The violent and disputed electoral process in Rivers State and apparent embezzlement of local development funds have antagonised local communities, which would be exacerbated if the military redeploys into Ogoniland. However, a return to armed insurgency in the Niger Delta currently seems less likely given militant groups’ preoccupation with lucrative oil theft and piracy activities.
The Gulf of Guinea has become the world’s largest piracy hotspot since the decline of Somali piracy in the early 2010s, with incidents increasing markedly in the last two years, continuing into early 2019. With the media reporting of new attacks in recent weeks, including kidnappings for ransom, we examine the piracy threat and its trends in the Gulf of Guinea.
Reports in the last few weeks have highlighted the persistent threat of piracy, armed robbery at sea and kidnap-for-ransom in the Gulf of Guinea. Within just the first quarter of 2019, 22 incidents were recorded across the Gulf while the region accounted for all worldwide crew kidnappings with 21 crewmembers kidnapped in five separate incidents. Although the prevalence of piracy may be higher – it is believed that about half of all attacks go unreported – incidents this year have already been recorded in Nigeria, Benin, Cameroon, Ghana, Ivory Coast, Liberia and Togo.
The threat of piracy has been steadily increasing in this region over the past half-decade. Since 2014, there have been approximately 250 actual and attempted attacks in the Gulf of Guinea, according to the International Maritime Bureau’s Piracy Reporting Centre. However, between 2017 and 2018 alone, the number of attacks increased by more than 70 percent. Nigeria has been and remains the epicentre of this threat. In 2018, 48 incidents were reported in Nigerian waters and between October and December alone, 41 kidnappings were recorded off its coast. Thus far this year, 14 incidents have occurred in the country’s waters – making up over 60 percent of the total reported incidents in the region to date. While this is a slight improvement year-on-year compared to official data collected in 2018, the waters within the Gulf of Guinea, and specifically those off Nigeria, remain some of the most dangerous for vessels and crew. We explore the evolving nature of this threat and the outlook for the year ahead.
A persistent and evolving threat
The below map shows piracy and armed robbery incidents that have been reported to the International Maritime Bureau in 2019 to date. The markers show attempted attacks, boardings, incidents in which vessels were fired upon, hijackings, and suspicious vessels. If exact coordinates are not provided, estimated positions are shown based on information provided.
Emerging alongside the rise of commercial oil exploitation in the region, piracy in the Gulf of Guinea has posed a persistent threat since the 1970’s. As global maritime trade expanded from this period onwards, ports became busier and vessels were forced to wait to berth, rendering them vulnerable to opportunist attackers. Small gangs in hollowed-out tree trunks masquerading as fishing vessels carried out these first attacks. Over time, however, these makeshift canoes were fitted with outboard motors to extend their speed and range, before gradually becoming more sophisticated to include the use of advanced technologies and weapons, including speedboats, radio frequency jammers, satellite navigation and a combination of small arms and light weapons.
By the 1990s, attacks shifted from Lagos Anchorage towards the Niger Delta where incidents became more politicised as a result of contestation over the exploitation of oil and the distribution of its rents among the local population. Crimes, such as oil bunkering and kidnapping for ransom, were attributed to groups such as the Movement for the Survival of the Ogoni People (MOSOP) and the Movement for the Emancipation of the Niger Delta (MEND), who would use criminal activities to raise revenues and further political ends by bringing attention to their cause. While an amnesty programme launched in 2009 contributed to an initial decline in incidents, an increase in reprisals were reported from 2016 onwards. Today, it is evident that political insurgents have been co-opted by highly organised, sophisticated criminal groups, with clear involvement by senior politicians and members of the security force. These groups also operate outside of Nigeria, in the waters of neighbouring countries, and the threat of piracy now extends from Senegal all the way along the coast to Angola.
From steel pipes to RPGs
As small maritime-focused gangs (such as the Seadogs, the Corsairs and the Vikings), organised criminal groups and political insurgents (such as the Niger Delta Avengers, Red Scorpions, and the Niger Delta Greenland) have melded, it has been difficult to pinpoint the number of groups operating in the region and their respective sizes. In 2012, it was estimated that there were around 1,250 ‘trained’ pirates, but this figure is in itself questionable given that groups employ young men and local fisherman via ‘unions’ on a job-by-job basis depending on the skills needed. There has been little verifiable evidence subsequently to demonstrate the exact number of pirates operating across the vast number of criminal gangs and militant groups, which are generally accepted to be amorphous.
