The Supreme Court ruling to nullify last month’s elections is a potential game-changer that has stunned the Kenyan political system and reinvigorated the opposition. Despite overturning perceptions of the opposition leader as a perennial political loser and giving credence to long-time opposition concerns over electoral manipulation, a re-run election is still too close to call at this stage.
Africa’s second largest oil exporter prepares for its most significant political transition since the 1970’s that is likely to shake up the country’s political dynamics, while in the backdrop socio-economic grievances are intensifying and the government’s arbitrary attempts to prevent an economic collapse before the elections are heightening investor non-payment and currency inconvertibility risks.
The high stakes of this election and ample scope for electoral manipulation indicate that the outcome of a probable second round run-off vote is more likely to be disputed and that partisan supporters and militia groups will mobilise to protect their ethnic and political interests, heightening security risks in major cities and commercially important regions.
EXX Africa publishes a special report on the outlook for the Rwandan elections in August, including an assessment on the prospect for violence and a post-election view on political stability, foreign donor relations, and investment opportunity. Despite Rwanda’s steady economic growth, alienation from the political process increasingly risks a broader deterioration in the country’s outlook.
Ghana’s new government is likely to benefit from a tentative economic recovery in 2017 as more oil production comes on stream, yet the unsustainability of the country’s debt situation and high contract alteration risks will continue to pose serious threats to investors in key sectors.
South Africa’s governing party has been relegated to a predominantly rural constituency, which will trigger a divisive backlash from its urban constituency over the next year, causing policy paralysis for key industries, exacerbating security risks, and retaining high probability of a credit downgrade.
On 3 August, South Africa held nationwide municipal elections that were credited by observers as transparent and fair, despite some minor localised irregularities and disruptions. The long-time governing African National Congress (ANC) party gained 53.9% of the total vote, significantly down from 62% at the previous municipal elections in 2011. Crucially, the ANC lost outright control of councils in several major cities, including the country’s largest city Johannesburg, populous Ekurhuleni, and the administrative capital Pretoria (Tshwane Municipality) in the industrial heartland of Gauteng Province, as well as Port Elizabeth (Nelson Mandela Bay Municipality), an important manufacturing hub and port city in the traditionally ANC-aligned Eastern Cape Province. However, the party still retained the largest share of the vote in Johannesburg.
The main opposition Democratic Alliance (DA) only gained 26.9% nationally (up from 23.9% in 2011). Yet the DA extended its appeal with middle class urban voters and gained the highest share of the vote in Pretoria and Port Elizabeth, while extending its control over the country’s second largest city Cape Town in Western Cape Province, where it now leads councils in most municipalities. The radical leftist Economic Freedom Fighters (EFF) party, which was only formed in 2013, gained 8.2% of the vote and will play a key kingmaker role in coalition negotiations in hung councils. The Inkatha Freedom Party (IFP) also increased its share of the vote (4.3%), mostly drawn from ethnic Zulu voters in KwaZulu-Natal province.
These results are broadly in line with our forecasts made in January 2016 (See SOUTH AFRICAN ELECTION YEAR). The elections marked the first time that the ANC’s share of the national vote fell below 55% since taking power in 1994. The shift in support from the ANC to opposition parties was motivated by the ANC’s weak record on municipal service delivery, such as provision of water, electricity, and housing, as well as economic mismanagement, with unemployment at 27% and the central bank projecting zero growth this year. Moreover, widespread perceptions of corruption implicating senior officials, most notably President Jacob Zuma, have tarnished the party’s reputation. Politically motivated interventions in financial policy have also left South Africa’s debt just short of a downgrade to non-investment ‘junk’ grade (See SOUTH AFRICA’S THREE FINANCE MINISTERS). Major credit rating agencies postponed a widely expected further downgrade in June until after the municipal elections (See SOUTH AFRICAN DOWNGRADE DELAYED, NOT AVOIDED).
