Category Risk Management

Africa gains importance as arena for investment

13 November 2007 Control Risks

In 2007, Control Risks witnessed a significant increase in investment activity and interest in sub-Saharan Africa. Everything appeared set for 2008, but amidst renewed concern over the health of the financial system and the challenge posed by voracious Chinese investment appetites, questions remain as to how resilient this new optimism will be.

Speaking at the launch of RiskMap 2008 in Johannesburg, Chris Melville, Senior Africa Analyst of Control Risks Group, comments, “Arguably more than any other region, Africa has been subject to the most extreme lurches of confidence, and Afro-pessimism is so entrenched in the western mindset that it is almost instinctive to believe that downscaling of ambitions by increasingly risk-averse investors will first materialise in Africa.”

“At Control Risks, we consider that the ‘Afro-optimism’ of 2007 was more broad-based than many people considered,” continues Melville. “It was based on more than a simple hunger for commodities and reflected important changes in the global investment environment as well as significant changes in Africa itself.”

Africa is no longer the last frontier for investors (much less a frontier of last resort) but is an increasingly important arena for diversification, as well as being an important source of strategic resources and the location of one of the last great untapped markets. Consequently, Control Risks believe that investor confidence in Africa will be more resilient than in previous cycles.

However, in a less stable financial environment, renewed emphasis will need to be placed on risk management; an appreciation of Africa’s complexity and diversity will be central to this objective.

According to Melville, Control Risks believe that it will become ever more important to move away from views of the African continent that centre on reflex pessimism or unqualified optimism. In an environment where Congo – the quintessential African ‘basket-case’ – can be seen as a promising investment destination and where South Africa – long the repository of Afro-optimism and hopes for an African renaissance – can be gripped by concern over the sustainability and direction of post-apartheid reform, it is clear that customary analyses are breaking down.

A far more nuanced view is required, to understand both the evolving nature of political risk in the Democratic Republic of Congo and to gain clear sight on the likely impact of the current struggle over the ANC presidency.

The current review of mining contracts in Congo will be a key test of whether political conditions exist for sustainable investment in the mining sector. However, the process will continue to be dominated by improvisation and political interference, and investment in Congo will remain a high risk activity.

In South Africa, there is little doubt that the political turmoil surrounding the succession race and its handling has proven to be a bruising battle for the ANC. However, Control Risks believes that the underlying fundamental conditions for policy and business are unlikely to change overnight, even in the event of a victory for Jacob Zuma.

Anne Fruehauf, Southern Africa Analyst, concludes, “We consider that the struggle between Zuma and Mbeki is not simply about the victory of one ideology over another, but also about organisational culture. A change in organisational culture could pose a potential risk to policy through a ‘fraying at the edges’. However, within South Africa’s largely effective state institutions there appears to be a baseline consensus that the economic growth path cannot simply be abandoned. That said, any new government would be subject to the same constraining forces and maintaining the momentum of reform and development will be a challenge to whoever assumes the ANC presidency.”

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