Top Busi­ness Risks for Africa

Nomad Africa Magazine - - Inside Issue11 -

as Nige­ria ex­its the re­ces­sion of 2017, in­vestor sen­ti­ment across West Africa is likely to ex­pe­ri­ence up­lift this year. Still, po­lit­i­cal un­cer­tainty ahead of Nige­ria’s 2019 pres­i­den­tial elec­tions and on-going security con­cerns are among the key risks for busi­nesses op­er­at­ing in the re­gion, says spe­cial­ist global risk con­sul­tancy Con­trol Risks.

Con­trol Risks’ Se­nior Part­ner for West Africa Tom Grif­fin com­ments: “2017 has been a tough and tur­bu­lent year for busi­nesses in the re­gion, how­ever with Nige­ria ex­it­ing re­ces­sion, and for­eign ex­change short­ages eas­ing, we see a strong im­prove­ment in in­vestor sen­ti­ment emerg­ing. An­other ma­jor engine of growth will be Cote d’Ivoire, where eco­nomic ex­pan­sion is pro­jected at around 7% next year. There will be only a hand­ful of elec­tions in the re­gion in 2018, mean­ing con­ti­nu­ity will largely pre­vail with pol­icy de­ci­sions hav­ing the big­gest im­pact on the busi­ness en­vi­ron­ment.”

“In Nige­ria how­ever, although pres­i­den­tial elec­tions are next slated for 2019, cam­paign­ing has al­ready started. The un­cer­tainty that gen­er­ates, as well as the need for cash that an elec­tion brings, mean that po­lit­i­cal in­sta­bil­ity and reg­u­la­tors whose ac­tions will be dif­fi­cult to pre­dict re­main among top risks for busi­nesses in the year ahead.”

Ter­ror­ism and mil­i­tancy

Busi­ness as­sets and per­son­nel in West Africa will re­main vul­ner­a­ble to at­tacks by transna­tional or do­mes­tic mil­i­tant groups. In par­tic­u­lar, al-Qaeda and its af­fil­i­ates will con­tinue to pose a threat to op­er­a­tors in the Sa­hel, while the oil and gas in­dus­try in Nige­ria’s Niger Delta will re­main ex­posed to at­tacks by do­mes­tic mil­i­tant groups. Fail­ure to re­solve the un­der­ly­ing po­lit­i­cal and so­cio-eco­nomic griev­ances at the root of these move­ments will see the threat per­sist this year.

Ir­reg­u­lar reg­u­la­tors

As coun­tries in the re­gion, no­tably com­mod­ity-de­pen­dent economies, face grow­ing fis­cal pres­sures, op­er­a­tors are likely to see reg­u­la­tory bod­ies in­creas­ingly act as rev­enue-gen­er­at­ing bod­ies, strength­en­ing lo­cal con­tent pro­vi­sions, in­tro­duc­ing stricter fis­cal terms, re­view­ing con­tracts or er­rat­i­cally im­pos­ing fines in com­pa­nies in the hope of boost­ing state fi­nances. This will pe­ri­od­i­cally give rise to com­mer­cial dis­putes, le­gal chal­lenges, and the need for busi­nesses to en­gage with gov­ern­ment stake­hold­ers.

Po­lit­i­cal in­sta­bil­ity

Pro­tracted po­lit­i­cal and so­cio-eco­nomic griev­ances will con­tinue to fuel pop­u­lar dis­con­tent and a de­sire for regime change in parts of the re­gion. Cameroo­nian Pres­i­dent Paul Biya’s re-elec­tion bid amid a con­tin­ued cri­sis in the An­glo­phone re­gions will ex­ac­er­bate ten­sions, while To­golese cit­i­zens will con­tinue to protest for the end of the 50-year Gnass­ingbé dy­nasty. Protests will pose security threats to busi­nesses, while regime changes would prompt ma­jor in­sti­tu­tional changes and com­pli­cate en­gage­ments for op­er­a­tors.

New sec­tors, new risks

From Sene­gal’s off­shore po­ten­tial to

Across the African con­ti­nent, busi­nesses might see the neg­a­tive im­pact of a po­ten­tial re­newed debt cri­sis com­ing. Many coun­tries in Africa, Mozam­bique among them, face the prospect of a sovereign debt cri­sis, a decade af­ter they fol­lowed Ghana’s lead in en­ter­ing the in­ter­na­tional bond mar­ket. The prob­lem is driven by high lev­els of ex­ter­nal debt and per­sis­tent un­cer­tainty over the recovery of com­mod­ity prices to fund re­pay­ments. None­the­less, on­go­ing re­forms and gov­ern­ment recog­ni­tion of these is­sues will drive im­prove­ments this year.