WEAK COALITIONS POSE CONTRACT FRUSTRATION RISK
There is a precedent to form coalitions in South African municipalities, although this has not yet been replicated in major cities, where negotiations are likely to be lengthy and cumbersome. In Port Elizabeth, the DA has a stronger mandate to lead the council in coalition with smaller local opposition parties, such as the EFF, the ANC-breakaway Congress of the People (COPE), or the centre-left United Democratic Movement (UDM). However, coalition-building will be tougher in larger cities in Gauteng where margins of victory are far slimmer and the EFF is the only feasible opposition partner. The DA and EFF are not ideologically compatible partners. The EFF advocates nationalisation of banks, mines, and other key industries and seeks expropriation of farmland without compensation for redistribution. Moreover, EFF party leader Julius Malema has been charged with tax evasion and money laundering in relation to issuance of public contracts in his home Limpopo Province, though Malema has denied all such charges.
If the DA and ANC fail to form a coalition in those Gauteng cities, then election re-runs could be held or frail minority governments could emerge as an alternative. Eventual coalitions in Pretoria and Johannesburg are more likely to be weak and heavily dependent on support from smaller parties, chiefly the EFF. This will increase the risk of policy paralysis and cause delays in city procurement, maintenance and construction contracting, and service delivery. Port Elizabeth, Pretoria, and Johannesburg all have thriving manufacturing industries, such as vehicle-making factories and metal smelting plants. Municipal licensing to such industries is likely to face delays or could even be held up for politically-motivated reasons to frustrate rival political parties.
Moreover, municipal contracts signed by previous metro governments will be at higher risk of revision and even cancellation. The DA and EFF have campaigned heavily on eradicating corruption from municipal governments and are likely to review all procurement contracts, initiate graft investigations into questionable deals, and prosecute service providers accused of malpractice. This is likely to affect construction and engineering contractors, as well as telecommunications and broader utilities.
POLITICAL SUCCESSION CONTEST TO INTENSIFY POLICY PARALYSIS AND SECURITY RISKS
The primary consequence of the municipal elections has been the relegation of the once-dominant ANC party to a predominantly rural party that holds onto political power through alliances with traditional leaders in rural locations. As a result of the ANC’s slide in major cities, the party’s support could drop close to 50% in the 2019 national elections. This is likely to trigger a backlash among urban-based ANC leaders, especially those in Gauteng who saw the largest electoral setbacks at the municipal elections. EXX Africa has previously forecast that the most likely threat to President Jacob Zuma’s dominance would come from Gauteng Province, where the president is particularly unpopular (See THE DEMISE OF SOUTH AFRICA’S JACOB ZUMA). The anti-Zuma faction will be supported by influential veteran leaders of the ANC’s former armed wing (Umkhonto we Sizwe), as well as the ANC’s governing alliance partners labour federation the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP). President Zuma is widely expected to remove SACP and COSATU leaders from influential posts in an upcoming government reshuffle, which would further exacerbate internal alliance relations.
However, President Zuma is unlikely to be recalled or step down as national president until at least December 2017, when the ANC holds an elective leadership congress and when Zuma is due to stand down as ANC party president. He still retains significant control over the party’s top decision-making body the National Executive Committee (NEC) and will be able to influence his own succession, which is being contested by two rival camps spearheaded by Deputy President Cyril Ramaphosa, who enjoys the support of the anti-Zuma faction, and by Chairperson of the African Union Commission Nkosazana Dlamini-Zuma. Dlamini-Zuma will depend on the endorsement and political backing of President Zuma, who is her ex-husband, to ensure the support of rural provincial ANC leaders and the party’s Youth and Women’s Leagues. In the unlikely case that President Zuma steps down or is recalled as national president following the August elections, he will be succeeded by his deputy Ramaphosa, which would strengthen his chances of succession in 2017. EXX Africa currently views a succession by Ramaphosa as most likely, unless a strong third candidate emerges.
