Martyn Davies
Managing Director of Emerging Markets & Africa at Deloitte
Africa had its own Lehman shock moment in July 2014. From mid-2014, the oil price began its steep decline from a high of $142 in mid-july 2008. As the price of oil reduced, so did the growth prospects of a large number of African economies. This has had major developmental implications for many African economies as well as for many companies that have invested in their economies. Seemingly, the blanket “Africa Rising” narrative led to a general lack of inability to foresee and mitigate risk on the part of many multinationals in the region. Intra-regional multinationals in Africa must now adapt to what is dubbed Africa 3.0 - the emerging post-crisis African economy.
The global economy remains in an almost-daily “risk-on, risk-off” state of mind. Africa is no different and due to the overall lack of economic diversification, it is very vulnerable to external factors and shocks. There is thus a heightened sensitivity to risk, but what then is the real risk environment facing investors in Africa in the year ahead?
A rising debt crisis: Many African states are experiencing a fiscal blowout - they have taken on too much public sector debt and are unable to service it. In total, African states owe just more than $35 billion in Eurobond debt. Debt-to-gdp ratios across most of the continent’s economies are in the red zone of unsustainable debt. For frontier-type markets, any figure approaching 60 percent is considered unsustainable and governments need to reduce budgetary expenditure as a result. South Africa currently stands at 51.3 percent. The worst regional performer is Mozambique with a debt-to-gdp figure of 130 percent and will shortly be facing sovereign default. The general trend in 2017 indicates increased involvement of the IMF (International Monetary Fund) in specific African states, the necessity of structural reform and an overall reduction in state spending.
Captured capital: Many African states are rapidly imposing capital controls in order to shore up their forex reserves. As a result of dwindling forex reserves - often compounded by authorities trying to defend currencies haemorrhaging in value many invested corporates are finding themselves in situations where sudden foreign exchange restrictions are imposed on them and they cannot repatriate their dividends and invested capital, and have limited access to forex. Countries where this is currently prevalent are Nigeria, Angola and Zimbabwe. The question for investors in Africa will increasingly be how to mitigate currency risk and repatriate or reinvest “captured capital.”
rising regulatory risk: Regulatory action in some African states can be described as being somewhat “aggressive” over the past year as they seek to extract large sums from invested firms for regulatory infractions. Key examples include MTN’S (reduced) $1.7 billion fine in Nigeria and Exxonmobil’s extraordinary fine of $75 billion