Piracy in this part of the world is dynamic and comprises theft – varying from petty to sophisticated, where crimes are planned in advance and executed with greater skill -, oil bunkering, petro-piracy – often by means of ship-to-ship transfers or attacks on offshore platforms -, hijackings, and kidnap for ransom. Attacks also target an increasingly wide variety of ships, including: bulk carriers, container vessels, general cargo vessels, tankers, oil industry support vessels, and fishing vessels.
In the majority of cases, piracy takes the form of petty theft in port or from a vessel at anchor by perpetrators armed with knives or improvised weapons, such as pieces of steel piping. However, in more sophisticated incidents, attackers have boarded vessels well outside territorial waters, up to 100nm offshore, and are armed with assault rifles, machine-guns and rocket-propelled grenades (RPGs), demonstrating the intent to use lethal violence as a tactic when carrying out an attack.
Attacks off Nigeria have become increasingly violent, with pirates making use of multiple attack boats and engaging in shootouts with naval escorts. Kidnappings have also steadily increased over the past two years in which crewmembers are abducted form ships well offshore before being brought back into Nigeria where they are held for ransom. On 29 October 2018, for example, Nigerian pirates in a speedboat hijacked a tanker 100nm off Point Noire, Republic of Congo, kidnapping eight of the 18 crewmembers.
Modus operandi differs by incident. In more opportunistic attacks, small gangs will target vessels identified to have a poor security profile, attacking under the cover of night to avoid detection. With armed robbery at sea, attackers often pose as fishermen to blend in with the many small craft, before identifying a target and launching a stealth attempt at night, where use of force is threatened if perpetrators encounter crew. In kidnappings for ransom, ‘high-value’ targets are identified beforehand. In the most sophisticated attacks, motherships may be used and intelligence gained from corrupt officials to support a hijacking and ship-to-ship transfers.
The involvement of government officials from various departments has not only provided perpetrators with valuable intelligence but, through bribes, has ensured that naval forces turn a blind eye at crucial moments. Moreover, rumours of high-level politicians directly receiving oil rents and oil companies assisting local groups in bunkering oil as a ‘cost of business’, demonstrate how licit and illicit economies in Nigeria have blended.
Shipping companies have taken a number of ‘hardening’ measures to mitigate their vulnerability to attack. These include carrying armed guards deployed by security forces, such as in Nigeria, employing best practice management strategies for evasive measures, and awaiting berth outside high-risk waters such that vessels can move swiftly to port when required. However, private military security companies are not permitted in Nigerian waters, ruling out a method that proved most successful in combatting Somali piracy. Nigeria instead allows shipping companies to hire security escort vessels carrying naval officers. This strategy is nevertheless reported to be prohibitively expensive and largely ineffective as a deterrent.
State-based and regional efforts have drawn limited success with some countries garnering better results than others. Togo, for example, has been the most enthusiastic in the region, and has managed to decrease incidents in its waters by increasing patrolling activities and being the most likely of states in the region to respond to distress calls. Nigeria, however, has a mixed record, with security forces being plagued by corruption, and the majority of its defence budget having been deployed to fight the many conflicts onshore. Nigeria also seldom responds to distress calls, having led to a trend in the late 2000s and early 2010s in which masters simply did not report attacks to local authorities.
At a regional level, the establishment of joint reporting centres and cooperation zones have been met with a positive response. However, these efforts, while extensive and proactive on paper, have been hampered by funding and capacity constraints as well as the Anglophone/Francophone divide in the region, alongside fears of amplifying Nigerian hegemony by allowing Abuja to take a leading role. As such, however useful these strategies may be, they are often not fully implemented, forcing the region to rely on support from external actors, including the EU and the US, who regularly conduct joint exercises and counter-piracy training drills.
In the Gulf of Guinea, the nature, frequency, impact and geographical dispersion of piracy fluctuates as a result of a number of factors, including: the oil price, the exchange rate, whether fuel subsidies are in effect, the efficacy of state-based counter-piracy measures, the evasive behaviour of vessels and local politics. However, while the patterns of piracy are always shifting, the risk is never fully absent.