The relative political weakness of the two apparent frontrunners is likely to allow more succession candidates to emerge and seek the support of defeated ANC structures in large Gauteng cities. Potential figures around whom support for a third candidacy could rally include former president Kgalema Motlanthe, former Reserve Bank governor Tito Mboweni, ANC Secretary-General Gwede Mantashe, SACP leader Blade Nzimande, and ANC Treasurer-General Zweli Mkhize. Since the ANC has adopted a top-down political slate system to contest the party’s leadership, indications of such a third candidacy are likely to become apparent towards the end of 2016, one year ahead of the December 2017 ANC elective congress.
The main implication of such political uncertainty following the 2016 municipal elections will be continued policy paralysis over key pieces of legislation governing the mining, energy, power, private security, and agriculture sectors. Moreover, the government will be unable to implement cost-cutting and business-friendly measures proposed by Finance Minister Pravin Gordhan in February, accelerating a likely downgrade of the country’s debt rating to non-investment grade later in 2016. There is also a higher risk that the government proposes new radical and populist policies to boost its support ahead of the 2019 elections. Credit rating agency Fitch says ‘this could include costly spending measures that could require breaching expenditure ceilings or redistributive regulatory policies that might undermine economic growth.’ Populist proposals already resulted in a review of South Africa’s trade status with the US (See TRADE WARS: SOUTH AFRICA’S GAME OF CHICKEN).
The succession contest within the ANC will also trigger outbreaks of violence between partisan supporters, especially within key battleground provinces such as Gauteng. The lead-up to the municipal elections was marked by riots in Pretoria and disruptive strikes at fuel refineries (See SOUTH AFRICA ELECTION VIOLENCE). The political involvement of the trade unions also indicates heightened risk of disruptive industrial action over the next year in key industries, such as mining, manufacturing, power, and transport, as well as the public sector (See SOUTH AFRICA TO BEGIN ‘STRIKE SEASON’).
CREDIT RATING DOWNGRADE ALMOST INEVITABLE
The three major credit rating agencies are particularly concerned over South Africa’s unsustainable public spending, mismanagement and overspending at state-owned enterprises, rising unemployment, lacklustre growth, lack of regulatory clarity on key legislation such as minerals development and labour practices, as well as the uncertain political climate ahead of the 2017 ANC elective congress and the 2019 national elections. The prospect of a credit downgrade to non-investment grade has been delayed, but not avoided. The key indicators for a downgrade are future policy mistakes, a lacklustre economy, lack of necessary reforms, and an uncertain political outlook. All of these indicators are still in play following the municipal elections. As a result, a downgrade by at least one credit ratings agency is almost inevitable. The most likely timeline for a credit downgrade is in December 2016 or early in 2017.
The impact on the country’s economy would be devastating, drying up foreign investment, raising borrowing costs, while major international investors would be forced to ‘dump’ the country’s US dollar denominated debt. Local currency denominated debt would be unlikely to be directly impacted. A cut to non-investment grade would increase South Africa’s borrowing costs and further frustrate attempts to plug a budget deficit estimated at 3.2% of GDP in the 2016/17 financial year. According to Finance Minister Pravin Gordhan, it could take at least five years for South Africa to return to investment-grade status following further downgrades.
This holds serious implications for the local banking sector. South African banks have been hit hard by the shock to the rand and financial markets, while already facing an increasingly vulnerable economy and the increasingly likely prospect of a credit downgrade to junk status by ratings agencies. Meanwhile, aggressive rate hikes by the reserve bank would further damage local banks given their exposure to household debt. However, local investors are unlikely to turn away from South African banks, which have proven resilient to exogenous shocks over the past few years, thus limiting any immediate liquidity risks in the sector.
SEE COUNTRY PAGE: SOUTH AFRICA
Following the UK’s surprise vote to leave the EU, we assess the probable impact such a departure would have on African trade, investment, and security policy. In this free special report, EXX Africa analyses the impact of an eventual ‘Brexit’ on three of the UK’s most important African markets: South Africa, Nigeria, and Kenya.
- The UK vote to leave the EU was based on a non-binding advisory referendum and does not guarantee the UK’s departure from the EU. However, months of political uncertainty throughout Europe will rattle global and African markets.
