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EAC: Investor demand, business activity to increase as political stability returns

by: Category: East Africa, Economy & Politics, Energy, In Focus A+ / A-

Kenya is emerging from a protracted presidential election process and seeing a return to political stability.

Nonetheless, challenges will persist in 2018 for organisations operating in the country and East Africa more widely. High debt levels in Kenya and unpredictable policymaking in Tanzania are among the key risks for businesses operating in the region in the year ahead, says specialist global risk consultancy Control Risks in its annual political and security risk forecast RiskMap.

Management of high debt levels and regulatory uncertainty in some markets to pose key risks for business in 2018.

Control Risks’ Senior Partner for East Africa Daniel Heal comments:

“2018 is set to be a promising year for Kenya and the East Africa region. We have started to see the recovery of investor confidence due to the return of political stability in Kenya, as well as renewed interest in major infrastructure projects both in Kenya and across the region. We expect this to continue throughout 2018.”

“However, in Kenya, a pending repayment of the first portion of a Eurobond worth USD 774.8m in 2018 should be a trigger for the government to refocus attention on controlling public borrowing and spending before debt becomes unmanageable.

Kenya has a strong appetite for external borrowing and has remained politically intransigent about its downsides.

While Kenya remains highly unlikely to default on its debt, growing interest payments and international banks’ shrinking appetite to provide further loans will result in lower public spending, which has been a key driver for economic growth in recent years.”

Control Risks has identified the following as the key risks facing businesses in East Africa in 2018:

 

Lingering debt crisis raises potential reputational risk: Countries in the region with a more diversified economic base such as Kenya and Ethiopia will keep sovereign risks at bay over the next year, and are unlikely to face a debt crisis in 2018.

However, investors will have concerns about the sustainability of borrowing over the long term. Governments across the region will have to make significant improvements in public financial management, reduce public spending and demonstrate prudent oversight mechanisms to avoid negatively impacting the wider economy in the medium term.

Regional political cooperation increases vulnerabilities for investors: The infrastructure boom in East Africa is set to continue in 2018.

However, cross-border projects will depend on closer and more effective political cooperation between regional governments, raising political risk vulnerabilities. Increasing focus on local content will present a range of reputational risks for investors around third-party management, and land and community issues will require early and committed engagement from investors to avoid any major operational impact.

Tensions between Kenya’s national and county governments may generate new political risks: The country’s return to political stability in 2018 will begin to unlock investment demand.

However, the government will need to consolidate stability and focus on building effective working relationships with county governments to keep political risks at bay. It will also need to focus on stimulating the private sector by reassessing the interest rate cap, encouraging more private sector involvement in infrastructure projects and continuing to reduce bureaucratic hurdles.

Regulatory risks in Tanzania: Unpredictable policymaking in Tanzania will continue to present major regulatory risks for international and regional investors. President John Magufuli’s grip on power is tightening, and his authoritarian style and erratic approach to legislation will further damage investor confidence. He will continue to use nationalistic legislation in the extractives industry as a way of increasing government revenue and addressing fiscal restraints, presenting a range of regulatory and political risks for investors in the short-to-medium term.

Security and operational risks as a result of political pressures in Ethiopia and Uganda: In Uganda, speculation over President Yoweri Museveni’s succession plans is likely to persist, despite the likely passage of a constitutional amendment removing the age limit for presidential candidates.

While these are unlikely to significantly harm businesses in the country, factionalism in the ruling National Resistance Movement (NRM) will complicate policymaking and lead to bureaucratic delays for businesses.

In Ethiopia, the government is likely to face further protests unless it seeks to broaden the political space and make some leadership changes. This will pose security risks for businesses in the regions of Amhara and Oromia, and in the border area between the latter and Somali regional state.

 

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Business Journalist since 2009, has worked for Financial Post, Standard Media Group, Business Journal and People Daily.

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