Battling business challenges on the road to recovery

West Africa is enjoying a renaissance as its biggest economy comes out of recession, as Prince Cookey reports The countries of west Africa are crawling out of the recession that enveloped the region’s biggest economy, Nigeria. With Nigeria out of recession, the ripple effect is positively impacting on the region, even as challenges persist. However, across the region and Africa, political risk remains a major concern for dealmakers in 2018. According to a recent report, Resourceful dealmaking: Outlook for M&A in Africa, published by Mergermarket in collaboration with specialist risk consultancy, Control Risks, there has been a dramatic fall in M&A activity, with declines of 25% in volume and 26% in value in the first half of 2017, compared with a relatively buoyant 2016. Imad Mesdoua, senior political risk consultant at Control Risks, comments: “The drop-off signifies growing investor anxiety surrounding governance issues and weaker economic signals across key African markets. Specifically, political risk and transparency concerns have become the principal obstacles to successful acquisition in Africa. Ethical and compliance considerations are another major factor clouding the outlook for potential investors.” Among the report’s key findings are: Political risk will be a major obstacle to dealmaking in Africa during the next 12 months, according to 84% of respondents. Other risk factors include transparency concerns and completeness of information, which ranked joint first alongside political risk (84%), as well as compliance and integrity issues (80%). Almost three quarters (72%) of respondents said that getting caught up in a regulatory or criminal investigation is one of the highest risks in relation to a target company’s ethics and compliance standards. WEST AFRICA At the beginning of 2018, Control Risks identified five key risks facing businesses in west Africa: Terrorism and militancy: Business assets and personnel in west Africa will remain vulnerable to attacks by transnational or domestic militant groups. Irregular regulators: The rise of extra-government scrutiny will periodically give rise to commercial disputes, legal challenges and the need for businesses to engage with government stakeholders. Political instability: Protracted political and socioeconomic grievances will continue to fuel popular discontent and a desire for regime change in parts of the region. Cameroonian President Paul Biya’s will bid for re-election, while Togolese citizens will continue to protest for the end of the 50-year Gnassingbé dynasty. New sectors, new risks: From Senegal’s offshore potential to Nigeria’s embryonic mining sector, some countries in west Africa will be making forays into previously-undeveloped sectors in 2018. Ongoing operational risks: Shortages of – or difficulties in sourcing – fuel, foreign currency, equipment and skilled labour. The infrastructure deficits that persist in the vast majority of the region, such as in electricity, will continue to pose difficulties to businesses in the region. NIGERIA The first good news for Nigeria is that the country exited recession in 2017, leading to investor and market confidence in the economy, despite the prevailing challenges. Mayowa Adeduro, the immediate past managing director of Anchor Insurance Company, says the major risk factor in Nigeria today is insecurity resulting from acts of terror, kidnap-ransom and armed robbery. He is emphatic that: “By 2019, political uncertainty and political killings, to a large extent, will add to the above.” Rise in oil prices Another positive trend is the gradual rise in oil prices, which is having a positive effect on government revenue, leading to more projects across the country. Currently, Bonny Light is at $69.42 while Brent goes for $67.42, thus reducing financial strain on the economy. 2019 presidential election The 2019 presidential election will have a major impact on businesses operating in Nigeria, as well as foreign investors that have business interests in the country. Already, the National Assembly is in turmoil along party lines over the order or sequence of elections as prescribed by the Independent Electoral Commission (INEC). Whereas INEC slated the presidential election for 16 February 2019, some senators are seeking a change of the date for political reasons, creating more political and economic anxieties over the election. According to Tom Griffin, Control Risks’ senior partner for west Africa: “In Nigeria, although presidential elections are next slated for 2019, campaigning has already started. The uncertainty that generates, as well as the need for cash that an election brings, mean that political instability and regulators whose actions will be difficult to predict remain among our top risks for businesses in the year ahead.” Stability of Forex In 2016 and 2017, the volatile forex regime became a major negative trend for local and foreign business operators in the country. Local businesses that depend on importation suffered, while foreign operators such as airlines could not repatriate their earnings. In response, the Central Bank of Nigeria intervened in the forex market, injecting more than $18bn to ensure the availability of forex to businesses and achieve stability. Naturally, the forex crisis generated the usual blame game. For instance, Hope Uzodinma, chairman, Senate Committee on Customs, Excise and Tariffs, accused some banks and foreign companies of conspiring to create artificial scarcity of foreign exchange in the country. Mr Uzodinma was quick to suggest a solution: “The government will not only blacklist these companies but will also ensure that expatriates behind these companies are deported to their various countries. These fraudulent actions are some of the reasons why there is leakage in government’s revenue. This is why there is scarcity of foreign exchange.” For 2018 and 2019, the exchange rate could vary between NGN360 to NGN380 to a dollar, depending on the challenges of the 2019 presidential election, which will remain a major business disruptor in Nigeria. Rise in foreign debt Nigeria’s debt profile (domestic and foreign) is rising and that is not a positive for the country in 2018 and 2019. Figures released by the Debt Management Office put the domestic debt for the government at NGN12.589trn as at 31 December 2017, while external debt of the government, states and the FCT was NGN5.787trn. In dollar terms, the external debt rose from $10.718bn in 2015 to $11.406bn in 2016 and $15.047bn in 2017. Curiously, Nigeria is also seeking another $5.5bn external loan, which could further complicate the country’s finances. To further underscore the country’s risk profile, the Allianz Risk Barometer 2018 lists the top ten business risks for Nigeria thus: 1: Theft, fraud and corruption 2: Market developments 3: Changes in legislation and regulation 4: Macroeconomic developments 5: Cyber incidents like cybercrime, IT failure, data breaches and hacking 6: Political risks and violence