack.
As security conditions across the Sahel continue to rapidly deteriorate, regional and international states have renewed their efforts to support joint counter-terrorism operations. EXX Africa assesses the potential for these efforts to address the current crisis, and the possible outcome for the security outlook across the broader region, including the resurgence of the narcotics trade.
With 54 countries and a continental coastline of 30,500 km that spans the Mediterranean sea in the north, the Suez Canal and the Red Sea in the northeast, the Indian Ocean in the east, and the Atlantic Ocean in the west, Africa’s borders are both numerous and vulnerable. EXX Africa delves into the primary threat actors taking advantage of these vulnerabilities to further their own objectives across the continent. The report will be submitted the United Nations General Assembly this month and is pre-released to our clients ahead of the publication.
EXX Africa takes a closer look at the idiosyncrasies of some of the prominent internet shutdowns on the continent over the last year, exploring the causes and consequences of this repressive technological tactic.
The use of internet shutdowns by African governments to suppress popular dissent is becoming increasingly common. So far in 2019, there have already been reports of internet shutdowns in at least 12 countries. The states most affected usually have few internet providers, which makes it easier to implement a ban. Although such shutdowns may be contrary to local law, they are often detrimentally effective before they can be challenged in court. Furthermore, there is a lack of a binding international legal framework to hinder governments from acting with impunity.
These partial or near-total internet blackouts are most often implemented in anticipation, or in the wake, of anti-government protests, particularly around elections. However, governments also use targeted blocking of certain websites to restrict access to specific information during critical periods, such as national examinations. We explore some recent case studies from the past 12 months in this latest briefing. We also examine the impact such shutdowns have on commercial operations and the wider economy in African countries.
This briefing follows on from EXX Africa’s special report published at the beginning of the year and updates the key forecasts established in that report (See SPECIAL REPORT: THE COST OF INTERNET SHUTDOWNS IN AFRICA).
Sudan: Prolonged shutdowns to control unrest
Internet blackouts have become a staple during the past 12 months in Sudan, particularly from December to April as protesters took to the streets to oust former president Omar Al Bashir from power. During this period, the government intermittently blocked access to Facebook, Twitter, Instagram, and Whatsapp. However, it was the near-total shutdown instituted in June until July, following particularly violent unrest in the capital, which garnered the most attention (See SUDAN: HARD-LINE DARFURI MILITIA SEIZE CONTROL OF THE CAPITAL).
On 3 June, the Sudanese Transition Military Council ordered a partial internet shutdown amidst reported paramilitary attacks on pro-democracy demonstrators in Khartoum, during which an estimated 100 people were killed. To begin with, the ban targeted mobile networks before escalating to encompass fixed-line connections on 6 June. From 6 June to 9 July, a near-complete blackout was implemented, cutting the population off from the outside world. According to NetBlocks, a web freedom group, the internet disruptions under the rule of the Council were “more severe” than those imposed under Al Bashir at the time.
The Council’s actions contributed to significant condemnation from local and international watchdogs, in turn spurring social media campaigns. For example, throughout June, international social media campaigns, #BlueForSudan and #IAmTheSudanRevolution, were launched in an attempt to gain attention for the massacres and censorship being perpetrated in Sudan.
Locally, a lawyer, Abdel-Adheem Hassan, challenged the shutdown in court. On 23 June, Hassan was successful in ordering his telecoms operator, Zain Sudan, to restore connectivity. Yet, while his win was widely publicised and celebrated in the belief that the internet would be restored countrywide the next day, the operator only restored connection to his personal line.
According to Human Rights Watch, the near-total blackout in Sudan resulted in “wide-ranging harm”. Notably, it prevented activists and residents from reporting critical information regarding paramilitary forces, who were responsible for the attacks in Khartoum and previously for violent campaigns in Darfur, Southern Kordofan and the Blue Nile. Medical professionals further added that it made it difficult to organise ways to provide care.
The internet was only fully restored on 9 July after a further court challenge and a formal denouncement of the shutdown by the UN.
Chad: The longest night
Although Chad has a very low internet penetration rate – with only 6.5 percent of the population reported as having access to the internet as of 2017 – the country was recently subjected to the longest-running internet blackout on the continent. In March 2018, President Idriss Déby announced a partial internet block that affected major sites including WhatsApp, Twitter, Instagram, YouTube, and Facebook, as he prepared to amend the constitution to remain in office until 2033. Sixteen months later, the ban was lifted on 13 July 2019 (See CHAD: CREATING A DE FACTO MONARCHY AMID MULTIPLE CHALLENGES TO POLITICAL STABILITY).
