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Will this be Africa’s century?

October 17, 2019

Four principal challenges create risks for businesses and the continent itself but for those that can manage the risks, the opportunities are vast.
Credit, Political Risk and Terrorism
Geopolitical Risk

Urbanization across the world is happening at an unprecedented pace. Over the next 15 years, the makeup of the top 600 cities will change as the center of gravity of the urban world moves. Where this urbanization is happening is significant, especially to multinational companies and investors.

In the next five years alone, we expect 136 new cities to enter the top 600, with 90% of them concentrated in Asia and Africa, continents whose infrastructure are often the least able to cope with the dramatic social changes urbanization brings.

Additional urbanization on stretched infrastructure can lead to hasty planning, which can increase investment and people risks, including endemic corruption and violence. But there are four specific areas that represent significant exposure for companies with operations in, or exposure to, the urban areas of Africa.

  1. Uncontrolled development. Rapidly increasing urban population density can create severe problems, especially if planning efforts aren’t sufficient to cope with the influx of new residents. Much of the expansion will happen in slum areas and, as Zurich’s Global Risk Report suggested, rapid and unplanned urbanization can lead to competition for scarce resources, including land, water and food.
  2. Law and order. Competition for resources often leads to social instability, which may be intensified by high unemployment and widening inequalities in the city. If city governance is surprised by a sudden influx of people and fails to respond effectively, the city could see an increase in violence and a breakdown in law and order. It is estimated that much of the urban expansion is taking place in slums, exacerbating the existing socio-economic disparities.
  3. Political tensions. There are questions about how city and national governments will respond to the challenges of a growing, under-employed population with a fragile social fabric. Urban voters typically support opposition parties, so how incumbent governments respond to change will be revealing. One possibility is that the rising numbers of opposition supporters could pose a threat to old regimes, which could lead to increasing authoritarianism, as governments try to suppress dissent and tighten their grip on power.
  4. Debt. Some countries in Africa are already experiencing problems with debt. For example, Ghana is likely to see a debt crisis. At present, its borrowing is seemingly intended to plug fiscal deficits rather than fund projects likely to generate revenue — a particularly vicious spiral. Interest rates already consume a third of the country’s revenue, and with the economy highly reliant on cocoa beans, diamonds and gold, it remains highly vulnerable to international commodity fluctuations.

Opportunity in the risk

Much of this makes investing or lending in Africa challenging, as it’s nearly impossible to future-proof decisions when the pace of change is so rapid. In Willis Towers Watson and Oxford Analytica’s 2018 Political Risk Survey Report, 70% of the respondents said they were avoiding or scaling back investments in Africa given the economic and political challenges.

But Africa also offers opportunities to companies with effective geopolitical risk mitigation strategies.

The most common and effective variants include:

  • Contractual protection from host governments
  • Structuring for bilateral investment treaties
  • Continuous due diligence and monitoring
  • Political risk insurance

Investors can get contractual protection by requiring the host governments to give transaction agreements the force of law by legislative enactment or requiring special laws to be enacted for a particular project. Bilateral investment treaties are agreements for the mutual promotion and protection of investments made by investors in the two states party to the agreement. Political risk insurance can protect against a number of risks including:

  • Confiscation, expropriation and nationalization
  • Currency inconvertibility, where the government declares that local currency cannot be exchanged for any other currency
  • Forced divestiture or abandonment
  • Deprivation

Companies that are able to tackle some of the key concerns in emerging markets, such as hard currency shortages or a sudden regime change leading to cancellation of licenses or contracts, are readily adaptable to investing and gaining returns.

The key to managing the spectrum of risks and opportunities in Africa is to understand them and their drivers before developing an integrated prevent-and-protect strategy. It also requires the ability to respond when things don’t go to plan. As events in other regions suggest, companies that prepare in advance of the challenges will be able to guard against risks and reap the rewards accordingly.

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