A good time to invest in West African resources?
Following a series of negative headlines for West African politics, our latest research considers the main challenges and points of optimism for resource investors in the region. While investors should remain vigilant about the risks in West Africa, negative headlines and political turbulence should be understood in the context of an improving investment environment.
It’s a challenging time for West Africa
It is undoubtedly a challenging period for West Africa. The region is facing a growing debt crisis as a result of Covid-19, a security crisis in the Sahel, and strongman leaders appearing to tighten their grips on power. However, while these developments present significant risks and challenges to investors (that must be understood and addressed), underlying data suggests that business environments are largely improving, while international organisations such as ECOWAS have provided an increasingly effective force for economic liberalisation, stability, accountability, and growth.
There are several reasons for investors to be concerned about democratic backsliding and political repression. Undemocratic governments do not necessarily beget poor business environments. Resource companies have been able to operate profitably in countries like Equatorial Guinea and Gabon which have often been criticised by civil society groups for their poor democratic credentials. However, with ESG issues rising up investors’ agendas, operating in countries with ‘pariah’ regimes may carry an increasingly heavy reputational cost. Moreover, governments that are unaccountable to the electorate more often fail to share the benefits of resource development equitably through the country, creating corruption risks in the short term and a greater risk of resource nationalism and community opposition further down the line.
As Guinea, Cote d’Ivoire, Ghana, Burkina Faso, Gabon and Cameroon approach key elections, we consider the main challenges and points of optimism for resource investors. As we argue below, investors should remain cautious and vigilant about the risks in West African jurisdictions, but negative headlines and political turbulence must be understood in the context of an improving investment environment.
2020: a year of challenges for West Africa
2020 has been a year of political turbulence in many parts of West Africa. From the Covid-19 pandemic to disputed elections and military coups, the health of West African economies and democracies has come into serious question. One positive to emerge as been West Africa’s seeming epidemiological resilience to the Covid-19 pandemic. Predictions of devastating outbreaks have not yet come to pass, with numbers of cases far lower than in Europe, India and the Americas. Whether it is the region’s relatively youthful population, a readiness built upon previous experiences with Ebola and other epidemics, or inconsistent testing, West Africa, along with much of the continent, appears to be withstanding the worst of the pandemic.
Nevertheless, the global economic repercussions are continuing to take an indirect toll on the region. West African economies have suffered as a result of falling commodity prices, remittances and a dramatic slowdown in tourism. The cost of lockdowns and of managing the spread of Covid-19 has hit national budgets hard and highly indebted African states are unable to access the lines of credit needed to cover much of these costs. As this crisis continues to evolve, investors will need to monitor both the immediate and secondary impacts of Covid-19 in order to better anticipate the repercussions of political and economic challenges for their assets (see Critical Resource’s article on managing stakeholder relations during Covid-19 here). Governments may be tempted to target prospering sectors like gold with windfall taxes to plug holes in their budgets.
In addition to challenges presented by Covid-19, several West African states have seen political turbulence over the past year. Mali has shown periods of promise interrupted by military coups. Benin, once regarded as a beacon of democracy in the region, saw widespread attacks on the political opposition in 2019. Guinea’s Alpha Condé and Cote d’Ivoire’s Alassane Ouattara are due to run for third presidential terms this year in spite of constitutional limitations.
While at first glance many of these developments seem concerning, it is important to understand the underlying nuance in order to assess risk to investors. For instance, Cote d’Ivoire’s President Ouattara was due to step down but bowed to pressure from his party to stand for a third term following the death of his deputy. His re-election does not necessarily suggest an appetite for an indefinite grip on power. However, the decision is not popular among the opposition and may lead to a post-election crisis. The Constitutional Court’s move to ban former President Laurent Gbagbo and exiled ex-Speaker Guillaume Soro from participating in the elections raises the probability of significant protests.
A prospective third term for Alpha Condé in Guinea following elections later this month could threaten an even greater crisis. On 1 October, Amnesty International condemned excessive use of force against protestors by the security forces, claiming that at least 50 people have been killed since October 2019 (although opposition figures have claimed this number to be almost double). On the same day, the government closed its borders to Senegal, Guinea-Bissau and Sierra Leone following an attack on the prime minister’s convoy. Sources close to the president have stated in local media that groups from Sierra Leone are supporting attempts to destabilise the country.