According to the government, the ban was implemented for security concerns over terrorism threats. While this justification was challenged in local courts, all appeals were ultimately unsuccessful. The government only lifted the ban following a sustained international campaign, led by Internet without Borders, which included diplomatic pressure, protest action, as well as the sponsorship of VPN access for Chadians.
Long-term social media blackouts are common in Chad. Previously, in 2017, the government cut connections for ten months following controversial elections. These long periods of internet blackouts have severe economic consequences for the already impoverished country. According to the ‘Cost of Shutdown Tool’ by NetBlocks, the 2017 blackout cost the government an estimated USD 163 million. It is estimated that the most recent blackout cost upwards of USD 253 million.
Moreover, during the blackout, the country’s largest ISP, Millicom, a Swedish telecommunications company, was subject to substantial adverse media in Sweden regarding the company’s alleged failure to honour its UN commitments to protect free expression. In the early days of the blackout, the company claimed that the outage was due to technical problems before later admitting that the government had ordered the blackout. In June 2019, Millicom completed the sale of its operations in Chad to Maroc Telecom, a Moroccan telecommunication company. Although part of wider strategic disinvestment from Africa, Millicom’s withdrawal was likely impacted by the reputational damage it faced following the Chad blackout.
Mauritania: Internet shutdowns and propaganda campaigns
Mauritania held its presidential elections on 22 June. When violent protests broke out on 23 and 24 June in the capital Nouakchott, challenging the initial election results, the government moved to disrupt the internet before instituting a near-complete ban on both mobile data and fixed-line connections by 25 June. All of Mauritania’s consumer ISPs – Mauritel, Chinguitel, and Mattel – were impacted by the government’s decision.
By suppressing social and news media, the government was able to provide its own account of the protests through a false propaganda campaign. On 26 June, the state television broadcaster paraded a group of foreign nationals who alleged to take full responsibility for the protests. Only after the internet services were fully restored on 3 July did a more accurate picture of the post-election situation emerge.
Contrary to state propaganda, a number of Mauritanian political activists were reported to have been arrested for participating in the protests. Moreover, it was revealed that during the blackout, the state had detained two prominent journalists without charges. Lastly, once connectivity had resumed, delayed reports of civil unrest in the immediate aftermath of the elections from outlying rural areas began to emerge (See MAURITANIA: NATURAL GAS AND MINING BONANZA WILL MITIGATE INVESTMENT RISKS).
Ethiopia and Somalia: Shutdowns for exams
Internet shutdowns are not always instituted for political reasons. In Ethiopia and Somalia, they have also been implemented during national exams to prevent cheating. While internet access is occasionally restored in the evenings during these periods, the impact of such shutdowns is significant. According to Netblocks, a one-day shutdown of the internet costs Ethiopia at least USD 4.5 million and has a long-term impact on investor confidence in the host country.
The latter is particularly true in the case of Ethiopia as newly elected Prime Minister Abiy Ahmed has sought to privatise the national telecommunications provider, Ethio Telecom. Nevertheless, while such government interference is likely to concern potential investors, the anticipated establishment of an independent regulator is expected to provide appropriate checks and balances (See
Countries to watch
Protests in Zimbabwe have also been met with internet shutdowns in recent months. In January 2019, for example, the government imposed a “total internet shutdown” amid violent protests against a dramatic fuel price increase. Access to the internet and social media apps like Facebook, Twitter and WhatsApp were intermittently blocked as the country’s largest telecom company, Econet, sent customers text messages relaying the government’s orders and calling the situation “beyond our reasonable control”. As the situation has continued to decline over the past few months, with reports of load shedding of up to 16 hours a day, food shortages, and the outlawing of anti-government protests, further unrest and associated internet clampdowns are expected.
Tunisia is scheduled to hold the first round of its presidential elections on 15 September 2019. The country has enjoyed relatively free access to the internet since widespread blackouts during the Arab Spring in 2011. After transitioning into a democracy, a key test for the budding democracy will be whether or not these elections are free and fair. Any internet shutdowns during the election season, which the government would likely justify by appealing to the threat of terrorism, will instead be an indication of the state’s democratic integrity.
Burundi is expected to hold presidential and parliamentary elections in May and June 2020. In 2015, as President Pierre Nkurunziza, sought to seek a third term ahead of the country’s elections, messaging services including Facebook, Whatsapp,Twitter, and Tango were shutdown. Actions by the government since then have further pointed to little tolerance for media freedom. In March 2019, for example, the government renewed its suspension of Voice of America and withdrew the BBC’s operating license. As such, it is highly likely that next year’s elections will be accompanied by an internet shutdown and near-total blackout.
