27 March 2018

Political risk has been a dominant theme over recent months, from the recent inconclusive presidential election in Sierra Leone which will now go to a second round, to the resignation of Ethiopia’s Prime Minister Hailemariam Desalegn in early March. Meanwhile, policy changes to the mining code in the Democratic Republic of the Congo and local content regulations in Tanzania are giving international operators and investors challenges to deal with. Namibia has also announced plans to press ahead with reforms to its black economic empowerment plan, whilst the countries of West Africa and the Sahel face growing security concerns after the third major terrorist attack to hit Burkina Faso’s capital, Ouagadougou.

regional news in brief

Namibia

In February, Namibian President Hage Geingob announced that his government will go ahead with its new black economic empowerment plan, despite considerable resistance from Namibia’s business community. Under the National Equitable Economic Empowerment Framework (NEEEF), which was first mooted in 2017, foreign businesses will be required to cede a 25 percent ownership stake to previously disadvantaged individuals in an effort to redress income inequality and unemployment in the country. The plan has become a key point of contention amongst investors and other stakeholders and it is anticipated that the constitutionality of the draft bill will be challenged in court.

Nigeria

Nigeria will hold presidential and national assembly elections in February 2019. Despite a tenure marred by both his extended absence due to an unidentified illness and a broad failure to deliver on much of his 2015 campaign rhetoric, the 75-year old President Muhammadu Buhari looks likely to run for office a second time. Despite not publicly announcing his intentions, Buhari has been endorsed by his party, the APC, and his repeated refusal to rule himself out has brought criticism in Nigeria, notably from former President Obasanjo. In the absence of strong alternative candidates, both within the APC and the opposition, a second term for Buhari is on the horizon.

Burkina Faso

The Mali-based Islamist militant group, Jamaat Nusrat Al Islam wal Muslimeen (JNIM), claimed responsibility for two coordinated attacks on the military headquarters and French Embassy in Ouagadougou, on 2 March. Eight people were killed in the attacks, the third major incident in the city since 2015. Ongoing Western-backed counterterrorism efforts in the region are likely to motivate further attacks against African governments and Western interests in the medium term, particularly in participating countries, including Mali, Senegal and Niger. The threat of attack extends to “soft targets”, such as popular hotels and restaurants in major cities.

Democratic Republic of Congo

President Joseph Kabila has signed into law a new Mining Code, which will impose royalty payments of up to 10 percent on foreign companies’ mining minerals classed as “strategic”, such as cobalt, copper and gold. This is up from the current rate of 2 percent. Several international mining companies have lobbied against the law, claiming it will deter investors and limit the growth of the mining industry, as well as violating pre-existing agreements. Although President Kabila has agreed to open negotiations with affected companies over the implementation of the code, it comes in addition to increasing violent conflict in the east and south of the country.

Sierra Leone

On 7 March, Sierra Leone held its first presidential election since the Ebola crisis of 2014, which saw 16 candidates vying for the presidency. The opposition Sierra Leone People’s Party (SLPP) of Julius Maada Bio was narrowly ahead of Samura Kamara of the governing All People’s Congress (APC); however, a run-off will take place on 27 March as neither party reached the 55 percent of votes required. However, a number of smaller parties could yet play kingmaker ahead of the second round. Once elected, the new government will face challenges of growing youth unemployment and reviving an economy battered by low commodity prices and the impact of the Ebola crisis.

Tanzania

In January, the Tanzania Local Content Regulations came into effect, following amendments to the Tanzania Mining Act in 2017. These regulations, which are aimed at ensuring that Tanzanian citizens benefit from the country’s mineral resources, require mining companies, as well as their contractors and sub-contractors, to utilise majority Tanzanian-owned legal practitioners, insurance providers, and bank accounts. The regulations are the latest development in President Magufuli’s protectionist agenda, which has already seen the implementation of resource nationalism measures, which are shoring up his domestic political capital, but deterring foreign investors.