Nige­ria’s em­bry­onic min­ing sec­tor, some coun­tries in West Africa will be mak­ing for­ays into pre­vi­ously-un­de­vel­oped sec­tors this year. Prospec­tive in­vestors need to mon­i­tor closely how gov­ern­ment’s abil­ity to over­see these sec­tors evolves and what the as­so­ci­ated risks around these projects be­come.

On-going op­er­a­tional risks

Many of the ma­jor risks and chal­lenges busi­nesses face in West Africa are the on­go­ing prac­ti­cal im­ped­i­ments to day-to­day op­er­a­tions. Short­ages of or dif­fi­cul­ties in sourc­ing fuel, for­eign cur­rency, equip­ment and skilled labour; the in­fra­struc­ture deficits that per­sist in the vast ma­jor­ity of the re­gion, such as in elec­tric­ity and trans­port, will con­tinue to mean higher costs, higher de­mands on man­age­ment re­sources a tougher cap­i­tal-rais­ing en­vi­ron­ment, and greater un­cer­tainty for busi­nesses than in other re­gions.

Many coun­tries in Africa, Nige­ria and Cameroon among them, face the prospect of what could be­come a sovereign debt cri­sis, a decade af­ter they fol­lowed Ghana’s lead in en­ter­ing the in­ter­na­tional bond mar­ket. The prob­lem is driven by high lev­els of ex­ter­nal debt, per­sis­tent un­cer­tainty over the recovery of com­mod­ity prices to fund re­pay­ments, and bor­row­ing to fund re­cur­rent ex­pen­di­ture. Coun­tries de­pen­dent on oil rev­enues are par­tic­u­larly vul­ner­a­ble to bal­loon­ing debt this year.

In Nige­ria and Ghana, plans to bor­row heav­ily to fi­nance long-term in­fra­struc­ture projects will not gen­er­ate suf­fi­cient rev­enues in the com­ing year to fi­nance debt re­pay­ments. Amid ris­ing in­fla­tion and muted oil prices, Nige­ria’s debt ser­vic­ing pay­ments – which in 2016 dou­bled to 66% of to­tal rev­enues – are likely to rise fur­ther, plac­ing ex­treme strain on an al­ready stretched bud­get. With the gov­ern­ment of Pres­i­dent Muham­madu Buhari well over half­way through its term, yet to ful­fil many of the prom­ises that brought it to power and al­ready en­ter­ing cam­paign mode, busi­nesses in Nige­ria will re­main acutely sen­si­tive to po­lit­i­cal and op­er­a­tional in­sta­bil­ity this year.

East Africa Re­gion

Kenya is emerg­ing from a pro­tracted pres­i­den­tial elec­tion process and see­ing a

In Nige­ria and Ghana, plans to bor­row heav­ily to fi­nance long-term in­fra­struc­ture projects will not gen­er­ate suf­fi­cient rev­enues in the com­ing year to fi­nance debt re­pay­ments. Amid ris­ing in­fla­tion and muted oil prices, Nige­ria’s debt ser­vic­ing pay­ments – which in 2016 dou­bled to 66% of to­tal rev­enues – are likely to rise fur­ther, plac­ing ex­treme strain on an al­ready stretched bud­get.

re­turn to po­lit­i­cal sta­bil­ity. None­the­less, chal­lenges will per­sist in 2018 for or­gan­i­sa­tions op­er­at­ing in the coun­try and East Africa more widely. High debt lev­els in Kenya and un­pre­dictable pol­i­cy­mak­ing in Tan­za­nia are among the key risks for busi­nesses op­er­at­ing in the re­gion in the year ahead. Man­age­ment of high debt lev­els and reg­u­la­tory un­cer­tainty in some mar­kets pose key risks for busi­ness in 2018. Con­trol Risks’ Se­nior Part­ner for East Africa Daniel Heal com­ments: “2018 is set to be a promis­ing year for Kenya and the East Africa re­gion. We have started to see the recovery of in­vestor con­fi­dence due to the re­turn of po­lit­i­cal sta­bil­ity in Kenya, as well as re­newed in­ter­est in ma­jor in­fra­struc­ture projects both in Kenya and across the re­gion. We ex­pect this to con­tinue through­out 2018.”

