Few red flags for Africa in 2010 - Control Risks
2010 heralds mixed prospects across sub-Saharan Africa. The implications of the global economic downturn have varied widely, and the path to recovery will likewise not be uniform. The continent in general is likely to be out of step with the prevailing international trajectory. While a handful of countries - among them Congo (DRC) and Nigeria - will begin to feel some relief in 2010, many others may find themselves suffering a second wave of recessionary after-effects. Increased unemployment or underemployment, state spending cuts, high consumer prices and the slow recovery of remittance rates from abroad will all have political and socio-economic consequences.
Weathering the storm
Through 2008, the general sense among Africa's finance ministers and central bank governors was that the continent was and would remain relatively insulated from the effects of the global financial crisis. By and large, they appear to have been right: growth on the continent has generally been steady, though it is likely to have fallen to below 3% in 2009 - about half the average annual rate seen since 2000. Most countries are expecting to see the beginnings of an upturn in 2010.
These figures, though, do not tell the whole story. There is evidence of increased structural resilience across Africa's markets to the types of challenge thrown up by the economic crisis.
However, there are clearly limitations to the role that governments can play in guiding the post-slump recovery. With their export-led growth models, most countries will have little choice but to wait for global recovery to buoy them in its slipstream.
This generalisation is to some degree challenged in the continent's two largest economies, South Africa and Nigeria. Both have been disproportionately affected by the downturn, but at the same time have a wider range of resources to deploy, and greater room for manoeuvre, in managing their recoveries. The implications of the downturn are perceived to have been more pronounced for South Africa, given its neater integration into global markets. Meanwhile, the crisis has also provided a sharp reminder that even the most sophisticated economy on the continent is still hugely exposed by its reliance on primary commodities, having been badly buffeted by the vagaries of world metal prices. The country is set to run its first budget deficit since 2006, while the financing requirements of its counter-cyclical capital-spending programme stand to heighten debt-financing pressures to levels not witnessed since the late 1990s. The 2010 football (soccer) World Cup tournament will undoubtedly provide a stimulus effect, while moderate concessions to business during the crisis have demonstrated a degree of adaptive capacity on the part of government. However, overall the crisis has only accentuated the political challenge of managing the economy and emboldened the left's demands for change - a dynamic that will reverberate throughout President Jacob Zuma's term of office.
Nigeria's commodity vulnerability has also been made even more apparent, with the slump in oil prices bringing a close to 40% dip in the value of its 2009 exports and threatening the long-term viability of oil windfall savings. Signs of stabilisation in oil prices will be welcome. But the feasibility of a government amnesty plan for Niger delta militant groups - which were responsible for attacks on oil facilities that saw production levels plunge by 30% in 2009 - could be called into question as politicians position themselves for a boisterous campaign in 2010 ahead of the 2011 polls. Moreover, the government's frantic search for deficit-financing sources and talk of more borrowing to sustain infrastructure investment will test adherence to improved levels of fiscal discipline.
Continuing commodity dependence
Elsewhere, the crisis has shone a spotlight on continued primary commodity dependency in almost all other sub-Saharan countries. It has reinforced long-standing obstacles to diversification, both by hampering efforts to raise domestic revenues and by reducing the prospect of FDI inflows into non-traditional economic areas such as labour-absorbing manufacturing and services, as well as the commercial exploitation of previously untapped primary commodities.
Moreover, attempts to stimulate investment have to rely predominantly on measures such as tax cuts or periods of tax exemption, or the subsidisation of energy to industrial or commercial consumers.
Regional overviews
In light of such measures, even when investment inflow figures start to look healthier, it is questionable to what extent governments will be in a position to extract benefits from them, particularly in the form of revenues or employment guarantees.
Thus, despite pre-crisis perceptions of Africa as the last frontier for investors of all shapes and sizes, commodities are set to remain the primary - if not sole - determinant of African markets' relevance and direction. The continent-wide balance of power and balance of interests between governments and foreign investors has barely altered, despite some positive trends in individual countries.
Open for business
The continent's traditional attractions are still the main draw for investors from China and other emerging markets, despite their increased sensitivity to the need to pay lip-service to the economic aspirations of domestic governments. State-backed Chinese companies acquired oil reserves in Cameroon, Gabon and Nigeria in 2009, and will be looking to make headway into Uganda and Ghana, as well as offshore reserves off Liberia and Sierra Leone, in 2010. They are also likely to seek to consolidate major mining deals in Guinea, and acquire additional mining assets in countries from Liberia to Zambia.
Notably, the model that Chinese interests initially used to break into sub-Saharan extractive opportunities - whereby infrastructure construction and loans were exchanged for access to mineral resources - shows signs of being replaced by more traditional deal structures, supported by local banks that are also increasingly being bought into by Chinese interests. The change of approach is likely to enable a wider breadth of Chinese penetration across sectors.
At the same time, 2010 will see the stepping up of interest in Africa from other emerging market players. The free-trade agreement (FTA) between India, Brazil and the countries of the Southern Africa Customs Union is likely to finally be cemented. Meanwhile, Russia's hastening of debt forgiveness, along with President Dmitry Medvedev's tour of oil- and mineral-producing countries in mid-2009, is expected to foreshadow enhanced strategic investment from that quarter.
No more no go
The entry of new players, and the expansion of the interests of China and other emerging markets are increasingly coming to mean that no part of the continent is off-limits in terms of investment potential. Even in Somalia, oil companies are waiting impatiently for the chance to begin exploring long-held blocks in its somewhat less anarchic semi-autonomous regions. Beyond that, the Horn of Africa's variable security climate has proved no deterrent to business, illustrated by the volume of Chinese investment in Ethiopia in recent years.