Zimbabwe

Zimbabwe’s opposition politics have weakened after the death of Morgan Tsvangirai, the long-term opposition leader of the Movement for Democratic Change-Tsvangirai (MDC-T), on 14 February. The opposition party, which is viewed as the only viable alternative to the ruling party, the Zimbabwe African National Union – Patriotic Front (ZANU-PF), is now further compromised by internal succession battles. Violence has flared between opposing factions within the MDC-T, particularly after Nelson Chambisa, the party’s leader, was named its presidential candidate for elections anticipated later this year. Amid fears that the MDC-T could split ahead of the election, another victory for the rejuvenated ZANU-PF looks highly likely.

Cameroon

Cameroon’s Paul Biya has instigated a harsh military crackdown in the country’s English-speaking regions following an escalation in violence caused by the arrest of 47 separatist leaders. Strikes and violent protests have been ongoing in the north-west and south-west of the country, also known as “Ambazonia”, since late 2016 over a growing concern from the regions that their language is being pushed out of public life by a French-speaking majority. International investors and domestic operators, including in the dominant extractive and agricultural industries here, have already been impacted by connectivity and security issues, along with the 30-percent of Cameroon’s commercial banks located in “Ambazonia”.

Ethiopia

On 15 February, Hailemariam Desalegn, Ethiopia’s prime minister, resigned in an unexpected move officially described as a means to promote peace and political and economic reform, and to end the protests that have been ongoing in the country since 2015. The Ethiopian People’s Revolutionary Democratic Front (EPRDF), the ruling coalition of four ethnically-based political parties, is yet to decide on Desalegn’s successor, although there is speculation that the next leader of the EPRDF will be from the Oromo tribe, in an effort to help quell the Oromo-led anti-government protests. However, the declaration of a state of emergency alongside Desalegn’s resignation indicates that substantive democratic reforms, and therefore an end to the protests, are unlikely.

Water World: Ports, Power and Position in the Horn of Africa

The challenges of navigating complex political and investment environments

Global players, including the US and China, are acutely aware that there may be a pending change in the power dynamics of the Horn of Africa. While the political posturing of regional players like Egypt, Sudan and Ethiopia is well known, it is increasingly clear that this power play is steeped in securing control of the region’s strategic waters. Djibouti continues to punch above its weight as a key trade and security hub, but with interest piquing in Somaliland, a new competition over strategic ports is emerging. Yet, it is not just maritime opportunities up for grab. Beyond the Bab al Mandab Strait, the freshwaters of the Nile are also in the mix. The Grand Ethiopian Renaissance Dam (GERD) project is due to be completed later this year, which will produce over 6,000 megawatts of electricity when it comes online. The dam will make Ethiopia a major powerhouse, allowing it to export electricity across the region, but this will come at the expense of more cordial diplomatic ties with Egypt. While regional and global powers, including the US, China, the United Arab Emirates, Turkey and others, will be eager to back the winning horse in the latest power race in the Horn of Africa, they cannot rely on their enemy’s enemies being their friend. Cross-border hostilities may come to overshadow old regional alliances as the Horn of Africa’s states set their own power agendas.

Fighting over the Nile

The GERD is due for completion in 2018. The USD 5 billion project will take between five and 15 years to fill, in a process Egypt is certain will jeopardise its primary water supplies. Ethiopia is expected to start filling the dam as early as July 2018 and the issue has already become a focal point in deteriorating relations between Egypt, Ethiopia and the third party to the project, Sudan. The Blue Nile in Ethiopia transcends Sudan before joining the White Nile and entering Egypt, and supplies 85 percent of Egypt’s water, inherently linking the three countries and their water supplies. Yet, since Ethiopia laid down the cornerstones for the GERD in 2011, the three states have been at loggerheads over securing equitable utilisation of the dam. Talks aimed at resolving the issue have collapsed several times and in an apparent effort to put pressure on Ethiopia’s ally, Sudan, and in ensuing retaliation against Egypt, the two countries have since renewed their own historical diplomatic spats.