- If the UK does leave the EU, the impact on many African economies will be short-term and relatively insignificant. The UK will have two years to renegotiate trade agreements with African countries.
- The South African economy is now more likely to fall back into recession and extreme currency volatility indicates that a downgrade of its credit rating to non-investment grade in December is now almost inevitable. Bi-lateral security cooperation and aid programmes face less disruption.
- The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
- Kenyan markets were relatively stable following the ‘Brexit’ vote, although any disruption in EU trade negotiations would negatively impact the cut flowers export market. It is likely that the UK would prioritise trade negotiations with Kenya, which could even benefit Kenya and other EAC members.
On 23 June, the United Kingdom (UK) voted to leave the European Union (EU) in a non-binding advisory referendum, which resulted in the resignation of UK Prime Minister David Cameron and is likely to trigger fresh elections later this year or in 2017. Despite pressure from some EU countries, it is unlikely that exit negotiations will begin until a new UK government is firmly in place. There is a possibility that the next UK government will not trigger exit negotiations at all, based on a legal technicality or if it calls a second referendum.
Regardless of the probability of an eventual UK exit from the EU, the referendum result has caused market turmoil across the world, as investors worry that the result of the UK vote could drive fresh momentum to anti-establishment movements in other European countries. Global stocks lost USD2 trillion in value on 24 June and sterling fell to a 31 year low. UK companies and banks were some of the worst affected, with USD55 billion wiped off banking stocks. The price of commodities also fell, with the price of oil dropping 3.9% to USD50 per barrel. However, the price of gold gained 4.7% as a reflection of investors’ perception of gold as a safe haven. At the time of writing on 27 June, Asian stocks and the UK pound were extending losses.
In Africa, currencies, stocks, and bonds also tumbled as a result of the UK referendum vote. The South African rand fell by 8% against the US dollar, before recovering to trade at 3.6% weaker, while falling to a record low against the Japanese yen. Investors are worried that African countries will have less access to international capital markets, which would halt large infrastructure and other projects. There is also a concern that the UK will now disengage from Africa, as its economy inevitably slows, and foreign aid flows are cut. While the UK has a firm commitment to spend 0.7% of its gross national income (GNI) on development aid, an eventual recession in the UK would decline GNI in absolute terms and thus diminish development aid to Africa.
Moreover, any trade deals that the UK has in place with African countries are essentially trade agreements with the EU, which has exclusive jurisdiction over its members’ trade deals. Any exit from the EU could terminate the UK’s access to the EU’s single market, forcing the country to negotiate new trade accords with African countries, which is likely to be a cumbersome and lengthy process. It is however likely that the UK would leave many existing trade agreements in place and thus mitigate risk of trade disruption. In this special report, EXX Africa assesses the likely implications of a UK departure from the EU for some of the UK’s top African trading partners, as well as other implications on wider investment and security. We analyse two key drivers of risk, firstly the impact of a ‘Brexit’ on existing trade and other arrangements with the EU, and secondly the longer term effect of a probable economic slow-down of the UK economy, which is the fifth largest in the world with substantial ties to the African continent.
CASE-STUDY: IMPACT ON SOUTH AFRICA
The South African economy is now more likely to fall back into recession and extreme currency volatility indicates that a downgrade of its credit rating to non-investment grade in December is now almost inevitable. Bi-lateral security cooperation and aid programmes face less disruption.
The South African economy is the most exposed to the global economy and in particular its currency is the most volatile among its emerging market peers. South Africa is reliant on foreign capital to finance its wide current account deficit. Additional fears of euro-scepticism in other EU countries have also stoked fears that South Africa’s trade with the EU is under threat. South African exports to the EU reached over USD14.2 billion in 2015. However, the impact on the South African economy would be short-lived and relatively manageable. In a worst case scenario, where the UK economy were to shrink by 5% and UK imports were to drop by 10%, South Africa’s economic growth would fall by only 0.1% (according to research by North West University).
