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Industry reporting from 2017-2019 indicates a trend of
increasing paid-out political risk insurance claims in Africa. Risk
is partially driven by high exposure to commodity prices, as in
Zambia, which has altered mining royalty laws five times since 2014
following copper price fluctuations, or in Kenya, where tax
increases are clearly tied to commodity price cycles.
However, contract risk often also derives from political
transitions representing a rupture with the previous operating
environment. Most recently, in December 2018 Democratic Republic of
Congo (DRC) saw its first peaceful presidential transition with the
election of opposition candidate Felix Tshisekedi. Tshisekedi has
entered into coalition with the alliance of former president Joseph
Kabila, but is working to consolidate power at Kabila's expense,
raising the threat of eventual corruption investigations and review
of mining contracts awarded by his predecessor.
Elsewhere, popular unrest and coups have unseated executives
across several African countries - most recently Sudan in April
2019. But transfer of power often remains within key influence
groups, where a ruling party or coalition remains in power, but a
different internal faction becomes dominant. In Ethiopia, for
example, a substantial realignment within the ruling Ethiopian
People's Revolutionary Democratic Front (EPRDF) coalition saw
Oromia and Amhara-based ethno-linguistic parties come to the fore,
with the election of ethnic-Oromo prime minister Abiy Ahmed Ali in
April 2018 after mass protests in Oromia and Amhara regions. This
reduced the power of the previously dominant Tigrayan People's
Liberation Front, traditionally aligned with Ethiopia's
economically-powerful military.
In such cases, unplanned disruption of longstanding, highly
centralized power structures are followed by more fluid influence
dynamics as rival groups jockey for power and protesters maintain
pressure for more responsive, transparent government. Consequently,
investors are exposed to targeting over perceived political
affiliations or failure to generate value for the national economy,
resulting in discrimination, audits, and in extreme cases, contract
cancellation. In Tanzania, for example, John Magufuli's
administration has overhauled natural resource legislation,
abandoning stability clauses and requiring all disputes to be
processed first through Tanzanian courts, while at the same time
sidelining party veterans and potential opponents within his Chama
Cha Mapinduzi (CCM) party. Situations like these are more
challenging to forecast than election-related contract risk,
because they require a dynamic, evolving view of internal factions
and stakeholders within ruling parties.
In the next two years, regional themes of local content and
anti-corruption will continue to drive both planned electoral
transitions in Africa, and unplanned transitions and realignments.
Domestic revenue mobilization to achieve political pledges will
also be key in forecasting sector-specific risk. Below we highlight
several key risks to watch:
Mozambique
Public grievances over corruption have driven the realignment of
the ruling FRELIMO party ahead of October 2019 elections. Under
President Filipe Nyusi, who hails from the gas-rich northeastern
Cabo Delgado province, power in FRELIMO has tilted towards the
northern regions, away from the circle around former president
Armando Guebuza. As Nyusi seeks to shore up his position following
a USD2bn loan scandal involving various FRELIMO figures, companies
associated with the Guebuza patronage network are more likely to
see frustration risks to licensing processes in sectors like
construction and engineering, and discriminatory practices in
sectors like telecoms and property development, although natural
gas and coal concessions already awarded are unlikely to be
affected.
Cote d'Ivoire
The chances of an opposition victory in scheduled October 2020
elections have increased after the Democratic Party of Cote
d'Ivoire's withdrawal from the government coalition in August 2018,
and the prospective return of former president Laurent Gbagbo after
his provisional release by the International Criminal Court in
January 2019. In this event, politically-connected local exporters
would likely receive a much higher share of the cocoa crop despite
past failings in coping with price drops. French companies also run
contract cancellation risks, particularly for major infrastructure
projects, if Gbagbo holds much influence in a future government, as
he blames France for influencing his eviction from the presidency
in April 2011.
Ghana
Elections are due in December 2020, if the New Patriotic Party
(NPP) is re-elected it would likely revise contract terms,
including a new fiscal regime for the mining sector (including a
windfall tax component) and improved tax compliance (reviewing VAT,
withholding tax and corporate tax exemptions and stabilization
agreements) in the mining and telecoms sectors. At the same time,
firms not complying with new requirements to partially list on the
local stock exchange will be threatened with license revocations.
Meantime, an opposition victory would likely see special audits
into NPP-awarded contracts, especially those signed by state-owned
entities (SOEs) in the electricity, cocoa and fuel transportation
sectors.
Ethiopia
They are scheduled to hold legislative elections in December
2020. The new administration of President Abiy Ahmed will likely
seek to maintain a parliamentary alliance with the Amhara
Democratic Party (ADP) by providing political allies with
preferential access to hard currency and domestic loans. Meanwhile,
in his party's Oromia heartland, grassroots support is likely to
increase for raising taxes for foreign-owned projects in Oromia,
particularly in the mining and agricultural sectors.
Zambia
Threats of mining sector license revocations have become part of
the political rhetoric in Zambia, most recently in the case of
Vedanta Resources, over its failure to meet the government's tax
demands. Tax increases in the mining sector are being fueled by
rising domestic and external debt obligations, and further tax
compliance audits are likely in the one-year outlook, spreading to
multinational corporations outside the mining sector following a
recent tribunal ruling in favor of the Zambian Revenue Authority
(ZRA) which is likely to embolden further ZRA demands.
Post-coup Sudan
Evolving influence dynamics expose investors to risks stemming
from any association with sidelined influencers. The Declaration
for Freedom and Change (DFC) - which has coordinated the
anti-government protests - has compiled a list of companies
associated with ousted President Omar al-Bashir to inform calls for
corruption investigations, raising contract frustration and
cancellation risks. The list includes telecoms companies and local
distributors for manufactured goods.
Chad
Opposition and civil society groups have mobilized around
similar grievances as protesters in neighboring Sudan, over rising
costs of living stemming from lower oil prices. Chadian President
Idriss Deby has responded by curbing access to social media
platforms over the past year and delaying legislative elections,
although Chadian insurgents and Islamists - including Boko Haram -
still pose a greater threat to Deby's position than popular
uprising. Any transition in power would exacerbate very high
payment risks for government contractors and expose energy
investors to audits of license awards and fiscal terms.
Posted 06 June 2019 by Anna Boyd, Associate Director, Economics & Country Risk, IHS Markit and