It is thus unsurprising that the protracted dispute between Egypt and Sudan over the Halayeb Triangle has again come to the fore. Recent political posturing has not only seen the temporary withdrawal of the countries’ respective ambassadors, but also the co-opting of other regional countries. Sudan has accused Egypt of deploying troops along the Eritrea/Sudan border and responded by deploying troops on its side of the border. This strategic move is likely to exacerbate historical grievances between Eritrea and Ethiopia, amid Egypt’s ongoing claims that Ethiopia and Sudan have joined forces against Egypt in the GERD dispute. Meanwhile, Sudan has accused Egypt of supporting rebels with military equipment in its own Darfur region, where Sudan has been waging a protracted war against rebel groups. Rumours of an Egyptian military base in Eritrea, as well as alleged Egyptian support for Ethiopian rebels, point to an increasingly tense region. On the other hand, Egypt accuses Sudan of supporting the now-banned Muslim Brotherhood in undermining the current regime. This has raised some hesitation among foreign investors amid concerns over an increased likelihood of regional war, specifically regarding the GERD’s attractiveness for investors in Ethiopia’s agricultural sector. Meanwhile, should tensions between Egypt and Ethiopia intensify, they could jeopardise prospects for the 60 or more Egyptian companies present in Ethiopia and their accumulative USD 150 million investments in the country.

Proxy battles and new military positions

The region is fast becoming a proxy stage for the wider Gulf diplomatic crisis, between the Saudi Arabia-led Gulf Cooperation Council (GCC) bloc, which includes Egypt, on one side, and Qatar on the other. Despite claiming neutrality, Sudan appears to be cosying up to Qatar’s ally, Turkey. President Omar Al Bashir has sought to grow ties with his Turkish counterpart, President Recep Tayyip Erdoğan, who is on a sustained soft power drive utilising Turkish public and private investment right across the continent. Turkey and Sudan reached a lease agreement for Sudan’s Suakin Red Sea Island last year. The deal over Suakin has raised concerns in the region that Turkey will seek to establish a military presence on the island, which will tip the balance of military powers in the Horn, particularly with regard to Djibouti.

Djibouti is strategically located along the shipping lines of the Gulf of Aden. At least 20,000 commercial ships pass through the Gulf of Aden each year and 11 percent of the world’s seaborne petroleum passes through the region en route to the Suez Canal. Djibouti also hosts French, US and, more recently Chinese, foreign military bases.

The US and France have an entrenched security interest in the country, with Djibouti serving as the base for US and French regional counterinsurgency operations, including into Somalia and Yemen. Yet, China’s soft power initiatives have put the country far in the lead in the battle over Djibouti through high capital investments, which the more established global powers have not matched. China has invested billions of US dollars into Djiboutian infrastructure, including the Doraleh Container Port, which Djibouti’s landlocked neighbour, Ethiopia, is dependent on for at least 95 percent of its foreign trade. Djibouti is also expected to feature prominently in China’s One Belt, One Road initiative and there is widespread speculation that a Chinese company is in the running to take over Doraleh from the Dubai-based DP World. DP World had previously secured a 30-year concession to operate the port in 2006, but in an unexpected move on 23 February, Djibouti President Ismaïl Guelleh dissolved the contract by presidential decree, alleging that it had been obtained fraudulently. This is a confident move on the part of Djibouti, ultimately rebuking the world’s fourth largest ports operator and potentially tainting ties with the United Arab Emirates (UAE), in favour of far more lucrative ties with Beijing.

Introducing Somaliland

Although DP World will push back against the decision, the UAE is already looking beyond its borders. In 2017, DP World committed USD 442 million to develop Somaliland’s Berbera Port amid wider UAE plans to establish a military base in the self-declared independent territory. The move on the part of the Dubai-based company and the UAE will significantly increase the strategic importance of Somaliland. In return for the base, the UAE will build a new civilian airport for Berbera and rehabilitate the road linking the city to the Ethiopian border at Wajaale. Meanwhile, on 6 March, reports emerged that Ethiopia has purchased a 19 percent stake in DP World’s Berbera project in a likely effort to reduce Ethiopia’s reliance on Djibouti. If successful in linking Somaliland and Ethiopia, the development will reduce Djibouti’s regional bearing, provided that Ethiopia feels Somaliland’s development will not overshadow its own.

Regional vs domestic trade offs

Some powers, notably China, the UAE and even Turkey, are gaining advantage over their rivals in securing influence in the region. However, Djibouti’s push back against DP World and Ethiopia’s entry into Berbera demonstrate that the region’s own states still have a forceful role to play.

