the african year in 2017 - africa practice the oil price slide and ... rise of...

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January 2017

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africapracticeThe African year in 2017 - January 2017

The African Year in 2017

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Political events over the last year have shaken the foundations of the world’s global order. A resurgence of political and economic nationalism in leading developed nations has torn up the rule book for the liberal consensus on international trade and politics that has shaped the world around us since the end of the Second World War. In 2017, we will begin to see the consequences of this shift as US foreign policy pivots along populist and protectionist lines, and Europe is locked in a tussle to limit the fallout from the UK’s landmark decision to leave the European Union.

While these developments represent the front line of global political change, the ripples will also be felt in Africa; a continent that has become far more integrated and relevant to the global order over the course of the last decade. We anticipate that Africa will be both impacted by the foreign policy shifts of key trading partners across the globe, and influenced by the new political narratives shaping government systems and policies across the globe. There may be opportunities

for Africa to rise up the priority list of foreign trade partners and to untangle itself from some of the trade restrictions presented by the current global order. But there will also be risks posed by the new breed of national protectionism, both in foreign government handling of trade, and international aid policy.

In our last annual forecast, ‘The African Year in 2016’, we remarked on how the growing connectivity and urbanisation of societies in Africa would shape the relationship between government and electorate in 2016, forcing greater accountability and raising the stakes of elections. This has manifested in the momentous opposition election victories in Ghana, The Gambia and Benin, as well as in the popular uprisings that have rocked Ethiopia, Zimbabwe and the DRC. It has also shaped some of the internal power struggles and strategic shifts witnessed in some of the most well-established ruling parties on the continent, notably in South Africa, Tanzania and Angola.

Amidst a changing global political narrative in 2017, we do not see the popular appetite for change and swifter progress weakening amongst the burgeoning African youth. But we may see more in the way of pushback from the entrenched political order. Generally, political reforms in Africa over the last decade have lagged behind government efforts to ‘open up’ the continent’s economies to foreign investment. In several instances, this has created resistance to governance reform and political freedoms from vested interests within the ruling system. President Yahya Jammeh’s rejection of his electoral defeat in The Gambia, the contested nature of the 2016 Gabon election result, and the heavy-handed

clampdowns on unrest in a host of African countries in the last year are just the latest examples of this dynamic.

Looking ahead to 2017, we feel the year will be marked by political volatility linked to these clashes playing out between established orders and opposition forces; between modernity and tradition; and between the politics of change and that of continuity. Those governments which fail to recognise the need to champion reform, diversify their economies, enable political liberties and hold a more policy-driven political debate, will likely see growth drag and frustrations rise. Others that adopt a more reformist and dynamic approach will benefit from the considerable opportunities that exist to attract investment and achieve sustainable development through increased investment, growth and access to debt, enabling higher capital expenditure.

Meanwhile, businesses will need to navigate this volatility and adapt their strategies to respond to the shifting market dynamics around them, presenting both risks and opportunities for those prepared and committed to play the long game. Global business attention in 2017 will focus primarily on the political risks presented by the US transition, ongoing Brexit negotiations, upcoming elections in France and Germany, and the outlook for the troubled BRIC economies. But in Africa, beyond the usual headlines created by elections, public scandals and political show-boating, a divergence in economic fortunes is likely to become more apparent as government capacity to drive development by incentivising investment and delivering efficient spending is put to the test.

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Revenue considerations• Enabling business environment reforms

• Resource and market potential

• Foreign relations

• Governance standards

• Alignment of tax reforms and development agenda

• Tax collection, compliance and efficiency

Efficiency and impact of capital expenditure• Oversight mechanisms

• Recurrent expenditure ‘drag’ without reform

• Subversion of funds

• Infrastructure as force multiplier for growth, productivity

• Spending strategies and project prioritisation

• Governance standards

• Clarity of vision/policy

Debt considerations• Cost of debt

• Concessional vs non-concessional

• Domestic capital markets capacity

• Willingness to reform

• Resource-backed loans

• Role of China, the Gulf and Western lenders

• Debt spending plans

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Africa divergingThe ‘Africa Rising’ narrative has been picked over relentlessly since the slide in global commodity prices exposed the shortfalls of this over-simplified epithet. The failure of most African economies to use the commodities super-cycle to build stable macroeconomic bases, drive reform and diversify investment has been all-too-tellingly exposed by the current downward cycle. In particular, governments which have failed to institute political reforms and open up their economies to diversified investment have suffered considerably from the downturn. Conversely, the growth and opportunity story still rings true in a number of African states which present diversified economies and relatively steady political systems. These dynamics are leading to a growing divergence in economic prospects across the continent, requiring a nuanced and well-informed approach by investors.