Tanzania is expected to hold multiple elections in 2020, including presidential and parliamentary votes. With current President John Magufuli having cracked down on online media over the last year (See EXX Africa Special Report: The Cost of Internet Shutdowns in Africa) it is likely that he may move to control messaging ahead of and during the elections by implementing partial bans on the internet and removal of anti-government sites. Indeed, during an August 2017 meeting with leaders from China, the Tanzanian Deputy Communications Minister praised his counterpart for blocking social media platforms and replacing them with “homegrown sites that are safe, constructive and popular”.
Each case of those in power using internet blackouts to control information, and therefore people, has its particularities. However, one constant in all of these cases is the economic impact of the blackouts at both a macro- and micro-economic level. Decreased productivity, lack of email communication, disruption to online sales, decreased online advertising; these are a few examples of the consequences of internet shutdowns for commercial entities. At a national level, a recent Global Network Initiative report indicates that the loss of internet connectivity has a pronounced effect on a country’s daily GDP. The report estimates that an average high-connectivity country stands to lose at least 1.9 percent of its daily GDP for each day of a total internet shutdown. For an average medium-level connectivity country, the loss is estimated at one percent of daily GDP, and for an average low-connectivity country, the loss is estimated at 0.4 percent of daily GDP.
Activist groups like NetBlocks and Global Network Initiative are creating awareness of both the prevalence of internet shutdowns around the world and their associated economic impact. This awareness is vital for the media, NGOs, and international organisations to try to combat the increased use of shutdowns across the African continent. Indeed, internet access and the guarding against the abuse of it by those in power are fast becoming a key frontier for the protection of international human rights. However, the fight against the abuse of freedom of expression is expected to be prolonged in Africa, as more and more leaders are turning to this form of control to suppress dissent and manipulate access to information. In the interim, businesses and the wider economy are expected to bear the brunt of these decisions.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
A mostly peaceful and democratic transition of power will allow the political status quo to remain intact, while Mauritania embarks on an exciting new chapter of rapid economic development driven by recovering iron ore mining revenues and a nascent natural gas industry. Despite some concerns over potential contract reviews and the looming threat of regional militancy, EXX Africa remains largely optimistic on Mauritania’s investment outlook.
Transport logistics are a vital and promising sector for business in Africa. However, traversing land, sea, and air routes across the continent comes with a plethora of political and security risks. EXX Africa explores the key concerns in this regard, their manifestation, impact, and outlook.
Doing business in Africa is beset with a number of political and security risks. Recent research by Aon reveals that 70 percent of countries in sub Saharan African are currently at risk from strikes, riots, and other types of civil unrest while 25 percent are at risk from sabotage and terrorism. Although government assets are most frequently targeted during such events, these risks ultimately affect the viability and profitability of private entities and investments as well.
The latest Emerging Markets Logistics Index, which ranks 50 emerging economies across the world, places these concerns in the transport logistics sector. Agility Logistics produces this index. Rankings are pulled from data from institutions such as the IMF, the OECD, the World Bank, the UN, and the WEF, among others, and is supported by a survey of trade and logistics industry professionals. Findings from the 2018 Index reveal that many of the top supply chain risks in sub Saharan Africa relate to political and economic concerns, with industry professionals citing corruption (23 percent), government instability (18.3 percent), terrorism (9 percent), and piracy (4.1 percent) as major risks. In North Africa, terrorism (43.8 percent) and government instability (19.9 percent) together represent almost two thirds of the primary concerns.
A similar long-term study by Willis Towers Watson echoes these findings. Its 2016 Transportation Risk Index, compiled from data and insights derived from 350 interviews with executives in the sector, noted that the number one long-term (up to ten years) megatrend for logistics across the continent concerned geopolitical instability and regulatory uncertainty.
Such political and security risks tend to affect transport logistics across the continent in three ways: border closures or delays, the targeting of state assets, or the targeting of private assets. We explore each of these manifestations, identifying their major trends, impact and outlook below.
Border closures and delays
Government and geopolitical instability frequently result in the planned or unexpected closure of land, sea and air routes, affecting the movement of goods and services. Such closures most often arise as a result of a change in government – whether by democratic or undemocratic means – or as a result of bilateral tensions between neighbours.
Election periods pose one of the primary threats in this regard. Even votes deemed free and fair, and organised by democratically elected governments can cause disruption. During the General Elections in Nigeria in February 2019, for example, the government announced the closure of all borders and implemented various restrictions on vehicular movements for the voting weekend. A similar elections-related border closure took place in December 2018 when the Democratic Republic of Congo (DRC) closed its borders with its nine neighbours as it held its long-awaited polls.
Unexpected changes of power, such as via an insurrection, coup, revolution or rebellion, further results in risks to the logistics sector and induces high levels of uncertainty. During the successful removal of President Omar Al-Bashir in Sudan in April 2011, following weeks of anti-government protests, the transitional military council closed the country’s airspace for 24 hours as well as all border crossings until further notice.
