Stabilization across Africa masks divergent trends


Jeremy Weltman
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The region’s high risks are still evident - despite the attractions of recent bond issues - according to Euromoney Country Risk Q3 results.

The risks attached to Africa’s 51 sovereigns stabilized in Q3 2012, with the region’s average score unchanged at 29.0 compared with Q2 2012. Only 13 countries saw their risks increase and 12 became less risky. The region has fallen out of favour comparatively little during the past two years.

Of all the world’s regions that have succumbed to increased risk, Africa has proven the most resilient, in spite of the Arab Spring causing ructions in northern parts of the continent.

Africa’s resilience partly reflects the bounce-back effect in Libya, where post-conflict reconstruction and the establishment of democracy are slowly turning around the country’s fortunes. The borrower has seen the biggest increase in risk of any African state during the past two years, but its risk profile has eased since the fall of Muammar Gaddafi, with Libya climbing the rankings again – up four places since Q2 2012 to 134.

Scores for Libya’s political sub-factors remain low, but have noticeably improved during the past 12 months, especially with regards to government stability and repatriation risks. The economy, badly affected by the war, contracted by a spectacular 41.8% in real terms last year, according to the African Development Bank, but is expected to record double-digit expansion in 2012 on the back of the reconstruction and the resumption of oil production.

Olivier Vojetta, head of global market research at FM Capital Partners, and one of ECR’s contributors, notes: "Libya is making good progress after the recent political upheaval. Overall, we are optimistic about the long-term prospects of the country if the necessary reforms are carried out and structured to benefit local people."

Egypt, by contrast, has failed to improve. Although seemingly over the worst of its political and social instabilities after the revolution in early 2011, which led to the overthrow of president Hosni Mubarak after three decades in power, the country’s ECR score has continued to slide. No other country in Africa or the Middle East has suffered a larger adjustment, culminating in an eight-place drop in ECR’s rankings to 113 since the beginning of the year, and a fall of 17 places.

Egypt’s fall from grace is part of a wider problem for Africa: that only Botswana and South Africa score more than 50 out of 100. Consequently, the region remains one of the riskiest in the world. This is sometimes overlooked by return-savvy investors snapping up the steady stream of sovereign debt placements from African issuers seeking finance for infrastructure development.

Indeed, the markets appear to be pricing in a lower level of risk than ever before, as illustrated by Zambia’s first 10-year sovereign debt issue yielding less than its Spanish equivalent, and with other sub-Saharan Africa (SSA) sovereigns enjoying tighter CDS spreads than their eurozone counterparts.

However, ECR’s survey results suggest that economists are still questioning the relative merits of emerging frontiers in SSA, where countries have different characteristics, and where political and structural risks should not be ignored. This is evident in recent comments by ECR’s experts.

Despite some improvements in Uganda, for example, Gtwesigye – a local expert – notes: "The brain drain is still high, as most skilled workers seek better opportunities in other economies. Healthcare has been historically unsatisfactory, with little government will to combat health issues. Unions exist, but are not taken too seriously as a political bargaining tool."

On Ghana, Emmanuel Anyidoho, one of ECR’s expert economists based at the African Development Policy Centre, comments: "Public monopolies exist, illiteracy needs improvement, healthcare needs improvement, the economy is not highly diversified, the current account is still in deficit, 45% of budget support comes from external sources [loans and donations], tax revenue cannot cover expenditures, unemployment is high [and] real government statistics are absent."

Many of these problems are shared by other countries in SSA, and cannot be overlooked as reasons for the continent’s low average score.