Sunday 19, August 2018 by Banker Africa

Sweeping advancement in control risks in Africa

 

In a new report Control Risks has examined the differences in risks and rewards across African nations.

2017 saw substantial political upheaval in Africa with significant power transitions taking place across the continent. Examples of this range from Zimbabwe’s Robert Mugabe leaving office to be replaced with Emmerson Mnangagwa to the prolonged election cycle in Kenya and Jacob Zuma’s exit as the South African premier. In general, political change was sorely needed in many of these markets.

A recent report from Control Risks, the Africa Risk-Reward Index, points to the significant drop-off in merger and acquisitions (M&A) in the first half of 2017 as evidence that change was needed. M&A experienced a 25 per cent decrease in volume for H1 2017 and a 26 per cent drop in value relative to H2 2016, driven by uncertainty as to the long-term political stability in South Africa, the continent’s largest M&A market.

KENYA
The prolonged election cycle dominated the narrative for 2017 and exposed the persistent issue the Kenya faces with ethnic and regional divisions in politics. The report notes that this led to many domestic and foreign investors choosing to wait out the period of uncertainty. Furthermore, as noted in our own macroeconomic examination of Kenya earlier in this magazine, the Government faces concerns over its external debt burden, with a new $2 billion Eurobond issued in February even as proceeds from the previous issuance have not been accounted for.

Furthermore, Control Risks also note that security threats from insurgent Somali Islamist group al-Shabab remain. Kenya’s reward score came is as amongst the highest of all Sub Saharan countries. The firm points to the pro-business approach of Kenya’s Government and its plans to improve and diversify the economy important factors in Kenya’s score.

“Kenya presents an attractive investment destination. Improving relations between the government and opposition will be instrumental in ensuring that political tensions do not undermine economic growth, and more prudent fiscal and macroeconomic policies would also help maintain positive economic prospects,” the report stated.

SOUTH AFRICA
In December 2017 Cyril Ramaphosa was elected to replace long-time president Jacob Zuma and took the presidential mantle in February 2018. The move immediately improved investor confidence in Africa’s most developed financial market. Control Risks note that Ramaphosa is expected to tackle issues of fiscal expenditure and tackle endemic corruption with public institutions and state-owned enterprises, increasing the scale and scope of potential businesses opportunities in South Africa. However, it will take some time for GDP growth to be impacted meaningfully by Ramaphosa’s policies, the report continued.

“Chief among these challenges are those identified by Ramaphosa in his first State of the Nation Address in February 2018: restoring the health of state-owned enterprises, addressing the policy impasse in the mining industry, improving job creation (especially addressing youth unemployment), reviving the manufacturing sector, promoting small business development, growing the tourism sector and exploring digital industrial revolution opportunities,” said the report.

The outlook so far for 2018 has not been positive, with disappointed results in the mining and manufacturing sectors for Q1. In addition, consumers face a tightening with oil prices pushing fuel prices to an all-time high. Considering these factors Control Risks have revised their GDP forecast for Kenya to 1.9 per cent, down from two per cent.

CÔTE D’IVOIRE
Since the 2010-11 crisis following a disputed election result that led to a civil conflict, Côte d’Ivoire has experienced an impressive recovery. Between 2012 and 2017 the country has consistently been one of the world’s fastest growing economies, averaging 8.5 per cent annually. The 2016-2020 National Development plan includes efforts to increase infrastructure investment and improve the overall business climate. These factors could lead to an improvement in foreign investment, with the stable macroeconomic environment and high economic growth rates acting as contributing factors, the report added.

However, obstacles remain, with issues of corruption and political interference plaguing President Alassane Ouattara’s Government. Growth has also not been entirely inclusive, with rates of unemployment and poverty remaining stubbornly high. Indeed, the country saw protest action in 2017.

“Despite the projection of strong fiscal spending, we expect the fiscal deficit to remain sustainable, largely due to continued efforts to widen the tax base,” said the report. “The short-term economic growth outlook remains positive: we forecast a real GDP growth rate of seven per cent for 2018.”

SENEGAL
In contrast to the previous nations mentioned, Senegal has maintained a positive reputation for stability and democracy, with peaceful transfers of power since the 1990s and having never experienced a coup since independence. However, the country has struggled to attract high levels of foreign investment, the report noted, due to the lack of exploitable natural issues, and a number of systemic issues—notably a bureaucy and power generation.

In 2014 President Macky Sall launched a $19 billion economic development plan, the Emerging Senegal Plan (PSE) which has focused on infrastructure and improving the business environment. Control Risks point to Senegal’s annual growth rates of nearly seven per cent since 2016 as evidence that the PSE has begun to pay off.

“Under the PSE, growth has increased steadily over the last three years, reaching close to 6.4 per cent in 2017,” said the report. “It is an imperative for the country to create a more favourable investment environment so that future growth is led by the private sector.”

MOROCCO
Morocco has established itself as the most politically stable country in North Africa. In the Africa Risk-Reward Index it scored the lowest risk score of any country at 4.09. Under the authority of King Mohammed VI, the elected Government has continued a series of economic and social reforms that have been aimed at improving the country’s resilience to shocks and increasing Morocco’s competitiveness.

In light of these reforms Morocco has become a leading FDI destination in North Africa, with authorities looking to establish the country as a regional industrial hub. Indeed, several large French automotive firms have already established factories in Morocco. Challenges remain in addressing social grievances with less developed regions in particular remaining a key concern for the Government, said Control Risks.

So far efforts to reduce economic disparity between rural and urban areas have been largely unsuccessful with only limited results. Furthermore, although the agreement in principle from the Economic Community of West African States (ECOWAS) to allow morocco entry is a positive move for investment, issues relating to regional balance of power and tariffs will likely delay full admission beyond 2018.

“Despite these issues, Morocco remains on track to consolidate its position as North Africa’s investment hub and the gateway between Europe and Africa,” the report concluded.

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