South Africa’s Finance Minister Pravin Gordhan has said that the country’s Treasury and the central bank would take any additional measures to cope with the implications of the ‘Brexit’ vote, while South Africa’s President Jacob Zuma has assured markets that South African banks and financial institutions could withstand the shock, as demonstrated during the 2008/09 global financial crisis. While a 0.1% loss in GDP growth is relatively small, the country’s economic growth rate has already slumped, recording a 1.2% contraction in the first quarter of 2016, as mining and farming output shrank. The UK exit vote thus indicates that a recession will be increasingly likely for the South African economy in 2016.
The impact on the currency would be more significant and have longer term implications on the country’s debt rating. The rand has already lost 21% against the US dollar so far in 2016. On 24 June, the South African rand was the worst performing currency after the UK pound, before paring some of its previous losses. This is due to South Africa’s close financial ties to the UK and the fact that many large South African companies have a dual listing on the London and Johannesburg stock exchanges. According to research by Unicredit, UK banks’ claims on South African companies account for 178% of South Africa’s foreign currency. South Africa’s already volatile currency and a probable recession further would increase the prospect of a downgrade of the country’s credit rating to non-investment grade by December. The longer term implications would lead to weak growth, higher inflation and interest rates, as well as extensive capital flight.
According to Bloomberg, the UK is South Africa’s fourth largest export destination, mostly dominated by metals and agricultural goods. The bulk of these exports have duty-free access to the EU under the terms of the Trade Development Co-operation Agreement. The trade terms with the UK will now need renegotiation and revision, which could take up to two years, and significantly impact investment in key industries such as mining and agriculture. Moreover, South Africa is a member of the Southern African Customs Union (SACU), which is dominated by asymmetric trade with South Africa. Other SACU members, i.e. Botswana, Namibia, Lesotho, and Swaziland, will similarly be affected by the trade renegotiations with the UK. South Africa’s Trade and Industry Minister Rob Davies has offered UK companies that stand to lose their duty-free access to EU markets a base in South Africa, thereby continuing these companies’ access to the EU through the EU-SADC Economic Partnership Agreement (EPA), which includes six countries of the Southern African Development Community (SADC).
Beyond trade and investment, the implications of an eventual ‘Brexit’ are less likely to be extensive. The presence of the British Peace Support Team (BPST) in South Africa, which provides for bilateral military co-operation such as joint exercises with the South African National Defence Force (SANDF), is unlikely to be affected. South Africa is one of the top ten countries receiving British aid, which could be cut down as the UK economy enters severe recession. Britain’s bilateral development programme in South Africa came to an end in 2015, since when the relationship between the two countries has shifted to one of mutual co-operation and trade.
CASE-STUDY: IMPACT ON NIGERIA
The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles as the UK withdraws from the EU. Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
The main impact of a ‘Brexit’ on Nigeria would be further deterioration of the country’s already struggling economy, which has been caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the Niger Delta. There is extensive trade and security cooperation between the UK and Nigeria that would be likely to face several years of disruption as the UK departs from the EU. Nigeria is the UK’s second-largest export market in Africa. Bilateral trade between the two countries is currently worth USD8.3 billion and projected to reach USD25 billion by 2020. The UK is also Nigeria’s largest source of foreign investment, with assets worth over USD1.4 billion. Moreover, UK-Nigerian remittances account for USD21 billion a year. The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts.
A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances. There is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour. On 24 June, Nigerian stocks ended a three-day rally, falling 1.4% over worries of Britain’s vote to leave the EU. Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses. Nigerian stocks had previously rallied 8.5% after the government floated the naira and ended a highly controversial currency peg.
