Top Business Risks in sub-Saharan Africa
Understanding sub-Saharan Africa’s evolving risk landscape is an imperative in order to manage risks and opportunities in a way that is both opportunistic and sustainable.
Commodity crash exposing macroeconomic weaknesses
Structural risks, long evident in sub-Saharan African economies, were exposed by the end of the commodity super-cycle. One of the consequences was a slowdown in real GDP growth, which arguably bottomed out last year at a mere 1.4%, compared to an average of 5.3% per annum (p.a.) over the preceding decade, as reported by the International Monetary Fund (IMF).
The normal response from policymakers to an exogenous (i.e. external) macroeconomic shock (like falling commodity prices) would be a combination of fiscal and monetary stimulus.
However, the global financial crisis of 2008 that started in the US had lasting repercussions across the world, with many sub-Saharan African governments choosing to stimulate the economy via looser monetary and fiscal policy stances.
While this helped to mitigate the effects of the global financial crisis, this also limited the options to use the same tools when sub-Saharan Africa faced a commodity-price crisis a few years later.
Currency risk exacerbated by rising debt levels
While the continent is showing signs of being on a path to recovery in 2017, it is a tentative recovery, and a path that has many potholes. Multiple years of fiscal and current account deficits meant that governments had to incur external debt. World Bank data show that sub-Saharan Africa’s total external debt increased from US$282.9bn in 2010 to almost $454bn by the end of 2016 – representing an increase of some 60%.
These debts require interest payments, and given that they are denominated in foreign currency, this means that countries are even more susceptible to exchange rate risk than they already were. Weakening local currencies are translating to rising interest payments, which are becoming increasingly burdensome. This places more pressure on governments to increase their debt levels in order to meet interest payments, which could potentially lead to a debt trap.
Financial sector under increasing pressure
In line with rising debt in the public sector, the financial sector in sub-Saharan Africa is also facing mounting pressure. The IMF noted in its May 2017 sub-Saharan Africa Regional Economic Outlook that the combination of lower real GDP growth and uptick in government arrears “has resulted in a widespread increase in nonperforming loans, triggering higher provisioning, straining banks’ profits, and weighing on solvency”.
A thriving and – more importantly – stable financial sector is systemically vital for the ongoing development and growth of sub-Saharan Africa. Should the financial sectors in pockets across the region continue to deteriorate, or even fail, then long-lasting negative consequences are sure to follow.
Additional structural risks
As mentioned earlier, structural factors that were exposed by the commodity-price slumps continue to place strain on sub-Saharan African economies, and carry their own risks. On top of the lack of diversification and overdependence on commodity exports that directly led to the slowdown across the region, there are additional structural risks that need to be taken into account.
These include extreme weather conditions (listed as the most likely global risk by the World Economic Forum in its 2017 Global Risks Report), interstate conflicts, failure of national governments, a lack of infrastructure, unemployment or underemployment, and terrorism. While these risks are relatively confined to specific countries or geographical regions, they do hold the potential for spreading (also known as contagion or spillover risk). As such, investors and businesses alike must be cognisant of these risks when formulating their strategies.
Furthermore, there are potential risks emanating from outside of the continent that could potentially have adverse effects on the sub-Saharan African region. Uncertainty in global financial markets does not bode well for Africa, since investors generally seek calmer waters in times of turbulence.
This is known as a flight to safety, which traditionally sees higher debt costs in emerging and developing markets. Upticks in geopolitical risk are key drivers of flights to safety.
Article partially appeared on AfricanInsider
Credit: BusinessInsider, Deloitte, WSJ
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