Africa holds its breath as election season looms

Political risks are likely to increase in the coming months as two of Africa’s economic heavyweights – Nigeria and South Africa – head to the polls in the next 12 months. Speaking at Commercial Risk Africa’s Risk Frontiers West Africa – Roadmap to Success seminar in Lagos last week, Genevieve Ahinful, underwriter at African Trade Insurance Agency, warned of the risks posed by the election cycle. She told some 120 delegates: “We do see an increase in local funds but there are a lot of promises made. Once the election is won, where does that money go? “You might see a spike in the local economy ahead of the vote but post-election it doesn’t translate into those promised infrastructure projects. “Foreign investors are very wary and will not go into a country when there are elections looming,” Ms Ahinful said. The danger, she explained, is that the old rules are ignored and contracts get rewritten. “Investors would rather sit back and wait and see who wins before coming in,” she said. Even the 20-year projects will slow down, as the backers wait to see how the political winds change. The overall message however is about risk quantification. “If you cannot quantify the risk to your business, are you prepared for what might happen to the business should that event occur?” she asked. “Sometimes you have decide not to do business.” Considering the impact of sanctions and a possible trade war between US and China, Ms Ahinful said: “We are lucky that we have economists and credit analysts with their expertise on board but, for most businesses, doing due diligence and KYCs can be very simple thanks to Google. “Type in the country name, type in political scandal, political issues – do a Google research and then delve deeper,” she suggested. “If you want to take a risk on a supplier, you will want trade references, bank references [and to] check whether they are good payers.” Fakoya Jolaolu, actuary, risk management and compliance at Africa Re, stressed that most contracts include clauses insisting that neither party will enter into transactions with organisations involved in money laundering and fraud. “You must scan all your clients,” he warned. “Check the ownership and leadership structure of all your clients.” Mr Jolaulo said companies need to be particularly careful when it comes to sanctions. “You want to respect the sanctions that the US has imposed because it is easy for them to freeze your assets.” However, he admitted that it is not necessarily a straightforward issue. Many African businesses will ultimately have ownership from sanctioned countries somewhere among their shareholders. Take the example of Sudan, he said. Businesses may well find there is a Sudanese shareholding somewhere in their supply chain. While there may be US sanctions, Sudan is also a member of the African Union – a respected institution . “Businesses have to make a decision,” Mr Jolaulo said. “It goes back to management and the board as to whether you want to continue with that business. If so, what currencies does the company use?” He also suggested in that kind of situation, the company has to be ready to defend its decision and live with the consequences. “We have had cases where funds are frozen because we dealt with some countries using US dollars,” he said. Most insurance policies have an exclusion when it comes to sanctions, warned Ms Ahinful. “And the reach of the US when it comes to sanctions is particularly long. They don’t just pursue companies but [also] down to the individual level.” Another suggestion from Mr Jolaolu was to be prepared. “Set up a committee,” he said, “and think through what you would do in certain situations. For example, by the time the US government reimposed sanctions against Iran, we had already worked through how we would manage that change.” The pair both admitted that it can be hard to manage the risk when global politics is in such a state of flux, but they agreed plenty of research and open discussion would help risk managers and their firms cope.

Africa holds its breath as election season looms

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