Unsuccessful attempts at regime change can also result in panic, as witnessed in January 2019 when Gabon suddenly closed its border with Cameroon following an attempted coup against President Ali Bongo. All cross-border trade ground to a halt forcing local businesses to divert their goods to Equatorial Guinea.
Poor bilateral relations can further limit the flow of goods and services. While there are some known long-standing tensions between neighbours that have resulted in border closures, such as between Morocco and Algeria (ongoing for 25 years) and Ethiopia and Eritrea (borders have closed again despite a peace deal in July 2018), emergent socio-political developments can cause abrupt stoppages to cross-border commerce as well. In February 2019, Rwanda unilaterally decided to close its busiest border with Uganda over mutual allegations of threats to national security. The decision not only affected bilateral trade but impacted trade to Burundi, the DRC and Zambia as well. One month later, borders were again closed in Southern Africa, this time between South Africa and Mozambique following xenophobic attacks in Kwa-Zulu Natal province. During this incident, a crowd of around 200-300 Mozambicans barricaded the N4 and began targeting trucks with South African license plates.
Targeting of state assets
Beyond broader political threats and the closure of borders, the logistics sector is often impacted by security-related incidents in which non-state actors target key state infrastructure assets. Such incidents may emerge during acts of militancy, labour unrest or sabotage.
The strategic importance of a country’s infrastructure – particularly its ports – often renders these assets prime targets for militant attacks and activity. This has been demonstrated repeatedly in conflict zones over the past 12 months, with attacks reported against sea and air ports in Somaliland (Bosaso Port), Somalia (Mogadishu International Airport), Libya (Ras Lanuf and Es Sider Ports, and Mitiga International Airport), Niger (Diffa Airport), and Mali (Sevare Airport). Militants may even attempt to seize such assets for political leverage. In March 2019 in the Central African Republic, a local rebel group stationed at the border post with Cameroon blocked cargo to impede commercial traffic in an attempt to force the government to include them in the newly formed government.
The economic importance of logistical infrastructure further incentivises established worker unions to target such assets during labour disputes and negotiations. In this instance however, disruptive events are not limited to conflict zones but can be found across all countries, including the major economies. In a 2019 survey on supply chain risk management in South Africa, all 20 participants identified socio economic factors, such as labour unrest, as a key source of vulnerability. South Africa has also been impacted by frequent incidents of sabotage within the logistics sector, with arson and derailment attacks having recently been carried out against both its passenger and cargo rail services.
Targeting of private entities
Political and security risks may also affect private commercial entities and their assets directly as well. One of the primary security threats in this regard is posed by piracy. While this threat is location and sector specific, its impact is significant – particularly considering that 90 percent of African imports and exports are moved by sea. According to the 2018 Oceans Beyond Piracy report, in East Africa alone, the annual cost of maritime piracy was estimated at USD 1.4 billion in 2017 (down from USD 7 billion in 2010) while in West Africa it was estimated at USD 818 million (up from USD 719.6 million in 2015).
Most concerning, according to the latest statistics released by the International Maritime Bureau, the threat from piracy is increasing in West Africa. Since 2014, there have been approximately 250 actual and attempted attacks in the Gulf of Guinea, with a 70 percent increase in incidents being reported between 2017 and 2018 alone. This surge is expected to result in associated rises in the cost of maritime business, particularly with regard to insurance. In 2017, the total costs of additional premiums incurred by ships transiting the Gulf was calculated at USD 18.5 million. Moreover, it was estimated that 35 percent of all ships now take out Kidnap & Ransom insurance, totalling USD 20.7 million.
Companies operating in the transport logistics sector are also frequently targeted by corrupt individuals. The sector remains particularly vulnerable to corruption given its close engagement with customs officials who are often underpaid and look to increase their wages through opportunistic facilitation payments. Extensive red tape and delays further amplifies this risk: according to the African Development Bank, the average customs transaction across the continent could involve 30-40 different parties. In addition to increasing commercial operating costs and affecting intraregional and international trade, such corruption at ports of entry and exit frequently facilities a range of illicit activities as well, such as the smuggling of people and goods, and tax evasion.
Despite these challenges, there remain sound opportunities for transport logistics in Africa. Egypt, Morocco, Algeria, Tunisia, Libya, South Africa, Nigeria, Ethiopia, Ghana, Tanzania, Uganda, Kenya, Mozambique, and Angola all featured within the Emerging Markets Top 50 Logistics Index last year.