“How­ever, in Kenya, a pend­ing re­pay­ment of the first por­tion of a Eu­robond worth USD 774.8m in 2018 should be a trig­ger for the gov­ern­ment to re­fo­cus at­ten­tion on con­trol­ling pub­lic bor­row­ing and spend­ing be­fore debt be­comes un­man­age­able. Kenya has a strong ap­petite for ex­ter­nal bor­row­ing and has re­mained po­lit­i­cally in­tran­si­gent about its down­sides. While Kenya re­mains highly un­likely to de­fault on its debt, grow­ing in­ter­est pay­ments and in­ter­na­tional banks’ shrink­ing ap­petite to pro­vide fur­ther loans will re­sult in lower pub­lic spend­ing, which has been a key driver for eco­nomic growth in re­cent years.”

Lin­ger­ing debt cri­sis raises po­ten­tial rep­u­ta­tional risk

Coun­tries in the re­gion with a more di­ver­si­fied eco­nomic base such as Kenya and Ethiopia will keep sovereign risks at bay over the next year, and are un­likely to face a debt cri­sis in 2018. How­ever, in­vestors will have con­cerns about the sus­tain­abil­ity of bor­row­ing over the long term. Gov­ern­ments across the re­gion will have to make sig­nif­i­cant im­prove­ments in pub­lic fi­nan­cial man­age­ment, re­duce pub­lic spend­ing and demon­strate pru­dent over­sight mech­a­nisms to avoid neg­a­tively im­pact­ing the wider econ­omy in the medium term.

Re­gional po­lit­i­cal co­op­er­a­tion in­creases vul­ner­a­bil­i­ties for in­vestors

The in­fra­struc­ture boom in East Africa is set to con­tinue this year. How­ever, cross­bor­der projects will de­pend on closer and more ef­fec­tive po­lit­i­cal co­op­er­a­tion be­tween re­gional gov­ern­ments, rais­ing po­lit­i­cal risk vul­ner­a­bil­i­ties. In­creas­ing fo­cus on lo­cal con­tent will present a range of rep­u­ta­tional risks for in­vestors around third-party man­age­ment, and land and com­mu­nity is­sues will re­quire early and com­mit­ted en­gage­ment from in­vestors to avoid any ma­jor op­er­a­tional im­pact.

Ten­sions be­tween Kenya’s na­tional and county gov­ern­ments may gen­er­ate new po­lit­i­cal risks

The coun­try’s re­turn to po­lit­i­cal sta­bil­ity this year will be­gin to un­lock in­vest­ment de­mand. How­ever, the gov­ern­ment will

Un­pre­dictable pol­i­cy­mak­ing in Tan­za­nia will con­tinue to present ma­jor reg­u­la­tory risks for in­ter­na­tional and re­gional in­vestors. Pres­i­dent John Magu­fuli’s grip on power is tight­en­ing, and his au­thor­i­tar­ian style and er­ratic ap­proach to leg­is­la­tion will fur­ther dam­age in­vestor con­fi­dence.

need to con­sol­i­date sta­bil­ity and fo­cus on build­ing ef­fec­tive work­ing re­la­tion­ships with county gov­ern­ments to keep po­lit­i­cal risks at bay. It will also need to fo­cus on stim­u­lat­ing the pri­vate sec­tor by re­assess­ing the in­ter­est rate cap, en­cour­ag­ing more pri­vate sec­tor in­volve­ment in in­fra­struc­ture projects and con­tinue to re­duce bu­reau­cratic hur­dles.

Reg­u­la­tory risks in Tan­za­nia

Un­pre­dictable pol­i­cy­mak­ing in Tan­za­nia will con­tinue to present ma­jor reg­u­la­tory risks for in­ter­na­tional and re­gional in­vestors. Pres­i­dent John Magu­fuli’s grip on power is tight­en­ing, and his au­thor­i­tar­ian style and er­ratic ap­proach to leg­is­la­tion will fur­ther dam­age in­vestor con­fi­dence. He will con­tinue to use na­tion­al­is­tic leg­is­la­tion in the ex­trac­tives in­dus­try as a way of in­creas­ing gov­ern­ment rev­enue and ad­dress­ing fis­cal re­straints, pre­sent­ing a range of reg­u­la­tory and po­lit­i­cal risks for in­vestors in the short-to-medium term.

