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Economic recovery for West Africa, political uncertainty through transitions and instability in Southern Africa and high debt levels are regulatory uncertainly in some East African markets, says global risk consultancy Control Risks’ annual ‘RiskMap’.

Top five business risks for West Africa

Signs of economic recovery for West Africa as Nigeria exits recession – Militancy and political uncertainty remain key risks for businesses in 2018

As Nigeria exits the recession of 2017, investor sentiment across West Africa is likely to experience uplift in 2018. 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 in their annual political and security risk forecast ’RiskMap’.

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 our top risks for businesses in the year ahead.”

Control Risks has identified the following as the key risks facing businesses in West Africa in 2018:

  • 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 in 2018.
  • 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 Nigeria’s embryonic mining sector, some countries in West Africa will be making forays into previously-undeveloped sectors in 2018. 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 on-going practical impediments to day-to-day 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 in 2018.

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 in 2018.

Top five business risks for Southern Africa

Political uncertainty through transitions and instability are among the key risks for businesses in Southern Africa in 2018.

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 in 2018, 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.”

Control Risks has identified the following as the key risks facing businesses in Southern Africa in 2018:

  • Political instability in South Africa: 2018 will see a continuation of divisions within the ANC following the December 2017 election of a new party president. Competing factions – and the possibility of a split in the party – will drive policy uncertainty and political instability, with President Jacob Zuma likely to step down before the end of the year.
  • 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 in 2018 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. 2018 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.

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 in 2018.

Top five business risks for East Africa

Kenya is emerging from a protracted presidential election process and seeing a 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 to 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.”

Control Risks has identified the following as the key risks facing businesses in East Africa in 2018:

  • 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 in 2018. However, cross-border 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 in 2018 will begin to unlock investment demand. However, the government will 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 continuing 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.
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