Looking more closely at the data, Egypt and Ethiopia were identified as having made significant strides in the logistics sector. The improvement in business conditions in Egypt, including the reduction in business costs associated with crime, violence and terrorism, has been identified as one of the primary reasons for it jumping six places in the index last year – the most of any country. Similarly, Ethiopia’s goal to become a low-cost manufacturing and textiles hub along with the opening of Africa’s largest cargo terminal in Addis Ababa has attracted much attention. However, ongoing security concerns, especially the threats posed from ethnic conflicts and terrorism along border areas with Somalia and Kenya, were identified as setbacks.
In another promising development, South Africa, Nigeria, Egypt, and Kenya were identified within the pool of countries that have the most potential to grow as logistics markets within the next five years. However, sub Saharan Africa’s two largest economies – South Africa and Nigeria – each fell down the index, with Nigeria falling seven spots. Both countries were nevertheless identified as turning a corner, particularly with regard to corruption and political instability and uncertainty in 2019.
As demonstrated above, supply chain risks vary wildly from country to country across Africa. From isolated events that cause single points of impact (such as a militant attack), to ongoing events that generate a localised yet sustained impact (such as strikes), to all-encompassing events (such as a coup), companies in the transport logistics sector are advised to stay abreast of political and security dynamics to navigate and forecast their threat environment. In addition, transport logistics should consider using political risk insurance to insulate their operations against disruption.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
The misreporting of economic data and indicators is becoming increasingly apparent across some African countries. EXX Africa assesses the political motivations involved in the manipulation of economic statistics and the likely repercussions for investors and nascent continental trade agreements.
On 20 February, Tanzania’s National Bureau of Statistics rebased the country’s economy in order to recalculate growth in gross domestic product (GDP) over the past few years. The rebasing practice is commonplace and many African countries have rebased their economies over the past few years. Most notably, Nigeria overtook South Africa as Africa’s largest economy after a rebasing calculation in 2014 that almost doubled its GDP to more than USD 500 billion. The rebasing of Ghana’s economy last year meant that economy expanded by 24.6 percent in 2018.
However, the timing of rebasing economies is often politically motivated. In Tanzania’s case, the GDP rebasing shows a 3.8 percent expansion of the economy in the year that President John Magufuli came to power, even though there are signs that the economy has slowed since he was elected. Magufuli will seek re-election in 2020 based on a campaign pledge to broaden Tanzania’s economic growth through state-led interventionist policies.
In Zimbabwe, the statistics agency rebased some of its economic statistics last October in an unexpected move that the government said increased the nominal size of its struggling economy by more than 40 percent in 2018, which seems highly unrealistic given the country’s ongoing economic crisis. In neighbouring Zambia, the finance minister is planning to rebase the country’s GDP in 2019, which should see a sudden spike in economic growth this year, even though the economy is mired in debt and heavily impacted by falling export values.
Misreporting of national statistics
It is obvious, that the rebasing of a country’s GDP can be manipulated in order to serve political means, particularly to boost an incumbent in an election year or to deny an economic slowdown. Moreover, there have been numerous recent instances in which governments have failed to properly disclose publicly-guaranteed loans or have manufactured economic statistics, such as inflation, public debt, and GDP numbers.
This leads to a broader argument that the misreporting of statistics is commonplace in many African countries. In 2014, the Centre for Global Development (CGD) argued in a report that the misrepresentation of national statistics does not occur merely by accident or due to a lack of analytical capacity – at least not always – but rather that systematic biases in administrative data systems stem from the incentives of data producers to overstate development progress.
The CGD report argued that there are significant inaccuracies in the data being published by national and international agencies. These inaccuracies appear to be due in part to perverse incentives created by connecting data to financial incentives without checks and balances, and to competing priorities and differential funding associated with donor support. These inaccuracies, perverse incentives, and lack of functional independence mean that public and private investment decisions based on poor data can be deeply flawed, with major implications for well-being and public expenditure efficiency.
COUNTRY CASE STUDIES
In this report, EXX Africa assesses a number of African countries where there are strong indications or past precedents of manipulation of economic and financial statistics. Our case studies vary from suspected manipulation of economic growth and inflation numbers to suit political ends, to a lack of disclosure of publicly guaranteed loans. These case studies do not provide a definitive list of countries that have misreported on indicators, but do illustrate a broader problem across African economies that is likely to have a major impact on foreign investors’ risk exposure and the future of hallmark African trade agreements.
TANZANIA – EXAGERATING GROWTH NUMBERS
Optimistic central bank forecasts show that Tanzania’s economy is picking up steam again. The rebasing of GDP also ‘magically’ increases the size of the country’s economy since current President Magufuli came to power. However, falling foreign direct investment, partial donor suspensions, and a tarnished investment reputation, as well as an unfolding scandal into massive public accounting discrepancies, paint a different picture.