The threat of attacks of all kinds – ranging from petty theft to kidnap for ransom – will therefore continue in the medium to long term for a number of reasons. Poverty levels remain high, meaning that young men looking for income opportunities are numerous, policing and law enforcement remains weak, and governments are frequently distracted by other security and political issues, such as Islamist extremism onshore and local elections.
Shipping companies operating in this region should exercise caution, and continue to follow the measures detailed in Best Management Practices 4 alongside the guidelines issued by the International Chamber of Shipping and its partners. Further, vessels can minimise their risk by, where possible, planning to limit the time spent at anchor or adrift, or doing so much further offshore. Vessel hardening can also prove effective in improving the vessel’s security integrity and preventing boarding. This can include the deployment of barbed wire fencing along the vessel perimeter, the utilisation of a ‘safe room’ for crew to retreat to, and the development of standard radio and emergency procedures in the event of an attack. All necessary insurances should also be in place to mitigate loss for those with commercial interests in shipping, or whose goods are bound from or destined to the region.
The Islamist insurgency in northeastern Nigeria has continued on a track that is all too familiar. In many ways, the conflict appears to be repeating trends seen in previous years, particularly from 2013 to 2015, when the insurgency flared up dramatically. Should the conflict continue on its current trajectory, the threat may again extend beyond Borno State and Nigeria’s borders.
While the defeated opposition seeks a re-run of the presidential vote and gears up for supplementary state elections, the government of President Buhari is moving ahead with pro-growth economic policies and planning asset sell-offs in the oil sector to finance its gaping budget deficit.
President Buhari’s victory in last week’s presidential elections will be challenged in the courts. Various indicators suggest worse outbreaks of violence are to come across security hotspots in coming weeks, with further unrest expected ahead of upcoming gubernatorial elections.
The misreporting of economic data and indicators is becoming increasingly apparent across some African countries. EXX Africa assesses the political motivations involved in the manipulation of economic statistics and the likely repercussions for investors and nascent continental trade agreements.
On 20 February, Tanzania’s National Bureau of Statistics rebased the country’s economy in order to recalculate growth in gross domestic product (GDP) over the past few years. The rebasing practice is commonplace and many African countries have rebased their economies over the past few years. Most notably, Nigeria overtook South Africa as Africa’s largest economy after a rebasing calculation in 2014 that almost doubled its GDP to more than USD 500 billion. The rebasing of Ghana’s economy last year meant that economy expanded by 24.6 percent in 2018.
However, the timing of rebasing economies is often politically motivated. In Tanzania’s case, the GDP rebasing shows a 3.8 percent expansion of the economy in the year that President John Magufuli came to power, even though there are signs that the economy has slowed since he was elected. Magufuli will seek re-election in 2020 based on a campaign pledge to broaden Tanzania’s economic growth through state-led interventionist policies.
In Zimbabwe, the statistics agency rebased some of its economic statistics last October in an unexpected move that the government said increased the nominal size of its struggling economy by more than 40 percent in 2018, which seems highly unrealistic given the country’s ongoing economic crisis. In neighbouring Zambia, the finance minister is planning to rebase the country’s GDP in 2019, which should see a sudden spike in economic growth this year, even though the economy is mired in debt and heavily impacted by falling export values.
Misreporting of national statistics
It is obvious, that the rebasing of a country’s GDP can be manipulated in order to serve political means, particularly to boost an incumbent in an election year or to deny an economic slowdown. Moreover, there have been numerous recent instances in which governments have failed to properly disclose publicly-guaranteed loans or have manufactured economic statistics, such as inflation, public debt, and GDP numbers.
This leads to a broader argument that the misreporting of statistics is commonplace in many African countries. In 2014, the Centre for Global Development (CGD) argued in a report that the misrepresentation of national statistics does not occur merely by accident or due to a lack of analytical capacity – at least not always – but rather that systematic biases in administrative data systems stem from the incentives of data producers to overstate development progress.
The CGD report argued that there are significant inaccuracies in the data being published by national and international agencies. These inaccuracies appear to be due in part to perverse incentives created by connecting data to financial incentives without checks and balances, and to competing priorities and differential funding associated with donor support. These inaccuracies, perverse incentives, and lack of functional independence mean that public and private investment decisions based on poor data can be deeply flawed, with major implications for well-being and public expenditure efficiency.