However, events in both countries need to be understood in terms of their troubled histories and recent development. Both the Condé and Ouattara governments have presided over periods of growing prosperity and improved governance which have considerably improved the countries as investment destinations. While Ghana remains the standard bearer for democratic values in the region, Sierra Leone, Senegal, Burkina Faso, Nigeria and Liberia have all also seen peaceful democratic transfers of power over the last two decades, many for the first time, even if their elections and subsequent governance have been imperfect.
Meanwhile, the recent coup d’état in Mali, while alarming, may ultimately resolve problems that have not been addressed since the country’s last coup in 2012. International pressure had led to the ushering in of a largely ineffective president in Ibrahim Boubacar Keïta, whose inability to contain violence in the north angered the public. A prolonged national dialogue, ahead of democratic elections, could help voters and politicians to root out systemic problems so that lasting stability can prevail with a transition to civilian rule. However, there are concerns among the international community and opposition groups that the military will seek to stand their own candidate in any future elections. ECOWAS’ demands for a fully civilian-led transition government have so far been unmet, and ECOWAS have consequently maintained sanctions which threaten to paralyse the Malian economy.
Security risks in Sahelian regions, namely in Cote d’Ivoire, Burkina Faso, Mali, northern Nigeria and Cameroon, also remain a cause for concern. Political instability owing to disputed elections, as well as ineffective or corrupt government, can exacerbate these risks. Investors will need to monitor these situations closely to ensure that their assets are not adversely impacted by escalations in violence.
Several indicators suggest improving business environments
Many investors have avoided West Africa owing to perceptions of the region as a difficult place to do business. In reality, political and social risks in the region are commensurate with other emerging regions and there has been significant improvement in the operating environment over the past decade. While the growing role of Chinese companies with state backing presents a challenge, Chinese investment in many countries has also improved infrastructure and supported economic growth.
It is notable that the World Bank’s ‘ease of doing business’ scores have seen marked improvement in most cases across the region. These scores constitute an aggregate score for several factors relevant to resource companies, such as dealing with construction permits, getting electricity, registering property, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
The region has also benefited from solid economic growth (with some exceptions). The average annual GDP growth rate was 4.18% from 2010-2019, the strongest performer being Ghana, with an average growth rate of 6.8% over the same period, while the weakest was Equatorial Guinea, which contracted by an average of 3.3%. However, due to the Covid-19 pandemic, regional GDP is projected to contract by 2% in 2020.
While data from the West Africa region is often patchy or disaggregated, some key indicators show positive trends. There has been considerable investment in energy generation and transport infrastructure over the past decade. Since 2000, youth literacy rates across West Africa have increased by an average of 13.4% and all West African countries have seen an increase in access to electricity, moving from an average of 29% to 54% of the population since 2000.
A further cause for optimism for investors is the influence and liberalising force of international organisations, such as the African Union and ECOWAS. As noted above, ECOWAS has proven a stabilising force in the region. It is playing a central role in overseeing Mali’s transition back to civilian government in the aftermath of the coup d’état earlier this year. Its peacekeeping forces have intervened in numerous crises in the region, most recently in the Gambia, following then-President Yahya Jammeh’s refusal to stand down following the 2016 elections. When political crises reach a tipping point, the stabilising force of ECOWAS should reduce risk for investors. ECOWAS’s stabilising role is supported by that of the African Union, which has intervened in Mali since 2013, as well as other international actors such as France and the United Kingdom that have been active in providing military support.
ECOWAS is not without its problems. It is widely perceived, for instance, to protect incumbent national leaders above promoting democratic values. It has also had notable failures on security, such as with Boko Haram in Nigeria, whose insurgency has expanded into Cameroon, Chad and Niger. However, ECOWAS continues to be instrumental in promoting and codifying the terms of market integration and liberalisation in the region, as well as encouraging FDI. Nested within ECOWAS is the West Africa Economic and Monetary Union, whose shared currency, the CFA franc, is pegged to the Euro, providing some level of monetary stability among member states. Another group, the West African Monetary Zone, comprising mostly English-speaking countries, is working towards its own currency, the Eco, in the near future. While hurdles remain, it is hoped that continued economic integration will provide a strong catalyst for private sector-led growth and development across West Africa.