Tanzania’s central bank projects that the country’s real GDP would grow by 7.2 percent in 2018 and 7.3 percent in 2019, supported by public investment, particularly the implementation of mega infrastructure projects. The economy has been growing at around 7 percent annually for the past decade, but slowed to 6.6 percent in 2017.
However, Tanzania has been struggling to secure financing to fund its Five-Year Development Plan. Local sources report that a lack of public spending and private sector concerns over policy uncertainty are actually curtailing growth, rather than boosting the economy. Investor confidence has collapsed, driven by the government’s disputes with investors. As a result, foreign investment has dropped by more than 30% since 2015 when President Magufuli was elected.
Moreover, subdued government revenue collection and delays in securing financing for projects have held back development spending and hurt economic growth. A sharp fall in lending to the private sector, prompted by high non-performing loans, point to a continued slowdown in growth. Additionally, the institutions of the Tanzanian state are weakening and increasingly exposing public revenue to embezzlement and corruption. Tanzania’s public finances are in poor shape and efforts to ensure effective financial oversight face mounting obstacles.
Our recent analysis and local intelligence contradicts the Tanzanian central bank’s forecast. Last year, the government imposed criminal sentences for organisations and individuals that contradicted Tanzania’s official statistics. We laid out the arguments contradicting Tanzania’s official forecasts in a recent briefing (See SPECIAL REPORT: IS TANZANIA MANIPULATING ITS ECONOMIC GROWTH FIGURES?).
ZAMBIA – LACK OF DEBT DISCLOSURE
The budget deficit and pace of debt-accumulation are more likely to be higher than previously forecast by the Zambian government. This follows a contentious revision of the 2017 fiscal deficit by the Zambian government to factor in capital expenditures that had not been properly recorded in the previous years’ financial statements. The IMF remains the foremost remedy for the ailing Zambian economy. Anchorage from the lender of last resort and the prospect of a restoration of macro-economic fundamentals should aid in narrowing the trust deficit, plugging the funding shortfall, and unlocking the desperately needed investment inflows.
The elevated debt has also placed interest payments under scrutiny, with concerns that they may tend towards 27 percent of revenue in 2019. Disconcertingly, with the local kwacha currency rapidly ceding to the USD and the outlook on the mainstay copper industry appearing highly speculative, there is the feeling that the worst is yet to come for the externally vulnerable market. Indeed, further bullishness from the US Federal Reserve Bank or tariffs on the commodity could see the Kwacha depreciate more, revenue streams dry-up, and foreign short-term payment requirements tread further into default territory as portended by recent ratings downgrades.
Beyond the arithmetic, the downgrades, and belated disclosure of the capital expenditure also call into question Zambia’s transparency amid ongoing suspicions that the country is withholding the disclosure of its true financial position. EXX Africa has taken a strong position on Zambia’s debt disclosure since early 2018, which conflicts with official government accounts.
Unofficial accounts say that total external and domestic debt stands at USD19 billion, accounting for over 90 percent of GDP. Since early 2018, Zambia has signed more than USD1 billion in new loans, indicating that total debt could now be nearing 100 percent of GDP. External debt could be as high as USD15.6 billion, while local debt seems almost incalculable given lack of clarity in lending by state-owned entities from local banks. The argument over debt calculations centres on whether undisbursed contracted loans (mostly Chinese project finance) should be counted (See ZAMBIA: AUTHORITARIANISM AND ECONOMIC NATIONALISM GAIN FURTHER GROUND).
SUDAN – DENYING AN ECONOMIC CRISIS
The Sudanese economy is showing further deterioration as anti-government protests continue. The Sudanese pound has fallen to a record low on the black market, selling for 70 Sudanese pounds for cash transactions in recent weeks, as the gap with the official rate of 47.5 pounds continued to widen. The price of the dollar for cheque transactions stood at 83 pounds. Due to the lack of liquidity in the banks, US dollar carries two prices on the black market. The purchase price through checks is usually higher than the cash price.
The sudden depreciation over the past few weeks has been triggered by cash shortages following a run on the banks, as depositors fear the protests are gaining momentum since the opposition’s stated intent to unite against the embattled government. The Sudanese central bank sharply devalued the currency in early October to 47.5 pounds from 29 pounds to the dollar, and established a new system under which a group of banks and money changers set a daily rate. However, the official rate has barely moved, while the black market rate continues to depreciate against major currencies.
The economic crisis is being denied by the government, which recently released figures claiming that inflation was actually slowing. On 10 February, the state statistics agency said that Sudan’s inflation dropped to 43.45 percent in January year-on-year, from 72.94 percent in December led by slowing prices of food, beverages, and transport. Such figures have been widely ridiculed by both Sudanese and international economists as state propaganda.