COUNTRY CASE STUDIES
In this report, EXX Africa assesses a number of African countries where there are strong indications or past precedents of manipulation of economic and financial statistics. Our case studies vary from suspected manipulation of economic growth and inflation numbers to suit political ends, to a lack of disclosure of publicly guaranteed loans. These case studies do not provide a definitive list of countries that have misreported on indicators, but do illustrate a broader problem across African economies that is likely to have a major impact on foreign investors’ risk exposure and the future of hallmark African trade agreements.
TANZANIA – EXAGERATING GROWTH NUMBERS
Optimistic central bank forecasts show that Tanzania’s economy is picking up steam again. The rebasing of GDP also ‘magically’ increases the size of the country’s economy since current President Magufuli came to power. However, falling foreign direct investment, partial donor suspensions, and a tarnished investment reputation, as well as an unfolding scandal into massive public accounting discrepancies, paint a different picture.
Tanzania’s central bank projects that the country’s real GDP would grow by 7.2 percent in 2018 and 7.3 percent in 2019, supported by public investment, particularly the implementation of mega infrastructure projects. The economy has been growing at around 7 percent annually for the past decade, but slowed to 6.6 percent in 2017.
However, Tanzania has been struggling to secure financing to fund its Five-Year Development Plan. Local sources report that a lack of public spending and private sector concerns over policy uncertainty are actually curtailing growth, rather than boosting the economy. Investor confidence has collapsed, driven by the government’s disputes with investors. As a result, foreign investment has dropped by more than 30% since 2015 when President Magufuli was elected.
Moreover, subdued government revenue collection and delays in securing financing for projects have held back development spending and hurt economic growth. A sharp fall in lending to the private sector, prompted by high non-performing loans, point to a continued slowdown in growth. Additionally, the institutions of the Tanzanian state are weakening and increasingly exposing public revenue to embezzlement and corruption. Tanzania’s public finances are in poor shape and efforts to ensure effective financial oversight face mounting obstacles.
Our recent analysis and local intelligence contradicts the Tanzanian central bank’s forecast. Last year, the government imposed criminal sentences for organisations and individuals that contradicted Tanzania’s official statistics. We laid out the arguments contradicting Tanzania’s official forecasts in a recent briefing (See SPECIAL REPORT: IS TANZANIA MANIPULATING ITS ECONOMIC GROWTH FIGURES?).
ZAMBIA – LACK OF DEBT DISCLOSURE
The budget deficit and pace of debt-accumulation are more likely to be higher than previously forecast by the Zambian government. This follows a contentious revision of the 2017 fiscal deficit by the Zambian government to factor in capital expenditures that had not been properly recorded in the previous years’ financial statements. The IMF remains the foremost remedy for the ailing Zambian economy. Anchorage from the lender of last resort and the prospect of a restoration of macro-economic fundamentals should aid in narrowing the trust deficit, plugging the funding shortfall, and unlocking the desperately needed investment inflows.
The elevated debt has also placed interest payments under scrutiny, with concerns that they may tend towards 27 percent of revenue in 2019. Disconcertingly, with the local kwacha currency rapidly ceding to the USD and the outlook on the mainstay copper industry appearing highly speculative, there is the feeling that the worst is yet to come for the externally vulnerable market. Indeed, further bullishness from the US Federal Reserve Bank or tariffs on the commodity could see the Kwacha depreciate more, revenue streams dry-up, and foreign short-term payment requirements tread further into default territory as portended by recent ratings downgrades.
Beyond the arithmetic, the downgrades, and belated disclosure of the capital expenditure also call into question Zambia’s transparency amid ongoing suspicions that the country is withholding the disclosure of its true financial position. EXX Africa has taken a strong position on Zambia’s debt disclosure since early 2018, which conflicts with official government accounts.