Yet, it remains unclear whether the Horn countries will successfully navigate lucrative trade and security deals while avoiding the consequent political tensions, likely diplomatic skirmishes and increasingly critical domestic populations.

Egypt, which has been shaken by a series of political setbacks since 2011, has struggled to revive its long ailing economy and attract much needed foreign direct investment. A huge budget deficit, external debt sitting at USD 80 billion, and budget constraints, all restrict Egypt’s appetite for aggressive cross-border ventures. However, further Saudi investment is due to stream in, in support of the Kingdom’s strategic and political ally.
In October 2017, the US lifted a long-standing sanctions regime against Sudan and the country is eager to attract new FDI. Already increased protests against the Sudanese government over increased austerity measures and subsidy cuts could jeopardise these prospects and as such Sudan should be wary of the effect of aggressive actions in discouraging new investors.
In Ethiopia, current political uncertainty in the wake of the 15 February 2018 resignation of former Prime Minister, Hailemariam Desalegn, and the implementation of a second state of emergency in under two years, will also increase hesitation among investors.
Djibouti is facing growing international criticism over President Guelleh’s increasingly authoritarian rule while Somaliland remains unrecognised as a sovereign state, both of which could affect the legitimacy of commercial contracts with these governments. These challenges will amplify the consequences of overly aggressive security deals, at the expense of much needed trade.

Ultimately, the Horn of Africa will be one to watch in 2018. While global powers are eager to secure influence in the strategic region, countries in the Horn will likely weigh up their available options carefully. This will make the investment environment in up and coming players like Ethiopia, Djibouti and Sudan, increasingly complex. Yet, with governments needing to make trade-offs to manage domestic critics and placate regional hostilities to avoid discouraging investors, this is also a time of new commercial opportunities in the region, provided businesses stay one step ahead of regional posturing.

Politics and investment in the Horn

South Africa: Can a presidential transition turn the tide on corruption?

On 15 February 2018, during his speech after being sworn in as president, Cyril Ramaphosa restated his commitment to an anti-corruption drive in South Africa. The presidency of Jacob Zuma, Ramaphosa’s predecessor, was characterised by the entrenchment of a patronage network with seemingly unconstrained back door access to state funds and the placing of presidential allies into ministerial positions, the state’s prosecuting and revenue collecting authorities, and the boards of state-owned enterprises. Ramaphosa’s announcement has significant implications for the attractiveness of South Africa as an investment destination; however, whether he can deliver on his promises remains to be seen and will likely serve as a key test of his presidency. Ramaphosa has revealed very little regarding the implementation and reach of his anti-corruption drive, leaving observers to piece together a cautiously optimistic picture from the promises Ramaphosa has made in speeches and the recent (and long overdue) actions of the National Prosecuting Authority (NPA).

The Zuma legacy

The defining corruption scandal of Zuma’s nine-year administration was the “state capture” allegedly perpetrated by Zuma, his son and the Gupta family, a South Africa-based business family of Indian descent. This manifested through high-level government corruption and the erosion of corporate governance in state-owned enterprises and key agencies. One of the Guptas’ most audacious feats was the theft of over ZAR 200 million (USD 17 million) in public funds through a front company that had partnered with a provincial department to establish a dairy farm. This was identified by investigative journalists via a major e-mail leak known as the “Gupta Leaks”. The publication of details of the Guptas’ alleged largesse fueled widespread public discontent. The Gupta Leaks have also caused significant reputational damage locally to global firms such as KPMG, McKinsey & Company and SAP SE, not to mention Bell Pottinger, the UK-headquartered PR firm that collapsed in the wake of revelations that it had been hired by the Guptas to allegedly stir up racial tensions and deflect attention from the adverse coverage relating to the family.

As a result of corruption and poor corporate governance, parastatals like the country’s power utility, Eskom, South African Airways, and the South African Broadcasting Corporation, received several multibillion rand government bailouts. These bailouts, other maladministration, and a lagging economy have caused a steady increase in South Africa’s government debt, which almost doubled over the course of Zuma’s presidency to reach 51 percent of GDP in 2017. International credit rating agencies steadily downgraded South Africa’s rating during Zuma’s tenure; in 2017, two leading agencies provided junk ratings for South Africa’s unsecured foreign and local currency bonds, citing Zuma’s appointment of incompetent senior public officials as a main cause of the downgrade. The double junk status caused many international investors to retract their South Africa-based investments based on their portfolio mandates.

