With rising protectionism and escalating trade wars across Western markets, Africa offers a different story to investors. In their fourth edition of the Risk-Reward Index for Africa, Control Risks moves beyond the headlines to draw out the underlying patterns of change and structural risk factors.
We spoke to Barnaby Fletcher, Associate Director at Control Risks, about the reality behind Africa’s reformist rhetoric, the potential of regional trade blocs and his advice to investors seeking to navigate shifting national and geopolitical structures. There are very few risks which are insurmountable he begins but, with the kind of sweeping changes we are seeing across the continent, such as old liberation movements losing power and promises to create the world’s largest free trade zone, there is bound to be volatility.
Reform and resistance
Ethiopia is a classic example of this dynamic. Prime Minister Ahmed Abiy’s ambitious reform agenda has consolidated his country’s position at the top of the reward index. However, Fletcher warns against expecting quick results. “The perception of Africa as the continent of Big Man leaders, of presidents and prime ministers who can transform the country on a whim, is a myth” he explains.
This is especially true of a country like Ethiopia ruled by a coalition party and rocked by ethnic tensions. To an extent, Fletcher points out, wherever you see such ambitious economic, political and societal changes as those that Abiy is seeking to implement, a certain amount of unrest is to be expected. Abiy has taken on the traditional political dominance of the Tigray People’s Liberation Front (TPLF) and the commercial dominance of its affiliated companies. This naturally created a power vacuum and, as different groups compete to fill that space, instability and violence has followed.
Nonetheless, Control Risks’ assessment is that, thanks to his reasonably large popular mandate, international support and strategic placing of allies within the security forces, Prime Minister Abiy has “done enough ride out this period of volatility”.
“It is good that one person can’t bulldoze through systems”
The real lesson from Ethiopia is that reformist leaders must navigate complex stakeholder structures and, on balance, “It is good that one person cannot bulldoze through systems”. The same has been true in Angola, where President João Lourenço’s reforms have been slower than expected, in in South Africa, where frustration is building around Cyril Ramaphosa’s inability to engineer a clean break with the previous regime.
For businesses, the real risks, as well as the real opportunities, lie in their ability to understand and navigate these complex structures. Those risks that are often overlooked by businesses tend to be the most important but also the least dramatic. In reality, a business is far more likely to find that the “their success or failure lies in their ability to cope with the mundane, overly complicated and expensive bureaucracy, petty corruption, petty crime, stock theft, inadequate infrastructure etc…”.
“A hugely symbolic milestone”
As well as understanding national dynamics, businesses must also pay attention to supra-national structures. Interestingly, Control Risks have chosen to focus their analysis on the East African Community rather than the headline dominating African Continental Free Trade Agreement (AfCFTA). “We didn’t focus on AfCFTA”, Fletcher explains, “because it is at such an early stage. It is a hugely symbolic milestone and could potentially be very important but, it will take many years to see a significant reduction in barriers.”
The East African Community offers an example of what an advanced common market can achieve and the region continues to boast the highest levels of economic growth on the continent. When asked whether this might be a model for the rest of the continent as it drives the world’s largest free trade area forward, however, Fletcher highlights that other regional blocs have different strengths. The South African Development Community (SADC), for example, has had successes on the political side, notably facilitating dispute resolution between Malawi and Tanzania and responding to the 2009 coup in Madagascar. Meanwhile, the Economic Community of West African States is more experienced in managing a common currency.
The challenge for the AfCFTA will be applying these lessons on a much larger scale and against a backdrop of rising worldwide protectionism. “If you’re really going to get rid of trade barriers”, Fletcher admits, “you are going to have to cede some decision-making power” – a fact that can be easily exploited by populist leaning leaders. In an era where many global leaders are promising to protect domestic manufacturing, African leaders will need to ensure regional integration creates job opportunities, particularly in the underexploited manufacturing sector.
Crucially, however, the key value add of AfCFTA will be in creating markets that are large enough to be appealing to investors. Africa, Fletcher highlights, “still accounts for a disproportionately small portion of the global economy”. Politically the view is quite different. With 54 states, Africa represents the largest block in the United Nations General Assembly. Though economic opportunities play a key role in renewed international interest in Africa, “it’s also about gaining influence and having those countries as allies in international bodies”.
The traditional dichotomy of the USA’s model of exchanging commercial opportunities for political influence competing against China’s politically agnostic approach is breaking down. New players such as Russia, the Gulf States and Turkey are “trying to do it all”. In this environment of heightened geopolitical competition, African governments are not judging large-scale projects on purely commercial terms. Fletcher points to the German government’s backing Deutsche Telekom’s bid for Ethio Telecom as an example of a trend taking place across the region. If investors do not understand governments’ geopolitical and development objectives, they may find that they miss out on major projects or back the wrong ones.
Despite his warnings not to expect too much too soon from Ethiopia’s reform promises, Barnaby Fletcher still names the country as one his markets to watch in the next year, “Ethiopia is getting all the attention for a reason”, he says. Even though it comes with significant risk, “there’s no doubt that its telecoms licensing process is the most exciting opportunity in telecoms for quite a while”. Not least because, if it is a success, then more liberalisation will likely follow in domestic aviation, logistics and the financial sector.
Other markets to watch are South Africa, which remains one of Africa’s few large economies and boasts significant structural advantages, and Madagascar, where promises to end corruption and political instability could heed unexpected growth.
Click here to read the full Risk Reward Index for Africa.