Unofficial accounts say that total external and domestic debt stands at USD19 billion, accounting for over 90 percent of GDP. Since early 2018, Zambia has signed more than USD1 billion in new loans, indicating that total debt could now be nearing 100 percent of GDP. External debt could be as high as USD15.6 billion, while local debt seems almost incalculable given lack of clarity in lending by state-owned entities from local banks. The argument over debt calculations centres on whether undisbursed contracted loans (mostly Chinese project finance) should be counted (See ZAMBIA: AUTHORITARIANISM AND ECONOMIC NATIONALISM GAIN FURTHER GROUND).
SUDAN – DENYING AN ECONOMIC CRISIS
The Sudanese economy is showing further deterioration as anti-government protests continue. The Sudanese pound has fallen to a record low on the black market, selling for 70 Sudanese pounds for cash transactions in recent weeks, as the gap with the official rate of 47.5 pounds continued to widen. The price of the dollar for cheque transactions stood at 83 pounds. Due to the lack of liquidity in the banks, US dollar carries two prices on the black market. The purchase price through checks is usually higher than the cash price.
The sudden depreciation over the past few weeks has been triggered by cash shortages following a run on the banks, as depositors fear the protests are gaining momentum since the opposition’s stated intent to unite against the embattled government. The Sudanese central bank sharply devalued the currency in early October to 47.5 pounds from 29 pounds to the dollar, and established a new system under which a group of banks and money changers set a daily rate. However, the official rate has barely moved, while the black market rate continues to depreciate against major currencies.
The economic crisis is being denied by the government, which recently released figures claiming that inflation was actually slowing. On 10 February, the state statistics agency said that Sudan’s inflation dropped to 43.45 percent in January year-on-year, from 72.94 percent in December led by slowing prices of food, beverages, and transport. Such figures have been widely ridiculed by both Sudanese and international economists as state propaganda.
The underlying economic and financial weaknesses remain in place and indicators such as cash shortages and currency depreciation suggest rampant inflation. A more likely forecast for January inflation would be around 85 percent, suggesting that Sudanese authorities are manipulating the statistical reports.
The most recent International Monetary Fund (IMF) report indicated that Sudan’s gross international reserves remained very low in 2017 at just USD 1.1 billion, equating to 1¾ months of import cover. Local sources report that reserves have fallen to a new low over the past three months and are fast depleting, posing sever risk of non-payment and default on loans. In EXX Africa’s most recent analysis, we considered that Sudan is firmly in debt distress and poses highest risk of debt unsustainability (See SUDAN: PROSPECT OF A ‘SUDANESE SPRING’ LOOMS AS OPPOSITION UNITES).
REPUBLIC OF CONGO – PLAYING HIDE AND SEEK WITH THE IMF
A prevailing economic crisis in the Republic of Congo – manifest in the country’s debt accounting for 110 percent of its GDP – is increasing concerns regarding the country’s short-to-medium trajectory and President Sassou Nguesso’s longevity in implementing the necessary reforms to escape the malaise.
President Sassou Nguesso says his government is negotiating “on a basis of trust” with the IMF on the country’s financial problems. However, in 2017 the IMF accused Congo of having hidden part of its debt from the organisation by claiming it was 77 percent of GDP. According to the IMF’s own calculation, the ratio is 117 percent. Last year, French media claimed that the Congolese government had skirted requirements of the IMF through a financial contrivance created by French oil giant Total.
The IMF insists that the Congolese government first needs to restructure its USD 9.14 billion in debt, which at 117 percent of GDP the Fund deems unsustainable. The permitted debt threshold in the regional Communauté Économique et Monétaire de l’Afrique Centrale (CEMAC) organisation is 70 percent. Congo is seeking to restructure its debt with commodities trading houses after borrowing USD 2 billion from merchants. However, the bulk of its external debt is owed to Chinese entities.
Without regaining access to international financial institutions and markets, Congo faces an imminent cash-flow crisis. As it is, the government has had to resort to loans from China and short-term advances from its central bank. Rescheduling Congo’s debt will be extremely difficult because of the opacity and complexity of many of its deals, such as loans-for-oil with China. France and the US seem unwilling to deliver a bail-out, which increases the probability of a regional currency devaluation. The IMF seems adamant to avoid such a regional currency devaluation.
