Heading to the polls

2017 will be a busy year for African politics, when voters cast their ballots in more than 15 countries. Sanne Wass looks at some of the important polls coming up, and the key risks that election time presents to businesses operating in Africa.

2016 was a mixed year for African politics. In Gambia, a political crisis erupted after long-term incumbent President Yahya Jammeh refused to accept his defeat. In Uganda, Yoweri Museveni won his fifth presidential term amid violence and allegations of ballot fraud. Ghana, on the other hand, saw a peaceful transition of power after voters backed the opposition candidate for president. Elsewhere, in the Democratic Republic of Congo for example, scheduled elections simply didn’t happen.

Election time, especially in Africa, is often a period of increased uncertainty for an investor, trader or lender, bringing the risk of political violence and civil unrest, as well as legislative changes, new government actions and contract alterations. But what 2016 has indeed taught us is that elections in Africa are a mixed bag – and 2017 looks set to be no different.

“In some countries, elections are important,” says Robert Besseling, executive director of Exx Africa, a specialist intelligence company that forecasts African political and economic risk. “In other countries they are simply a whitewash; they are just a process which needs to be followed to demonstrate that the country is seen as democratic, even though it actually isn’t.”

Angolans, for example, will head to the polls in August, but for an election in which the opposition has little, if any, chance of unseating the ruling party. “The election is still a part of the democratic process, but it’s less meaningful,” Besseling explains. “Therefore, for banks and investors looking to work in Angola, the electoral cycle is less important, because it’s unlikely to change. So there’s less disruption every four or five years. But, at the same time, you never know when political change will hit. It depends on succession plans or on the health of one man, like in Zimbabwe. And it’s the uncertainty that is worst for any investor.”

Economic slowdown

In many countries, election cycles can have a much bigger economic impact, as companies and lenders tend to adopt a cautious approach to business around election time and postpone important decisions until certainty has settled over who will be in power.

“What you generally see is a bit of a slowdown in the economy and in trading in a lot of these places in the run-up and the immediate aftermath of the election,” says Peter Hampson, senior trade finance manager at Crown Agents Bank, which specialises in emerging markets. “It’s not necessarily banks restricting their flows of trade finance but the actual companies slowing down their demand for finance as well. People generally hold off making investment decisions or decisions to import materials that are in the non-essential category until they have certainty on the political and economic situation.”

Hampson mentions Uganda as one example, where President Museveni was re-elected last year. “If you look at how the country performed from 2015 to 2016, you saw a significant slowdown. We certainly saw it in the reduced number of letters of credit coming out of Uganda, and then it wasn’t really until after the government was settled towards the middle of last year, and the cabinet was fully appointed, that we started to see the uptick in trade come again. I think with Kenya, you may see a similar situation this year,” he says, referring to Kenya’s general elections, which, together with Angola and Rwanda, are set to be held in August 2017.

Kenya’s presidential race has been marred by violence in the past. The worst case was in 2007/08, when disputed results led to ethnic rivalries and violent protests, claiming roughly 1,300 lives and causing serious economic ramifications throughout East Africa.

“In Kenya, we’ve seen elections that were fairly destabilising,” says Kefa Muga, senior economist at African Trade Insurance Agency (ATI), the pan-African export credit insurer. “In 2007 there were long periods of uncertainty and the economy was almost shutting down in terms of investment activity. But thereafter, the country bounced back and we saw growth rates of 5, 6%. The impact was more short-term.”

The same observation is made by Hampson at Crown Agents Bank. “In the past Kenya has shown that it’s been able to come back to normal quite quickly,” he says. “What we have generally seen in most of the countries that we’ve dealt with is mostly peaceful transitions of power, a slight dip in economic situations before and after elections, but then back to business as usual within a few months of the elections.”

Short vs long-term risks

Kenya isn’t the only African country that has a history of violent, disruptive elections. Zimbabwe, Uganda, Côte d’Ivoire and Nigeria are just a few that have been characterised by election-related violence in the past. But while unrest and violence are surely a big concern for businesses operating in a country with upcoming polls, the most significant, long-term risk relates to the political changes that the election could bring about, Exx Africa’s Besseling explains.