In 2017, we will see African governments under enormous pressure to deliver results with potentially more scant resources. They will turn to two outlets to achieve this end. Firstly, businesses can anticipate a continued trend of fiscal reform and more aggressive fiscal and regulatory enforcement to drive revenue collection. This raises the risk of arbitrary or over-zealous treatment in some countries where institutional oversight or legal frameworks are weak. In instances where fiscal pressures fundamentally undermine commercial prospects, it will be vital that businesses can develop constructive engagement strategies premised on shared advantage to ensure government can achieve its goals of driving revenue-raising without


Revenue considerationsEnabling business environment reforms

Resource and market potential

Alignment of tax reforms and

Tax collection, compliance and

Efficiency and impact of

Oversight mechanisms

Recurrent expenditure ‘drag’ without

Infrastructure as force multiplier for

Spending strategies and project

• Taxes, duties and royalties

• International aid

• Concessional (IFI and development finance)

• Commerical debt (local and international)

• Infrastructure

• Social projects


potentially compromising future investment and growth. Secondly, we anticipate a continuing trend of African governments turning to both domestic and international markets for debt to fund spending plans. While development finance (and domestic markets where there is adequate liquidity) will be the preferred route, international money markets will also play their role.

With these two revenue streams in mind, it will be critical that governments ensure efficient and impactful spending to support sustainable growth. Those governments that are willing and able to reform public institutions, free-up cash for capital expenditure and create a business environment that is conducive to investment will make promising headway in 2017. This will create enormous opportunities for business – from plugging the estimated $90bn a year infrastructure gap to playing a part in the growing number of tech innovations and investments, most notably in South Africa, Kenya and Nigeria. Meanwhile, governments that see revenue-raising as a means to buy short-term political solutions and stave off rising popular or political dissent will see more sluggish progress, underpinned by prominent structural risks.

Signs of this divergence are already evident across Africa’s political-economies. Markets like Rwanda, Ethiopia and Côte d’Ivoire all face structural risks in their political systems. But their clearly articulated vision for development and energised efforts to create a conducive framework for this are reflected in levels of investment and growth. Meanwhile, other markets like Kenya and Tanzania have also placed a strong emphasis on industrialisation and diversification to support higher investment, employment and growth, with some success.

The laggards are by and large the economies which have rested on the laurels of their resource wealth and failed to commit more than rhetorically to diversification and reform. Equatorial Guinea is suffering negative growth while other oil-dependent markets like Gabon, Republic of Congo, Angola and Chad are also struggling to acclimatise to a new oil price environment. The fact that these countries’ political systems are buttressed by patronage and a desire to preserve entrenched vested interests exacerbates this situation, limiting the space for reform and efficient capital expenditure.

Mozambique meanwhile is suffering the consequences of its government’s actions in raising unsustainable debt to fund narrow self-serving interests. This has created a debt crisis that will take years to untangle. Having agreed to an international audit, a number of prominent figures within the ruling administration – leading right up to the President’s office – will come under scrutiny for their role in facilitating or concealing the debt mismanagement. Meanwhile, the process of disentangling and stabilising the country’s public finances will require substantial support from the bruised IMF and a host of other wary lenders. The promise of major investments in the extractives industry with advancements on some of the final investment decisions on the offshore Rovuma natural gas assets will not be enough to plug the gaping short-term gap in public finances. As such, a mediated resolution with the IMF and other donors will be essential, likely extending well into 2017 and beyond.

Finally, Nigeria presents an interesting example of an economy that is battling between a desire to reform and a resistance to change, particularly from vested interests within the ruling system. As the country pursues its most ambitious debt-raising initiative in history, it stands at a critical crossroads. Following the oil price slide and a raft of production shut-ins linked to insecurity in the Niger delta, Nigeria is sorely in need of a financial injection to facilitate capital expenditure. Moreover, its market fundamentals justify this approach. But debt-raising without reform or adequate governance oversight risks creating a further debt crisis cycle. In this respect, 2017 offers a unique opportunity for Nigeria to address some of the losses and leakages in its system, and drive a more efficient and performing state. However, President Muhammadu Buhari will need to show a more flexible approach, overcome rumbling divisions within his ruling party, and also tackle some of the current disconnect between his office and other organs of the state – notably the legislature and parts of his cabinet – to deliver on expectations.