As a result, new portfolio inflows will slow, which will hamper the implementation of the country’s new foreign exchange mechanism. On 20 June, the central bank introduced a more flexible foreign currency policy, removing a de facto peg of around 197 naira to the US dollar. The naira’s 16-month peg to the dollar had overvalued the Nigerian currency, resulted in an economic contraction, and harmed investments. The implementation of the fuel sector liberalisation, including the termination of a burdensome state-subsidy scheme, would be likely to face implementation issues. The sector’s liberalisation will add to fuel importers’ margins and will allow shipments of fuel to resume. The liberalisation of the fuel marketing sector and the proposed introduction of a flexible exchange rate are both aimed at soothing foreign investor concerns and to attract new fundraising to finance a record budget deficit widened by a fall in oil revenues. The effective implementation of the new currency regime and establishing its credibility will be key to attracting new foreign direct investment and portfolio flows. Finance Minister Kemi Adeosun is due launch a planned eurobond sale later in 2016. The government plans to raise USD10 billion of new debt of which USD5 billion would come from foreign investors. Much of this planning would be delayed as risk averse investors steer away from Nigerian debt.
Beyond trade and investment, the UK is also a key partner in Nigerian security. The UK has been crucial to drawing international attention to the Islamist Boko Haram insurgency in Nigeria’s northeast. There is a risk that the UK would become distracted from international security threats, such as those by Boko Haram, as it negotiates its departure from the EU. However, the US and France have proven more crucial partners than the UK in combating Boko Haram, thus mitigating the effect on counter-insurgency efforts.
CASE-STUDY: IMPACT ON KENYA
Kenyan markets were relatively stable following the ‘Brexit’ vote, although any disruption in EU trade negotiations would negatively impact the cut flowers export market. It is likely that the UK would prioritise trade negotiations with Kenya, which could even benefit Kenya and other EAC members.
Kenyan officials were quick to respond the market turmoil followed by the UK’s vote to leave the EU. Finance Minister Henry Rotich assured investors that Kenya has adequate foreign exchange reserves to absorb any shocks from the crisis. Kenya has USD5.6 billion in foreign reserves, which amounts to 5 months of import cover, which is higher than the four months the country usually holds. The central bank also said it would be ready to intervene in money and foreign exchange markets if required. Such assurances steadied the impact on the Kenyan shilling, but some banking stocks still suffered losses. Equity Bank and Co-operative Bank were down over 2% on 24 June, while other stocks were unchanged.
However, there is a risk of capital flight from Kenya as risk averse investors seek safe havens. This would weaken the shilling and increase import costs. Kenya’s import bill has steadily increased by more than 10% over the past five years. Another key concern would be that ongoing negotiations of a trade agreement between the EU and the East African Community (EAC) would be delayed as the EU copes with the UK’s departure. The Kenya Flowers Association expects any such delays would cost the Kenya flower industry USD38 million per month. Horticulture is a primary export market for Kenya and over one third of the EU’s cut flower imports, mostly to The Netherlands and the UK, are derived from Kenya. However, it is likely that the UK would prioritise trade negotiations with Kenya given the two countries’ long-standing bilateral relations. Such negotiations could even benefit Kenya and other EAC countries, as Kenya gains leverage over setting trade terms.
Although a series of diplomatic disputes have strained British-Kenyan relations over the past few years, Kenya is likely to feature as the UK’s principal destination for emerging market investment. Despite diplomatic disputes, Kenya is likely to remain a preferred beneficiary of British foreign investment in agribusiness (tea, tobacco) and in oil and gas, with the UK being instrumental in the development of Kenya’s region-leading financial sector. Much like US investment, British investment is likely to increase in the renewable energy sector, especially financing and technical co-operation for geothermal, solar, and wind projects, which represent lower-risk sectors. Given these interests, and the large presence of British expatriates and tourists, the UK is likely to maintain security co-operation towards mitigating the threat posed by Islamist militant group al-Shabaab, which has British nationals active within its ranks.
EXX Africa summarises and evaluates some of its key forecasts on financial sector risks in Africa over the past six months, focussing on the banking sectors in Nigeria, Angola, Kenya, DRC, Mozambique, and South Africa.
A modest recovery in the global prices of at least four metals is increasingly likely in 2016. In this Special Report, EXX Africa identifies key opportunities in six African metal-producing countries and assesses the political and security risk outlook.
- EXX Africa director Robert Besseling moderated a panel on Africa’s commodity rollercoaster at GTR Commodities in Geneva hosted by Global Trade Review (GTR)
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