Foreign, especially French, companies also resist a devaluation as the pegged exchange rate has assured low inflation and a French guarantee of fixed-rate convertibility to the euro. When France devalued the CFA franc by 50 percent in 1994, the result was high inflation and outbreaks of popular unrest. Therefore, all CEMAC members are opposed to resorting to devaluation. However, France will be unwilling to lend money directly to distressed and unreformed economies such as Republic of Congo. This means that a currency devaluation may become the only option left to mitigate the debt crisis, unless the IMF intervenes
MOZAMBIQUE – THE ‘HIDDEN’ LOANS SAGA CONTINUES
In early January, Mozambique’s attorney general indicted 18 nationals for their involvement in fraud involving USD 2 billion in loans to state-owned companies. The indictment includes ‘charges of abuse of power, abuse of trust, swindling and money laundering.’ The country’s Parliament and attorney general’s sudden action demonstrate growing panic inside the Mozambique government and renewed pressure to deal with the three-year old scandal that prompted the IMF and foreign donors to cut off credit support in 2016, thus triggering a currency collapse and a debt crisis from which the country is still trying to recover.
Former Mozambique finance minister Manuel Chang was among those indicted. Chang, who denies wrongdoing, has been detained in neighbouring South Africa since 29 December in a case brought by US prosecutors related to the fraudulent loans. Four days after Chang’s arrest, three former Credit Suisse bankers – Andrew Pearse, Surjan Singh, and Deletina Subeva – were detained in London. A fifth accused, Jean Boustani was arrested in the US. Boustani is alleged to have negotiated a round of bribe and kickback payments by his company shipbuilder Privinvest in order to ensure Mozambique government approval for projects to develop a coastal protection system for Mozambique’s 2,470 km coastline.
One of the projects was contracted by Mozambican state-owned company ProIndicus, which solicited USD 622 million in loans from Credit Suisse and Russian state-owned bank VTB Capital. Another project, to build a fleet of tuna fishing vessels, was housed under state-owned company Ematum, which gained USD 850 million in financing from Credit Suisse and VTB Capital. A third project involving Privinvest, nominally to build a shipyard, provide additional naval vessels, and upgrade two existing facilities to service Proindicus and Ematum vessels, fell under a third state-owned company, Mozambique Asset Management (MAM), which secured loans worth USD 500 million.
All loans were secured by Mozambique government guarantees and began to default on repayments around 2017. According to the US indictment, large bribes and fraudulent payments were made to the various accused bankers and Mozambique government officials. All accused have so far denied the allegations.
However, Mozambique’s Attorney-General has said she will seek to have those charged in the US and elsewhere face justice in Mozambique. Further arrests are expected as a number of names in the US indictment have not been disclosed. EXX Africa was one of the first risk advisories in early 2016 to flag substantial undisclosed debts, which was eventually confirmed by the Mozambique government, subsequently prompting the IMF and foreign donors to cut off support, triggering a currency collapse, and a default on sovereign debt.
Mozambique’s government is currently seeking to restructure the loans and in November struck an initial agreement with the bulk of its creditors to restructure a USD 726.5 million Eurobond. The agreement includes extending maturities and sharing future revenue from offshore gas projects. The agreement confirms EXX Africa’s longstanding forecast that creditors would not seek punitive measures against Mozambique, but would rather restructure debts while leveraging gas revenues as collateral. The agreement is the first in a set of steps that will be required to restore Mozambique’s relations with creditors and international financial institutions, especially the IMF.
We recently also assessed the threat of the Mozambique debts scandal spilling over into Angola, which we continue to monitor (See SPECIAL FEATURE: FALL-OUT OVER MOZAMBIQUE DEBT SCANDAL RISKS SPILL-OVER INTO ANGOLA).
Our analysis and economic forecasts show noticeable discrepancies between national official statistics and forecasts made by international agencies. The manipulation of economic data and the lack of full disclosure of publicly guaranteed loans will weigh on many African countries economic outlook this year and in the longer term.
In January, the IMF downgraded its 2019 sub-Saharan Africa growth projections from 3.8 percent to 3.5 percent. The World Bank is also rather subdued in its assessments, projecting that the sub-Saharan region will grow by no more than 3.4 percent this year. These projections are pushed downward by the muted economic recoveries in some of the continent’s largest economies, including Nigeria and South Africa. Meanwhile, the African Development Bank (AfDB) projects 4 percent growth across Africa, boosted by 4.4 percent growth in the North African region.
