Sub-Saharan Africa may maintain competitive levels of growth in 2015, but investors ignore political developments at their peril. Politics will remain a key factor driving risk for investors in Africa, with improvements in governance remaining elusive.
According to Thomas Hansen, senior Africa analyst with the respected UK-based consultancy, Control Risks, high commodity prices and expanding markets for goods and services have propelled Africa’s economies to spectacular growth in the last decade. But breakneck economic change across Africa has not sparked a transformation in how it is governed. ‘Politics from the Sahara to the south remains as messy as ever, with growth
coming despite government, rather than because of it,’ he says.
Writing in the Risk Map 2015 – the consultancy’s authoritative guide to business risk in the year ahead – Hansen says Africa’s growth is genuinely dizzying – even statisticians can’t keep up. In April 2014, Nigeria released updated GDP figures of $510bn for 2013 to overtake South Africa as the largest economy in sub-Saharan Africa. Not to be outdone, Kenya followed suit with a 25 percent increase in its recalculated GDP. Africa’s average economic growth of 5 percent in 2013 outstripped the 3 percent global average and dwarfed sluggish growth in the developed world. But political change has not kept pace. In a key indicator of the quality of governance across Africa, the Ibrahim Index of African Governance, the continent’s overall governance score has not budged since 2008.
‘It’s not for lack of trying. Policymakers across Africa have tinkered with their economic policies. Governments from Cameroon to Kenya have sought to bolster their tax take. But in most places, the fundamental character of politics has not changed. Even in most of the continent’s democratic states, politics remains fractious and riven by ethnic, regional and religious divisions. Meanwhile, superannuated rulers remain in charge in Angola, Uganda and Zimbabwe,’ Hansen explains.
The pace of political change may seem of little concern to investors focused on market fundamentals. But in reality, politics remains a central risk factor for investors with exposure to Africa. Even in politically stable states, sound macroeconomic management depends on ruling elites adopting a benign attitude and taking a long-term view.
Modern African history contains few such role models. In the continent’s democratic states, the main concern of power-holders – as elsewhere – is re-election. ‘The election cycle and the threat of political turnover make it hard for governments to take a long-term view. Africa certainly has no monopoly here, but weak accountability and mobilisation among the burgeoning middle class mean that governments are rarely held to account, particularly for pork-barrel spending,’ he says.
No country is immune – the laggards and the best-in-class are equally at risk. The democratic, relatively stable governments of Senegal, Ghana, Kenya and Nigeria are running budget deficits, despite economic growth of between 4 percent and 7 percent a year. According to Oxford Economics, all four governments will run deficits until 2017. By then, the external debts of Senegal, Ghana and Kenya will have doubled, with Nigeria not far behind. True, debts are increasing from a low baseline and are not necessarily out of control. But other risk factors suggest additional worries. Both Senegal and Ghana are running ‘twin deficits’ – both their current account and public finances are in the red – underscoring potential economic fragility.
African governments aren’t overwhelmed with debt. IMF figures suggest that external public debt stands at 24 percent of GDP on average. Moreover, high growth rates boost the sustainability of African debt. But memories are short. Africa’s sovereign and external debt levels are at historic lows only because of successive waves of public and private debt relief and restructuring. Only with the 1996 Heavily Indebted Poor Countries initiative and the 2005 Multilateral Debt Relief Initiative did debt levels fall, to a low of 22.3 percent by 2008.
Hansen argues that prudent policymaking cannot take the credit for Africa’s lower indebtedness. ‘Debt is increasing, rapidly in some countries. Still, the continent is not headed for an imminent debt crisis. Oxford Economics’ debt projections suggest that sovereign debt levels will remain moderate for most of Africa towards 2023 in light of sustained economic growth, with Cameroon – where debt levels are expected to gradually rise – the main exception.’
There are additional causes for concern. Despite increased investment in services and other sectors, Africa’s economies remain commodity-dependent. A drop in energy or commodity prices can render debt unsustainable. The economies of Angola, Nigeria and Equatorial Guinea, for example, are vulnerable to a sustained drop in oil prices, and if the low prices of late 2014 are sustained this will likely cause significant damage to their economies. Cote d’Ivoire and Cameroon are more diversified.
‘Here again, politics comes into play. Oil-rich Angola is attempting to boost its non-oil GDP through infrastructure investments, and has seen sustained growth since a slump in 2009. But all is not resolutely well. Concerns are rising over the viability of state-backed projects after a bad loans crisis in 2014 engulfed the Angolan subsidiary of Portugal’s Banco Espírito Santo. It’s still too early to tell whether other investments will go bad and take Angola’s sovereign risk profile with them.’
In Angola, and elsewhere in Africa, political accountability will remain the key factor behind economic management and sovereign risk. Few governments will be able to take a long-term view on public finances when their political survival, and potentially state stability, are at stake. High investor returns will remain at the mercy of risks stemming from gaps in macroeconomic governance.