Security and op­er­a­tional risks as a re­sult of po­lit­i­cal pres­sures in Ethiopia and Uganda

In Uganda, spec­u­la­tion over Pres­i­dent Yow­eri Mu­sev­eni’s suc­ces­sion plans is likely to per­sist, de­spite the likely pas­sage of a con­sti­tu­tional amend­ment re­mov­ing the age limit for pres­i­den­tial can­di­dates. While these are un­likely to sig­nif­i­cantly harm busi­nesses in the coun­try, fac­tion­al­ism in the rul­ing Na­tional Re­sis­tance Move­ment (NRM) will com­pli­cate pol­i­cy­mak­ing and lead to bu­reau­cratic de­lays for busi­nesses. In Ethiopia, the gov­ern­ment is likely to face fur­ther protests un­less it seeks to broaden the po­lit­i­cal space and make some lead­er­ship changes. This will pose security risks for busi­nesses in the re­gions of Amhara and Oro­mia, and in the bor­der area be­tween the lat­ter and So­mali re­gional state.

South­ern African Re­gion

Con­trol Risks’ Se­nior Part­ner for South­ern Africa Ge­orge Ni­cholls com­ments: “2018 will see con­tin­ued un­cer­tainty around po­lit­i­cal lead­er­ship in our South­ern African mar­kets. The tran­si­tions in Zim­babwe and An­gola in 2017, elec­tions in Mozam­bique later this year, and fac­tion­al­ism within South Africa’s rul­ing African Na­tional Congress (ANC) once again re­mind busi­nesses in the re­gion of the im­por­tance of gain­ing a clear un­der­stand­ing of the im­pact of such un­cer­tainty on their risk en­vi­ron­ment.”

Po­lit­i­cal tran­si­tions, gen­er­a­tional change

Zim­babwe’s Pres­i­dent Robert Mu­gabe has stepped down, An­gola’s Pres­i­dent José Ed­uardo dos San­tos has been re­placed by João Lourenço, and Mozam­bique’s Pres­i­dent Filipe Nyusi is con­sol­i­dat­ing his au­thor­ity. An­tic­i­pat­ing and pre­par­ing for how these tran­si­tions will af­fect busi­ness is es­sen­tial for suc­cess this year and be­yond.

Rep­u­ta­tional risks in noisy po­lit­i­cal en­vi­ron­ments

2017 saw a series of high-pro­file cor­rup­tion scan­dals in South Africa. These were ev­i­dent in a mass email leak show­ing fre­quent im­proper com­mu­ni­ca­tion among se­nior gov­ern­ment of­fi­cials, po­lit­i­cally con­nected in­di­vid­u­als and pri­vate busi­ness in­ter­ests. Some busi­nesses have learned the hard way that when a nar­row set of in­ter­ests un­der­mines and sub­verts the in­tegrity of state in­sti­tu­tions, this pro­vides a breed­ing ground for many other risks to flour­ish. Pro­tect­ing rep­u­ta­tion – and un­der­stand­ing what might com­pro­mise it – has never been more im­por­tant.

Large-scale cy­ber at­tacks against in­fra­struc­ture

2017 was the year of ma­jor but ran­dom dis­rup­tive at­tacks. This year could see the likes of Wan­naCry, NotPetya and BadRab­bit re­cur, but in a more pow­er­ful, tar­geted and dis­rup­tive man­ner. Na­tional in­fra­struc­ture sys­tems are par­tic­u­larly at risk.

New threats in Mozam­bique

Ma­jor fi­nal in­vest­ment de­ci­sions have been taken on liq­ue­fied nat­u­ral gas projects in north­ern Mozam­bique, sig­nalling a likely in­crease in for­eign in­vest­ment. Rapid eco­nomic devel­op­ment in a marginalised part of the coun­try with lit­tle state ca­pac­ity will present a chal­leng­ing security en­vi­ron­ment. The in­flux of money and for­eign work­ers will dis­rupt so­cial struc­tures and raise ex­pec­ta­tions of change, in­creas­ing the risk of so­cial dis­con­tent and the for­ma­tion of or­gan­ised groups tar­get­ing pub­lic and pri­vate in­ter­ests.

Pres­i­dent of Nige­ria Muham­madu Buhari ar­rives to speak at the U.S.-Africa Busi­ness Fo­rum held re­cently in the United States.

Above: Peo­ple walk the busy street filled with elec­tron­ics shops and ad­ver­tis­ing plac­ards of mo­bile phone op­er­a­tors at Com­puter Vil­lage, La­gos, Nige­ria. The World Bank fore­casts that eco­nomic growth in Nige­ria would edge up to at least 2.5 per cent this year.

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