Ramaphosa’s response

Ramaphosa, who was the national deputy president from 2014 to 2018, was elected as the president of the African National Congress (ANC), after narrowly surpassing Nkosazana Dlamini-Zuma, who was widely considered to represent a pro-Zuma camp, at the party’s elective conference in December 2017. Ramaphosa subsequently moved to pressure Zuma to resign, although his term as national president was only due to end with national elections in 2019. Finally, on 14 February 2018, Zuma resigned after days of political stalemate, during which parliament ceased to function and the State of the Nation Address (SONA) was delayed. On 16 February 2018, Ramaphosa delivered his first SONA, announcing a new dawn for South Africa and vowing, “this is the year in which we will turn the tide of corruption in our public institutions”.

Even before Ramaphosa’s oath of office, there were credible signs of a turning tide. In January 2018, the South African Asset Forfeiture Unit, a branch of the NPA, served an order to preserve assets worth ZAR 1.6 billion (USD 135.6 million) from McKinsey and Trillian Capital Partners, a Gupta-linked firm; and, Ramaphosa appointed a new board of directors at Eskom, which included experienced and well-respected individuals from the corporate sector. On the day Zuma resigned, the Directorate for Priority Crime Investigation, South Africa’s special corruption unit known locally as the Hawks, raided the Guptas’ home in Johannesburg in connection with the dairy farm scandal. The Hawks arrested and charged three subjects, including one Gupta family member and one of his associates, and have issued arrest warrants for other Gupta family members, who appear to have fled the country.

Ramaphosa’s commitments outlined in the SONA, and in subsequent speeches and interviews, have bolstered optimism about the rate of delivery on the promised change. For example, in his address he announced that directors at parastatals will no longer be involved in procurement processes. In late February, Ramaphosa announced his first cabinet reshuffle, which saw controversial ministers in key positions such as finance, mineral resources, energy and public enterprises, replaced with well-regarded individuals. On 8 March, the Judicial Commission of Inquiry into state capture got fully underway with the commissioner appointing the remaining members. The Commission is headed by Raymond Zondo, the deputy chief justice of the constitutional court, who is widely considered to be a competent, if somewhat perfunctory, candidate. Zondo and his team’s ability to deliver on their mandate of making recommendations to the presidency should be treated with cautious optimism; once they make their recommendations, the responsibility to take decisive political and legal action against wrongdoers will be pushed back to the presidency. However, in a notable positive development, the Gupta Leaks emails have been permitted as evidence in the judicial inquiry.

The first month of Ramaphosa’s presidency has seen substantial action taken to hold parties allegedly guilty of corruption accountable. The NPA has announced that it will reinstate the grand corruption charges against Zuma, which were dropped in 2009, and Ramaphosa suspended the South African Revenue Service (SARS) commissioner Tom Moyane with immediate effect when he refused to resign, accusing him of bringing SARS into disrepute and compromising public finances.

South Africa’s currency markets have continued to strengthen on the wave of optimism following Ramaphosa’s election. However, the rand remains volatile in relation to political shocks.
The daily average of foreign portfolio investment has quadrupled since 2017.
The rating agencies have noted the political changes in South Africa, although are yet to upgrade the country’s investment status.
At S-RM we have worked with multiple international companies and financial groups already seeking pre-transactional support.

What will stand in his way?

It is early days in Ramaphosa’s promised ‘New Deal’, the 10-point action plan proposed during his ANC presidential campaign, and the structural economic issues such as high unemployment and an entrenched culture of corruption pervasive across all levels of government are unlikely to be quickly resolved. There have already been a number of concerns expressed regarding the funding of any anti-corruption measures, given South Africa’s current economic outlook. However, a review of the size of South Africa’s bloated cabinet and national government departments, which was promised in the SONA, could reportedly save up to ZAR 4.7 billion (USD 390 million) annually.