A failure to liberalise the foreign exchange system or to secure a lasting peace agreement with Niger delta militant groups in the first six months of the year could prove particularly damaging, further compromising economic fundamentals and turning a rising tide of popular frustrations against the government. These conditions are unlikely to fuel major unrest or instability in the short term, but growing cracks in the ruling party could form the foundations for fragmentation in the lead-up to the 2019 elections.


05

The politics of ‘change’


Conflict and militancy

Governance

Corruption

Political stability

Macro-economic management

Infrastructure deficiencies

Social instability

Political interference

Regulatory and policy risk

Conflict and militancy

Governance

Corruption

Political stability

Macro-economic management

Infrastructure deficiencies

Social instability

Political interference

Regulatory and policy risk

Rise of nationalism/protectionism

Party dynamics and leadership

Economic diversification efforts

Islamist ascendancy

Electoral cycles

New engagement models by international community Rise of new

powers

Technological change

Changing FDI and aid trends

Climate change

Social pressures and generational change

Structural factors

Dynamicfactors Risksand religious identities instability models

shor

tfalls

Strength of ethnic Precedent of Extractive economic Educa

tion

syst

em

wealth weaknesses inequality

Dem

ogra

phic

bulge

Natural resource Institutional

Poverty and

With the populist narrative of electoral change becoming an increasingly common feature of global – and African – politics, a rising number of governments are taking office on bold promises of change and reform. Yet as we have already seen in Nigeria, the euphoria of an opposition victory and the strong mandate for reform this can provide can soon dissipate when confronted with economic and institutional realities.

Newly-elected President Nana Akufo-Addo faces a moderately more positive economic outlook in Ghana as the country begins to turn the corner on a tough few years of economic stagnation, rising inflation and spiralling public debt. However, many of his bold electoral campaign pledges are likely to face scrutiny as he comes to terms with the economic and political constraints of coming to power. Akufo-Addo and his party managed to exploit popular frustrations and hunger for change to secure their electoral victory. They will undoubtedly bring a more private sector-driven development agenda with positive consequences for business. But some of their policy pledges are unrealistic or practically unfeasible – especially in the context of a continued IMF support programme – and there remain big questions around the extent to which the change in government will actually drive tangible change for ordinary citizens hungry for progress and opportunity.



Other aspiring proponents of change will go to the ballot in 2017, hoping to mirror the recent successes of opposition forces in Nigeria and Ghana amongst others. Kenya looks set to see a tough electoral contest with the opposition forging an alliance of five parties to compete with the ruling Jubilee coalition. The opposition will seek to exploit rising popular frustrations around perceived government underperformance and corruption to secure victory. But facing its own internal divisions and leadership disagreements, it is likely to struggle to drive a dynamic enough campaign to unseat the incumbent, especially as the government embarks on a host of high-profile public spending initiatives in the elections lead-up to draw popular support.

The contested backdrop to the elections is concerning, and with the stakes growing higher – particularly for opposition leader Raila Odinga who is most likely to lead the challenge against President Uhuru Kenyatta – the risk of a volatile reaction to the vote outcome is evident. Unlike in 2007/08, the security apparatus is likely to be more prepared for unrest in the vote aftermath. But businesses will need to monitor developments closely, while Kenya’s political landscape is likely to become increasingly fractious in the vote lead-up and aftermath, creating additional policy and engagement challenges.

Meanwhile, in Liberia President Ellen Johnson-Sirleaf will stand down to mark the first fully democratic transition since the end of the country’s civil conflict in 2003. Liberia is certainly subject to some of the same popular pressures for change witnessed across Africa, amid frustrations over the slow pace of development and the perceived mismanagement and corruption of government. Johnson-Sirleaf’s domestic standing is a lot more nuanced than her shining reputation in the international community. With the popular figure of former footballer George Weah likely leading the opposition challenge against Johnson-Sirleaf’s preferred successor, vice-president Joseph Boakai, we could well see a change in the political balance of power come the elections in October.