involving war, terrorism, civil commotion 7: Fire and explosion 8: Power and energy blackouts 9: Business interruption including supply chain disruption 10: New technologies. In Nigeria, 60% of insurance premiums are derived from the energy sector. Of the 169 million Nigerians in 2014, only 2.25 million had active insurance. The market is also dominated by 59 insurers all targeting the market share, with penetration levels as low as 1%. LIBERIA The election as president of noted footballer George Oppong Weah in a smooth and crisis-free political transition is generating a positive economic dividend for Liberia. Today, investment is on the rise and Liberia is looking up again after the global slump in commodity prices and outbreak of the Ebola virus in the 2014/2015 season. Consequently, the economy recovered from -1.6% in 2016 to 2.6% in 2017. Indeed, growth is estimated to reach an average of 3.6% by 2019 on the strength of improved infrastructure development, especially road networks and cheaper electricity. The risk assessment In early 2018, Coface released a special risk assessment of the country. It found a high-risk political and economic situation and an often very difficult business environment, which can have a very significant impact on corporate payment behaviour. Corporate default probability is therefore very high. Coface also found that the business environment is very difficult. Corporate financial information is rarely available and usually unreliable when it is. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Inter-company transactions can thus be very difficult to manage in the highly risky environment, which was rated D. country Strengths Diverse natural resources (rubber, iron, gold, diamonds, oil) Strong financial support from the international community Member of Economic Community of West African States Weaknesses Infrastructure shortcomings Dependent on commodity prices Significant levels of poverty and unemployment, shortcomings in education and healthcare Recent Ebola epidemic which could reappear Recent and fragile democracy, high levels of corruption Difficult business climate Dominant informal sector THE GAMBIA The Gambia’s economy is largely dependent on tourism, rain-reliant agriculture, and remittances from the diaspora. However, erratic rainfall adversely affected the agricultural sector for several years, while the Ebola crisis in neighbouring Guinea, Liberia and Sierra Leone as well as the country’s political crisis of 2015/2016 also impacted negatively on its tourism sector. From 2016, the economy began to recover on the back of budget support and positive investor confidence, pitching its real GDP growth in 2017 at more than 3%. Challenges of doing business The situation in Gambia was aptly captured in a World Bank report, which states:“The macroeconomic framework continues to be characterised by high levels debt (more than 120% of GDP in 2016), crowding out public and private investment and creating significant risk of debt distress. “Debt service consumes an inordinate share of available resources (46% of taxes in 2016), leaving very little fiscal space to improve service delivery and undertake the public investment needed in physical and human capital to support the emergence of a thriving private sector. More than half of the debt is held by domestic banks (55% in 2016), which undermines the stability of the banking sector. “Exchange rate policies that sharply overvalued the Gambian dalasi have also contributed to financial strains and balance of payments imbalances. Central Bank official foreign reserves have declined significantly, with the periodic imposition of currency controls since 2013, and overvaluation (against the US dollar) of as high as 30% over pre-peg, market-determined rates. “The lifting of currency controls in January 2016 should facilitate a rebuilding of reserves over time, but there are other administrative controls in place that could pose ongoing challenges, including shipment controls on US dollars, British pounds sterling, and euros. “The key long-term development challenges facing The Gambia are related to its undiversified economy, small internal market, limited access to resources, lack of skills necessary to build effective institutions, high population growth, lack of private sector job creation, and high rate of outmigration.” To turn the tide, the country in June 2017 applied to the International Monetary Fund, which subsequently approved $16.1m under the Rapid Credit Facility for The Gambia. Mitsuhiro Furusawa, deputy managing director and acting chair, issued the following statement: “The Gambia faces an urgent balance of payments need, triggered by a weak agricultural season, lower tourism receipts due to the political turmoil, and higher commodity prices. These shocks along with past economic mismanagement have exacerbated an already weak economic situation. “The Gambian authorities are strongly committed to drastically reducing domestic borrowing, including by ending central bank deficit financing, and are taking substantive measures to increase non-tax revenue and reduce expenditures in 2017. “The Gambia’s high public debt exposes it to significant vulnerabilities. To reduce these vulnerabilities, multilateral development banks have committed to provide additional support and assurances of highly concessional support have been received from some of The Gambia’s major official bilateral creditors. “The authorities are also committed to developing a strategy to reduce vulnerabilities stemming from domestic debt. These actions will help make debt sustainable over the medium term, although risks are expected to remain elevated,” concluded Mr Furusawa. The insurance solution Given the stated major risk factors affecting businesses in west Africa, what are the insurance solutions available to local and foreign operators in the region? Former Anchor Insurance Company managing director MrAdeduro says the insurance market in west Africa has the capacity to mobilise relevant insurance products to take care of such risks as kidnap-ransom and terrorism. This is in addition to keyman insurance, theft and burglary insurance. On a wider level, Dipolelo Moime, chief executive of Legato Consultancy, has released a report – Tapping Into Africa’s Insurance Market: Growth, Opportunities & Risks – which examines how insurers in Africa could leverage their strength to support sustainable growth of economies on the continent. The study states: “A report by CNBC Africa highlighted that the insurance market in Africa is highly underdeveloped, with only 3.5% of the African market being insured, just as a 2012 report by Swiss Re global insurance document stated that total premiums in Africa alone amounted to $71.9bn – which translated to a penetration rate of 3.65% as compared to global average of 65% – with each African having paid an average of $664 in insurance premiums during the same year.”

Battling business challenges on the road to recovery

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