Scepticism persists over whether Ramaphosa has the power to pull off his promised anti-corruption drive to the extent necessary. Some officials in senior positions remain in power despite significant allegations of corruption against them. Ramaphosa’s deputy president appointment, David Mabuza, who is a controversial figure facing serious allegations of corruption, is demonstrative of the difficult line that Ramaphosa must tread in pursuing his ANC overhaul, while still placating the deep factional divides within the party. At present, three of the party’s top six officials are still Zuma-faction loyalists. Ramaphosa also failed to oust a number of controversial ministers during his cabinet reshuffle, preferring to move them to less prominent departments. Factional disputes within the ANC will continue to intensify ahead of the national election in 2019, and could prove one of the most challenging disruptions to Ramaphosa’s reform agenda. Ramaphosa has limited time to deliver before the election, though his ascendency to the presidency alone will likely return a significant number of ANC voters to the fold in 2019, and it is not yet clear whether corruption will remain on his list of priorities.

Moreover, policy direction is still uncertain on significant issues such as the regulatory framework for the country’s fledgling oil and gas sector, and the implementation of the government’s recent agreement to the principle of expropriation of land without compensation, which will receive a constitutional review in August 2018. However, the past month has seen rapid action on issues that were trivialised and repeatedly deferred under Zuma’s presidency, resulting in a renewed, if somewhat tentative, confidence in South Africa’s economy and investment outlook.

Key Profiles

Nhlanhla Nene - Minister of Finance

Nene is an ANC stalwart, and was the deputy minister of finance from 2009 to 2014 before assuming the top role, only to be replaced with an unexperienced backbencher by Zuma in December 2015 for allegedly refusing to bailout struggling parastatals. After his removal, Nene left public service to take up appointments in the private sector, including at South African companies backed by international investors. Nene is one of Ramaphosa’s key associates and has already taken significant action after his return to government, reportedly using his influence to force the ANC to drop a scheduled motion on the nationalisation of the South African Reserve Bank. As a well-regarded technocrat, it is anticipated that Nene’s appointment will bring stability to the Ministry of Finance, which had been treated as a political football under Zuma’s tenure.

JEFFREY RADEBE – MINISTER OF ENERGY

Radebe is the country’s longest continuously serving cabinet member, and his previous ministerial positions include public works, public enterprises, transport, and most recently, as minister in the presidency. Radebe, who is Ramaphosa’s brother-in-law by marriage, has the task of providing clarity over the integrated resource plan (IRP), South Africa’s energy plan for the next 30-50 years. Radebe is reportedly currently finalising long-delayed contracts with independent renewable energy providers to decentralise and diversify the country’s electricity production. Moreover, Radebe’s appointment is generally considered to be part of Ramaphosa’s plan to scrap the Zuma administration’s controversial ZAR 1.2 trillion (USD 100 billion) nuclear power deal with Russia. He enjoys a good reputation, but has been criticised for remaining silent, and therefore complicit, while he was a minister in the presidency during Zuma’s administration.

GWEDE MANTASHE – MINISTER OF MINERAL RESOURCES

Mantashe is the national chairperson of the ANC, and was previously the secretary general of the National Union of Mineworkers, South Africa’s largest mining trade union, and chairperson of the South African Communist Party. Although Mantashe is generally well-respected in public and private circles, his track record is not spotless; for example, his wife is a director of a group of companies which has won a ZAR 1.4 billion (USD 120 million) catering contract from Eskom. Mantashe takes over the mineral resources portfolio from a Zuma loyalist, and has the responsibility of resolving – which he promises to do within three months – the deadlock between the Chamber of Mines and government regarding the third draft of the mining charter, which was issued in June 2017. The new charter substantially increased Broad-Based Black Economic Empowerment and local content requirements for all mineral exploration and mining activities. and Ramaphosa has delayed expected legal proceedings in favour of further negotiations with stakeholders. Adding to an already busy portfolio, Mantashe will also look to finalise the Mineral Petroleum Resources Development Act Amendment Bill, which should finally provide regulatory certainty for South Africa’s fledgling oil and gas sector.

Sub-Saharan Africa - March 2018