African political risk: Expect the unexpected in 2012
Euromoney Country Risk
The outlook for political risk in Africa this year remains elevated, despite the recent trend towards fair and free elections on the continent.
The increasing pace of political change in Africa is likely to have substantial effects in 2012, given the importance of government intervention to the region’s economies.
This year, the political agenda in Africa is likely to be dominated by the large number of scheduled presidential, parliamentary and local elections. The table below shows planned presidential elections in Africa this year. Other legislative elections will also take place in countries such as Algeria, Burkina Faso, Cameroon, the Democratic Republic of Congo, Morocco and the Republic of Congo.
Elections in 2012
Source: FMCP Research
Although dates have been announced for numerous elections in the region, the fluid political situation in many countries means that changes to the electoral calendar are likely. In Zimbabwe, President Robert Mugabe has called for early elections this year as he seeks to bring an end to the present power-sharing arrangement between between his Zimbabwe African National Union-Patriotic Front (ZANU PF) and the Movement for Democratic Change (MDC). In Sudan, the Darfur region might yet hold a referendum on secession later this year.
Last year set a positive precedent, with relatively peaceful elections taking place in Cameroon, Nigeria and Zambia. This bodes well, although the violence that followed the disputed Kenyan presidential elections in 2007 suggests caution when extrapolating historical trends. Further examples of heightened political risk in Africa include the continued controversy in the Democratic Republic of Congo, where tanks are presently patrolling the streets to disperse protesters.
The two key election questions investors must consider are the election results and the subsequent policy stance of newly elected governments. But other important questions remain: will an election be conducted peacefully and lead to a swift transitions power, such as those which occurred in Ghana and South Africa? Or will there be a protracted power struggle, as witnessed recently in Ivory Coast and Kenya? Additionally, will the new leaders maintain the policies of the past, or will they renege and try to renegotiate previously agreed contracts?
The dangers of African tail risk
However, what is truly concerning is the possibility of unexpected political risks. One of the interesting features of the political risk outlook in 2011 was that political risk was not only elevated, but it was also concentrated on some of the continent’s largest and most developed countries. Who would have thought that political risk analysis in Africa would focus on Egypt, South Africa and Zambia?
In Egypt, the change of government, from Mubarak to a military-backed regime, has led to a state of heightened tension and political uncertainty. In Zambia, government intervention in the economy continues to increase after news that the deputy minister of mines recently instructed a copper mine to reinstate workers who had been dismissed for inciting a strike.
In South Africa, the largest economy on the continent, President Jacob Zuma remains under intense pressure. Economic growth has stuttered and is forecast to be weak in 2012, commodity prices have softened, and unemployment is over 23%. Politically, his nemesis Julius Malema continues to ponder a leadership challenge while members of his own ANC party have called on the government to nationalise the country’s mines and confiscate agricultural land without compensation to “democratise the economy”.
The below diagrams from Euromoney Country Risk’s (ECR) political risk ratings show the relative levels of country risk in these countries.
Figure 1 South Africa ECR score vs World vs Africa (2011)
Figure 1 shows that South Africa’s overall ECR score of 58.7 is just better than the world average of 53.6 but is substantially higher than the African average of 30.8. Unfortunately, government inefficiency manifests itself, with corruption receiving the low score of 7.7.
Figure 2 Zambia ECR score vs World vs Africa (2011)
Figure 2 shows that Zambia’s ECR score of 34.3 is just better than the African average of 30.8 but is substantially less than the global average of 53.6. Additionally, Zambia’s political system is a cause for concern, with government non-repatriation getting a low score of 5.9 out of 10.
Figure 3 Egypt ECR score vs World vs Africa (2011)
Figure 3 shows that Egypt’s ECR score of 40 is just better than the African average of 30.8 but is substantially less than the global average of 53.6. Additionally, Egypt’s political crisis is a factor behind its underperformance, with government stability getting a ranking of 3.20.
Political risk remains elevated across emerging markets
Increasing political risk is a growing trend not just in Africa but across the emerging markets. In Argentina, the government imposed capital controls in October to stem capital flight. Businesses and individuals now need the permission of the Central Bank to purchase US dollars. Iran continues to be a hotbed of political risk. Oil prices would rise dramatically if the Iranian government carried out its recent threat to close the Strait of Hormuz. The recent passing of Kim Jong-il in North Korea has also highlighted the country’s reclusive nature, although predictions that his successor will be more outward-looking might prove premature. China will undergo a change of leadership with Hu Jintao leaving after serving the maximum time allowed, with Xi Jinping expected to be the replacement.
In the developed world, the US continues to set the standard for political risk. The list grows ever longer: the intensive bickering between the main parties that led to government paralysis and the US downgrade by S&P in August; the Super Committee’s failure to reach a decision on reducing the deficit; the government’s inability to extend the expiring payroll tax cuts for more than two months; and the presidential elections in November.
In Europe, the situation is no better: the latest eurozone summit led to a symbolic treaty being signed, although it was more memorable for bickering between France and the UK. France has an election in May, with President Nicolas Sarkozy behind in the polls and the favourite pledging to renegotiate the recently signed eurozone treaty; and the new Italian government receiving death threats due to austerity measures.
These factors neatly encapsulate our overall view: increasing fiscal austerity will reduce the living standards of ordinary people, leading to increasing political risk as the bond between citizens and their leaders weakens.
This analysis was written by research analysts at FM Capital Partners, led by London-based Olivier Vojetta. Olivier is an expert member of Euromoney Country Risk (ECR), and provides a country risk score for Nigeria, South Africa and Kenya