The underlying economic and financial weaknesses remain in place and indicators such as cash shortages and currency depreciation suggest rampant inflation. A more likely forecast for January inflation would be around 85 percent, suggesting that Sudanese authorities are manipulating the statistical reports.
The most recent International Monetary Fund (IMF) report indicated that Sudan’s gross international reserves remained very low in 2017 at just USD 1.1 billion, equating to 1¾ months of import cover. Local sources report that reserves have fallen to a new low over the past three months and are fast depleting, posing sever risk of non-payment and default on loans. In EXX Africa’s most recent analysis, we considered that Sudan is firmly in debt distress and poses highest risk of debt unsustainability (See SUDAN: PROSPECT OF A ‘SUDANESE SPRING’ LOOMS AS OPPOSITION UNITES).
REPUBLIC OF CONGO – PLAYING HIDE AND SEEK WITH THE IMF
A prevailing economic crisis in the Republic of Congo – manifest in the country’s debt accounting for 110 percent of its GDP – is increasing concerns regarding the country’s short-to-medium trajectory and President Sassou Nguesso’s longevity in implementing the necessary reforms to escape the malaise.
President Sassou Nguesso says his government is negotiating “on a basis of trust” with the IMF on the country’s financial problems. However, in 2017 the IMF accused Congo of having hidden part of its debt from the organisation by claiming it was 77 percent of GDP. According to the IMF’s own calculation, the ratio is 117 percent. Last year, French media claimed that the Congolese government had skirted requirements of the IMF through a financial contrivance created by French oil giant Total.
The IMF insists that the Congolese government first needs to restructure its USD 9.14 billion in debt, which at 117 percent of GDP the Fund deems unsustainable. The permitted debt threshold in the regional Communauté Économique et Monétaire de l’Afrique Centrale (CEMAC) organisation is 70 percent. Congo is seeking to restructure its debt with commodities trading houses after borrowing USD 2 billion from merchants. However, the bulk of its external debt is owed to Chinese entities.
Without regaining access to international financial institutions and markets, Congo faces an imminent cash-flow crisis. As it is, the government has had to resort to loans from China and short-term advances from its central bank. Rescheduling Congo’s debt will be extremely difficult because of the opacity and complexity of many of its deals, such as loans-for-oil with China. France and the US seem unwilling to deliver a bail-out, which increases the probability of a regional currency devaluation. The IMF seems adamant to avoid such a regional currency devaluation.
Foreign, especially French, companies also resist a devaluation as the pegged exchange rate has assured low inflation and a French guarantee of fixed-rate convertibility to the euro. When France devalued the CFA franc by 50 percent in 1994, the result was high inflation and outbreaks of popular unrest. Therefore, all CEMAC members are opposed to resorting to devaluation. However, France will be unwilling to lend money directly to distressed and unreformed economies such as Republic of Congo. This means that a currency devaluation may become the only option left to mitigate the debt crisis, unless the IMF intervenes
MOZAMBIQUE – THE ‘HIDDEN’ LOANS SAGA CONTINUES
In early January, Mozambique’s attorney general indicted 18 nationals for their involvement in fraud involving USD 2 billion in loans to state-owned companies. The indictment includes ‘charges of abuse of power, abuse of trust, swindling and money laundering.’ The country’s Parliament and attorney general’s sudden action demonstrate growing panic inside the Mozambique government and renewed pressure to deal with the three-year old scandal that prompted the IMF and foreign donors to cut off credit support in 2016, thus triggering a currency collapse and a debt crisis from which the country is still trying to recover.
Former Mozambique finance minister Manuel Chang was among those indicted. Chang, who denies wrongdoing, has been detained in neighbouring South Africa since 29 December in a case brought by US prosecutors related to the fraudulent loans. Four days after Chang’s arrest, three former Credit Suisse bankers – Andrew Pearse, Surjan Singh, and Deletina Subeva – were detained in London. A fifth accused, Jean Boustani was arrested in the US. Boustani is alleged to have negotiated a round of bribe and kickback payments by his company shipbuilder Privinvest in order to ensure Mozambique government approval for projects to develop a coastal protection system for Mozambique’s 2,470 km coastline.
One of the projects was contracted by Mozambican state-owned company ProIndicus, which solicited USD 622 million in loans from Credit Suisse and Russian state-owned bank VTB Capital. Another project, to build a fleet of tuna fishing vessels, was housed under state-owned company Ematum, which gained USD 850 million in financing from Credit Suisse and VTB Capital. A third project involving Privinvest, nominally to build a shipyard, provide additional naval vessels, and upgrade two existing facilities to service Proindicus and Ematum vessels, fell under a third state-owned company, Mozambique Asset Management (MAM), which secured loans worth USD 500 million.