Liberia represents identity politics at their strongest but such change – beyond the inevitable personnel changes and anti-corruption investigations which accompany it – is however unlikely to result in fundamental shifts in government policy or foreign relations, providing some reassurance to investors. The elections will be turbulent and contested but the risk of a slide back into crisis and conflict is limited given the stabilisation efforts achieved since the end of the civil war, and the inexistence of major institutional rifts capable of fomenting conflict.



Changing the guard: managing political successionSeveral countries will undergo notable political successions in 2017. In Angola, long-serving President José Eduardo Dos Santos will hand over power after almost four decades to his party-appointed successor, Defence Minister Joao Lourenco. Amid rising socio-economic tensions and intense internal debate over the succession candidacy, Lourenco has emerged as a consensus figure. Interestingly, he is also seen as a reformer who can open a new chapter in the country’s political history. However, while we anticipate he will be swift to stamp his mark on taking office, creating shifts in the policy and power-structures of the country, Dos Santos, his family and the old guard of the ruling party will remain an immutable force behind the scenes, offering a parallel structure of influence behind the new executive’s office. This will create challenges for businesses engaged on strategic projects. But ultimately a managed succession is likely to limit the risk of a more turbulent and contested process down the line.

In South Africa, the ruling ANC has missed countless opportunities to call to account a leadership which has led the party – and the country – down a treacherous path. President Jacob Zuma’s management of the economy and party apparatus has severely dented investor confidence and popular support for a previously near-untouchable ruling party. To an extent, the dominance of the ANC as the liberation party from apartheid has shielded its leadership from its failings to deliver change to the masses, limiting the incentive to deliver and reform when buttressed by its historical political strength.

All that appears to be changing as criticism of Zuma and his government mounts. The next year is likely to see a great deal of navel-gazing from the ANC’s ruling cadres as Zuma hangs on to power through his working of the party machinery in the face of mounting internal resistance and continued sniping from the opposition. Ultimately, we believe this will come to a head in the party’s elective conference in December when the ANC is likely to make a break from Zuma’s contested leadership – albeit sticking with an establishment figure, most likely Zuma’s former wife Nkosazana Dlamini-Zuma. Although Zuma can technically remain President until 2019, creating scope for a parallel power structure to emerge, a change in national leadership of the ANC may be the straw that breaks the camel’s back in Zuma’s bid to preserve his position as head of state. However, guarantees will likely be needed around his legal immunity if he is to go without a damaging fight.

Perhaps the most uncertain succession prospects are in Zimbabwe where President Robert Mugabe has already declared himself the ruling ZANU-PF’s candidate for the next elections in 2018. The 92-year-old President is looking increasingly frail and while he remains dogged in his determination to remain in office until his death, the prospects of this are increasing with the passage of time. Despite Zimbabwe facing a worsening economic situation and a damaging succession battle within the ranks of the ruling party, the opposition’s inability to form a united front or to counter the forceful tactics of ZANU-PF in rallying support, is likely to mean that the ruling party remains the country’s predominant political force. In this respect, the rise of Grace Mugabe as a challenger to take over from her husband in a dynastical succession has elevated the risks of a turbulent succession. But we still believe Vice-President Mnangagwa is a more likely contender as an establishment figure who has the support or respect of key party constituents, the army and the international community.



Strife and conflict:Trouble in the hinterlandAlthough conflict levels across Africa are lower now than in the previous three decades, crisis and civil strife remain a resilient feature of the environment in some parts of the continent, particularly in areas of the land-locked hinterland. Unless the recent change in UN leadership prompts a more assertive peacekeeping intervention, South Sudan is likely to remain locked in an intractable conflict in 2017, made worse by the wayward leadership of the country’s two main political forces, the hardening of ethnic animosities amidst bitter fighting, and the impotence of international mediators who lack the resources and unity to achieve decisive resolutions. For now however, the regional impact is likely to be limited.