The highest growth levels will continue to be located in Anglophone East African countries, alongside the record growth tempo in Ethiopian. The fast developing Francophone West African countries, as well as Ghana, will provide a counter-balance on the other side of the continent, despite Nigeria’s more subdued growth rates. A post-election economic revamp could lift South Africa’s economy with beneficial effects for neighbouring states. In the meantime, the southern African region is expected to remain the continent’s worst performing economy.
A modest recovery in central Africa is unlikely to be sustained and is underpinned by IMF lending facilities to countries like Cameroon and Chad. The North African region is facing a decline as growth slows in Tunisia and remains stagnant in Algeria. Out of Africa’s five biggest economies, only Egypt will see growth rates of over 5 percent, again boosted by sizable loans from the IMF, World Bank and, Gulf states.
Debt sustainability will remain a key concern in Africa in 2019. The IMF warned last year that Africa’s debt-refinancing risks could be substantial over the next two years. The World Bank forecasts at least USD 5 billion in international debt redemptions in sub-Saharan economies this year and over USD 8 billion next year. These figures do not include domestic debt or substantial interest payments on both external and domestic debt.
Proper disclosure of debts and accurate and accountable reporting of economic and financial indicators will be crucial in determining African countries’ balance of payments and their longer term economic outlook. Investors will face higher risks in countries that are suspected of borrowing recklessly or manipulating economic indicators. Moreover, large trade deals, such as the nascent African Continental Free Trade Agreement (ACFTA), could be spoiled if all participating countries do not accurately and transparently disclose all their financial obligations and economic growth numbers.
SEE COUNTRY OUTLOOK: ALL COUNTRIES
There is no firm indication that the postponement of Nigeria’s elections was politically motivated, however the outcome of the vote is now more likely to be disputed, raising the probability of violence and commercial disruption in coming weeks.
Three days ahead of Nigeria’s hotly contested elections, there are strong indicators of political interference in the judiciary, threats of violence against foreigners, and concerns over internet restrictions. However, the economic outlook looks brighter if the polls pass off without major incident.
Ahead of the expected ratification of the world’s largest free trade agreement, we assess the divergent economic trajectory on the African continent, as well as persistent concerns over debt sustainability and political risk in some countries.
Investor optimism in African mining is gradually recovering as indicated by companies’ growing exploration budgets. However, some of the continent’s most important mining countries are frustrating investments through arbitrary changes to taxation regimes and imposing politically motivated fines.
The annual Mining Indaba conference in Cape Town, South Africa, takes place this year with fresh optimism after a four year slump. As interest in base metals begins to rebound and clean technologies boost demand for niche battery ingredients, mining exploration budgets are again increasing.
A recent report by S&P Global Market Intelligence found that mining companies spent USD 8.4 billion last year to explore new metal deposits. This marks a 15 percent rise on exploration spending in 2016. The report also forecast that exploration spending, excluding iron ore, could increase again by 20 percent in the next year. Mining company restructuring, consolidation, and high-profile mergers & acquisitions have also renewed interest in the sector. This bodes well for mining, which dominates foreign exchange earnings, tax earnings, employment, and GDP in many African countries.
However, African mining remains exposed to various significant challenges that will determine the sector’s operating risk climate in 2019. In this compact report, EXX Africa identifies the top risks facing the mining sector in Africa this year and puts the spotlight on some of the countries where political and security risks remain a substantial obstacle to investment.
EXX AFRICA RISK MAP FOR TOP TEN AFRICAN MINING COUNTRIES
EXX Africa has developed a unique risk scoring system for 54 African countries to compare and contrast the business operating climates across the continent. The country risk numeration is a crucial aspect of our analysis and forecasting methodology.
The below Risk Map identifies the top ten African mining countries in terms of mineral value and their respective risk outlook.
KEY POLITICAL AND SECURITY RISKS IN 2019
EXX Africa has identified the top risks facing the African mining sector in 2019. Almost all of the continent’s mining countries are affected by some form of political risk, which is further explained in the table below. The risk of taxation changes and contract frustration are by far the most prominent threats facing African mining, as outlined in the below Country Risk Spotlight section.
COUNTRY RISK SPOTLIGHT
DEMOCRATIC REPUBLIC OF CONGO
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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