All loans were secured by Mozambique government guarantees and began to default on repayments around 2017. According to the US indictment, large bribes and fraudulent payments were made to the various accused bankers and Mozambique government officials. All accused have so far denied the allegations.
However, Mozambique’s Attorney-General has said she will seek to have those charged in the US and elsewhere face justice in Mozambique. Further arrests are expected as a number of names in the US indictment have not been disclosed. EXX Africa was one of the first risk advisories in early 2016 to flag substantial undisclosed debts, which was eventually confirmed by the Mozambique government, subsequently prompting the IMF and foreign donors to cut off support, triggering a currency collapse, and a default on sovereign debt.
Mozambique’s government is currently seeking to restructure the loans and in November struck an initial agreement with the bulk of its creditors to restructure a USD 726.5 million Eurobond. The agreement includes extending maturities and sharing future revenue from offshore gas projects. The agreement confirms EXX Africa’s longstanding forecast that creditors would not seek punitive measures against Mozambique, but would rather restructure debts while leveraging gas revenues as collateral. The agreement is the first in a set of steps that will be required to restore Mozambique’s relations with creditors and international financial institutions, especially the IMF.
We recently also assessed the threat of the Mozambique debts scandal spilling over into Angola, which we continue to monitor (See SPECIAL FEATURE: FALL-OUT OVER MOZAMBIQUE DEBT SCANDAL RISKS SPILL-OVER INTO ANGOLA).
Our analysis and economic forecasts show noticeable discrepancies between national official statistics and forecasts made by international agencies. The manipulation of economic data and the lack of full disclosure of publicly guaranteed loans will weigh on many African countries economic outlook this year and in the longer term.
In January, the IMF downgraded its 2019 sub-Saharan Africa growth projections from 3.8 percent to 3.5 percent. The World Bank is also rather subdued in its assessments, projecting that the sub-Saharan region will grow by no more than 3.4 percent this year. These projections are pushed downward by the muted economic recoveries in some of the continent’s largest economies, including Nigeria and South Africa. Meanwhile, the African Development Bank (AfDB) projects 4 percent growth across Africa, boosted by 4.4 percent growth in the North African region.
The highest growth levels will continue to be located in Anglophone East African countries, alongside the record growth tempo in Ethiopian. The fast developing Francophone West African countries, as well as Ghana, will provide a counter-balance on the other side of the continent, despite Nigeria’s more subdued growth rates. A post-election economic revamp could lift South Africa’s economy with beneficial effects for neighbouring states. In the meantime, the southern African region is expected to remain the continent’s worst performing economy.
A modest recovery in central Africa is unlikely to be sustained and is underpinned by IMF lending facilities to countries like Cameroon and Chad. The North African region is facing a decline as growth slows in Tunisia and remains stagnant in Algeria. Out of Africa’s five biggest economies, only Egypt will see growth rates of over 5 percent, again boosted by sizable loans from the IMF, World Bank and, Gulf states.
Debt sustainability will remain a key concern in Africa in 2019. The IMF warned last year that Africa’s debt-refinancing risks could be substantial over the next two years. The World Bank forecasts at least USD 5 billion in international debt redemptions in sub-Saharan economies this year and over USD 8 billion next year. These figures do not include domestic debt or substantial interest payments on both external and domestic debt.
Proper disclosure of debts and accurate and accountable reporting of economic and financial indicators will be crucial in determining African countries’ balance of payments and their longer term economic outlook. Investors will face higher risks in countries that are suspected of borrowing recklessly or manipulating economic indicators. Moreover, large trade deals, such as the nascent African Continental Free Trade Agreement (ACFTA), could be spoiled if all participating countries do not accurately and transparently disclose all their financial obligations and economic growth numbers.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
Ahead of the expected ratification of the world’s largest free trade agreement, we assess the divergent economic trajectory on the African continent, as well as persistent concerns over debt sustainability and political risk in some countries.
A delicate political transition is underway in one of West Africa’s most exciting economies driven by developments in the mining and energy sectors. While the risk of a military coup has subsided, the threat of terrorism and post-election unrest remains high.
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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- BENIN: TRADE DISPUTE AND POLITICAL TENSIONS DESTABILISE COUNTRY’S EXEMPLARY MODEL
- MOZAMBIQUE: ELECTION MANIPULATION IS UNLIKELY TO TRIGGER RETURN TO CIVIL WAR
- NIGERIA: TRADE RESTRICTIONS DRIVE UP NIGERIAN INFLATION AND BOOST FUEL SMUGGLING
- KENYA: PRESIDENT STEPS UP PRESSURE TO LIFT THE LENDING RATE CAP TO APPEASE THE IMF
- BOTSWANA: POLITICAL TRANSITION WILL DRIVE MUCH-NEEDED ECONOMIC REFORMS