As a separate issue, there are also signs that neighbouring CAR is likely to see a worsening of fortunes as the new government struggles to assert its authority across the country when confronted by a patchwork of armed rebel groups. The hollowed-out state is chronically lacking in institutional capacity and infrastructural resources, leaving it on the peripheries of regional relevance and investor interest. A far greater concern for investors is the political outlook for the DRC. Although President Kabila has employed a variety of ploys to hang onto power beyond his constitutional term, mounting political and popular resistance to his rule as well as the looming threat of international sanctions have led to a provisional agreement for a transitional government to hold elections (at which Kabila cannot stand) by the end of the year. All that awaits is Kabila’s signature on the deal, which we feel will reluctantly be made in the end.



However, the transition process is likely to be fraught and volatile, resulting in a cycle of violent protests and controversies. The risk of a more deep-rooted political crisis is very real given Congo’s history of instability and conflict. As a result, businesses – particularly those with a significant footprint in the political melting pots of Kinshasa, the Kivus and Katanga – will need to monitor developments closely in what is set to be a turbulent transitional period, laced with uncertainties.

Lastly, Ethiopia has also witnessed a troubled year in which protests by two large ethnic blocks which felt marginalised by the current government have spilled over into a cycle of violence. This places very real threats on Ethiopia’s political and economic outlook. Although the government claims to have largely contained the issue and freed many of the political protesters arrested over the course of the disturbances, the ethnic imbalance within the ruling administration and the deep grievances of some of the protesters are likely to see yet further unrest in the year ahead.

Ethiopia’s economy will continue to grow apace and the authorities are likely to use a combination of appeasement and sometimes heavy-handed suppression of violence to try and bring an end to the standoff. But they will face significant pressures both domestically – and from the powerful diaspora – to enable greater reform. While some progress may be made in this respect to stave off a crisis, Ethiopia’s status quo looks set to be more volatile and contested than it was previously, with many of the latent issues underpinning its system now bubbling at the surface. This will create a number of constraints and challenges for business, especially firms with operations in some of the worst-affected areas.



Brexit and Trump: all bets are offSuch is the degree of uncertainty around the likely evolution of US policy-making under Trump or the trajectory of negotiations between the UK and EU that it is difficult to make firm predictions around the impact on Africa. In the next year, Africa is likely to remain something of a by-stander on the peripheries of these titanic clashes of ideals and interests. However, initial signals coming from the Trump camp suggest that Africa may fall further down the priority list for the new, more inward-looking and self-interested administration. This will impact both on trade and aid dynamics. Similarly, in the short-term at least, the UK and EU are likely to remain locked in lengthy and consuming negotiations which will distract from other global activities while pressure on UK aid spending will further increase.

These dynamics are likely to create short-term risks to Africa, particularly in instances where the US is a major strategic partner, or ongoing trade negotiations with the EU are hanging in the balance. Although other world powers – notably China, Japan and the Gulf states – may plug some of the gaps, Africa will want to remain competitive and engaged with its traditional Western partners. In the longer term, Brexit may provide some interesting trade negotiation opportunities for African states, and Trump’s policy approach may not turn out to be as radical as his campaigning suggests. But for 2017, these global developments are likely to weigh on Africa’s growth prospects.

From a political perspective, the deepening of nationalist sentiment and strengthening of protectionist narratives may also cast a shadow in Africa. The continent’s regional economic communities have themselves struggled with harmonisation and deepening integration when confronted with national interests. Meanwhile, although the AU chairperson campaign is proving more vibrant than some past campaigns, the institution will continue to struggle with resourcing and its ability to impact the lives of ordinary citizens, such is the degree of national mistrust and resistance that obstructs many of its activities. More broadly, the messages of protectionism and nationalism emanating from the US and Europe bode badly for shaping the attitudes and approach of governments in Africa and across the globe. This marks a trend that businesses – which tend to view the world through the prism of markets rather than national boundaries – will need to keep a watch on if they are to adapt and thrive in a more hostile global political landscape.



About africapracticeafricapractice is a pan-African risk advisory, public affairs and strategic communications business firm. We advise some of the largest institutions, companies and investors on the African continent, helping them to understand complex political and commercial dynamics and manage challenging relationships with demanding and critical audiences including regulators, media, capital markets, customers and suppliers.

Our team of political and sector analysts, public affairs advisors and communications specialists provides a range of services designed to assist companies to manage risk and reputation throughout the investment cycle:

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ContactRoddy Barclay Head of Intelligence and Analysis [email protected]/ +44 207 087 3785

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The African year in 2017 - January 2017


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