In the continent's other principal problem area, the Great Lakes region, increased investor interest is having a positive effect on the security situation. The unexpected rapprochement between Rwanda and Congo (DRC) at the start of 2009 is being consolidated largely on the back of a shift in emphasis from Rwanda. Kigali has ambitious plans for the development of a methane-extraction and energy-generation industry around Lake Kivu on the shared border, as well as wider economic goals. These were not being aided by continued international perceptions of Rwanda as a destabilising influence in eastern Congo.
Equally, an improvement in relations between Uganda and Congo (DRC) is largely being driven by mutual pragmatism over the need to create conditions that will facilitate the development of a viable oil sector on both sides of the Albertine Graben. Further assets are likely to be confirmed in the area in 2010, adding to already significant oil finds there.
Although the spike in piracy in the Gulf of Aden has eclipsed maritime insecurity in the Gulf of Guinea during 2009, the region will remain a hotspot for pirate activity in 2010. Attacks will be especially prevalent in Nigerian waters and, increasingly, offshore Cameroon. However, the ever-evolving tactics of Niger delta-based militant groups and copycat pirate gangs mean that areas as far west as Sierra Leone, where prospective oil finds have recently come to light, and as far south as Equatorial Guinea may not be immune to insecurity.
Infrastructure deficiencies to hold back progress
One risk that will re-emerge as recovery kicks in is infrastructure deficiency, which has been in many cases slightly - but only temporarily - alleviated by crisis-related falls in the use of port and other transport facilities, and in demand for energy. Major upgrade projects, including Botswana's Morupule B coal-fired power plant and power-generation facilities in South Africa and Zambia, have been delayed - in some cases due partly to temporary reductions in consumption, but largely because of a shortage of finance. In the Morupule case, insufficient funding is allied with the obstacle of South African power utility ESKOM's stalling over signing a power-purchasing agreement, despite the country's critical need for new capacity to support existing as well as new investment.
Given the suspension of new projects and the simultaneous falling off in maintenance spending, much key but already overstretched infrastructure will be in a worse state of dilapidation post-crisis than it was two or three years ago. The consequent lack of spare capacity to support an economic upturn will once again impose an unbreachable ceiling on growth and expansion prospects pending progress in key upgrades. South Africa is an important exception; the 2010 World Cup infrastructure budget has provided generous resources for infrastructure ancillary to the tournament, as well as for more general projects such as port upgrades.
Feeling the strain
The state of infrastructure supporting economic activity, however inadequate, is still vastly superior to the utterly abject state of the services provided to many ordinary people. Where demand is stretched, it is the general public that tends to lose out as scarce resources are channelled to investors. The continuing infrastructure deficit, along with resurgence in demand, is likely to see increasingly regular electricity and fuel shortages (and therefore increased transport costs).
These stresses are likely to be accompanied during the course of 2010 by recovery-linked rises in food prices.
Such circumstances, in tandem with the reduced ability of governments to spend to appease fractious public opinion and mask their limited legitimacy, will increase the likelihood of outbreaks of popular volatility across many parts of the continent. Countries including South Africa, Senegal, Kenya and Mozambique are particularly at risk. With potential orchestrating forces - notably labour unions - seeing their influence and bargaining power considerably dampened by the continuing effects of the crisis on availability and security of employment, discontent is likely to manifest itself in less focused ways, such as spontaneous civil unrest and sabotage.
Kenya in particular is one to watch. The extent of disorder seen in response not only to economic conditions, but also events such as the publication of census results early in 2010 and any prosecutions of senior political figures by the International Criminal Court, will provide a useful indicator of the atmosphere that will surround preparations for the next elections, due in 2012.
Governments not under threat
However, neither unrest nor any wider effects of the financial crisis are likely to materially undermine the legitimacy or survival prospects of incumbent governments. In all looming elections, inherent and usually long-standing domestic factors will be key in determining outcomes. Presidential elections due in Burundi, Burkina Faso, Guinea, Togo and Tanzania in 2010 will each showcase a different dominant dynamic in the spectrum of familiar sub-Saharan themes.
The sudden death of a long-standing authoritarian leader in Guinea has exposed the hollowness of state structures, and the extreme weakness of the foundations for democratic and civilian governance. In Burundi, an externally mediated and imperfectly executed post-conflict transition has left a country that may be able to weather the test of an election, but where the zero-sum logic of war is only slowly being softened. In Burkina Faso, Togo and Tanzania, to varying degrees, the failings of dominant parties may result in popular disenfranchisement and disenchantment, but incumbents are vulnerable primarily to internal machinations rather than opposition threats. In none will the fallout from domestic or international economic events genuinely alter the electoral playing field. In all, the incumbent is likely to remain in office.
Put away the red flags
We see relatively few red flags marking the broad political risk landscape for investors in Africa in 2010. By and large, most countries have stayed the economic liberalisation course and resisted the temptation of knee-jerk responses to the financial crisis. No African country save for the Seychelles has been in real danger of sovereign-debt default despite the financial crisis, testifying to improved domestic economic management in recent years and a broader international refusal to allow vulnerable countries to fail.
While rhetoric on resource-nationalisation and ‘use it or lose it' ultimatums has become more common, this has generally been aimed at appeasing a domestic audience. Governments by and large appreciate that they have neither the expertise or credibility - nor probably the desire - to run key economic sectors. In cases where the government intervened directly in investment projects in 2009, notably in Congo (DRC) and Guinea, drivers were more political and strategic than economic. All provide positive indications that governments generally continue to recognise the need to maintain consistency for investors regardless of short- and medium-term pressures.
This is an extract from the Control Risks publication Risk Map 2010, February 8 2010
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