“The real risk really comes with regulatory and legislative changes which could affect existing or future contracts,” he says. “But also it comes down to patronage. Whoever comes into power will have their own set of industry gatekeepers, or political influencers, who will be the main people influencing the signing of contracts in the future. The safeguards that you get in terms of contract stability and avoiding contract alteration risks are not always in place in many African countries.”

His comments are echoed by Matthew Solley, executive director, credit and political risks, at global insurance broker Arthur J Gallagher: “Unless it’s a particularly heated election, for trade the impact is not as significant as it might be for investment, because the business tends to be much shorter-term in nature. But the medium to long-term impact can be significant if a new government decides to go in a different direction politically, becomes slightly more interventionist or seeks to change agreements that have already been put in place,” he says, adding that the risk is especially significant for long-term investors who have formed a strong relationship with a government that has ruled the country for a long time.

Political risk insurance

To protect against losses that may arise out of political unrest or government changes, political risk insurance has become increasingly important for businesses working in volatile or risky political landscapes in Africa.

ATI, which operates in 12 African countries, mainly in East and Southern Africa, has witnessed a surge in demand for political risk insurance in some countries, especially for cover against political violence as they enter an election period.

“In Kenya in 2007 there was a lot of property damage to business and loss of income for businesses that were shut down during that volatile period,” Muga says. “In the next cycle of election, which was in 2013, we saw a huge number of requests for violence and property damage and business interruption cover, which is one of the key products that we offer. So the demand really spikes for some products during election time.”

At Arthur J Gallagher, whose clients are mainly large western companies and financial institutions, the experience is different: according to Solley, most of the company’s portfolio doesn’t tend to suffer from adverse selection when it comes to political risk coverage.

“If there is some noise early on and sign of some trouble, you may see a client come to the market that doesn’t typically buy cover. But most of the premium volume in the market is driven by large regular buyers of cover that see the value in the product, and thus they tend not to be so caught out by the fact that an election is coming up.” Solley adds that if an unknown entity comes to the market only when their risk is dire, it will likely get short shrift from insurers, or be charged very high premiums.

“Our clients, whether it’s the corporates, the banks or the trading groups, are typically entities that are experienced in trading in emerging markets. So they tend not to be easily spooked by difficulties on the ground. This, connected with insurers’ own experience, means that the insurance market has a relatively calm reaction, even when you’ve got slightly more difficult times,” he says.

At Exx Africa, Besseling points out that while the backing of a public or private insurer can be crucial, the key to protecting business in unstable environments is to understand the local political dynamics of the country in the first place.

“It’s very important to map out one’s risk forecast; in other words to try to identify risk indicators that will help foresee big changes on the horizons that could affect one’s operations. Many people are constantly being surprised about what goes on in countries. Gambia in 2016 is one example. And there will definitely be big surprises on the way in 2017 as well,” he ends.

Four African elections to monitor in 2017

2017 will see elections in a number of countries across Africa. August will be a busy month, with votes being held in Angola, Rwanda and Kenya. Other countries heading to the polls include Sierra Leone and Liberia, and possibly the DRC. Here are four elections to look out for:

Angola

President José Eduardo dos Santos, who has ruled Angola for 37 years, will be retiring before the 2017 elections. The ruling People’s Movement for the Liberation of Angola (MPLA) announced in December that defence minister Joao Lourenco will be his party successor, and with Angola’s electoral system, in which the leader of the winning party becomes head of state, Lourenco is set to become the country’s next president.

“The real political transition has already happened because the next president has essentially already been appointed by the ruling party,” says Exx Africa’s Robert Besseling.

Over his four decades in power, the outgoing President dos Santos has amassed extensive wealth and power over many sectors in the Angolan economy. A loyalist to dos Santos, Lourenco is likely to remain beholden to the economic and business interests of the dos Santos family once he becomes president, according to Exx Africa’s forecast. His presidency is expected to be marked by continuity and moderate changes in policy, and it is unlikely that contract risks will immediately increase.

“Joao Lourenco is very close to the dos Santos family,” Besseling explains. “So we’re not going to see any massive changes in policies or in which investors are being favoured, or a shift away from particular government practices.”

But, he adds, Lourenco is also close to many of the leaders in MPLA’s so-called ‘old guard’. “So even though he is unlikely to frustrate the dos Santos’ massive business interests in the country, he is still likely to begin to include other families and leaders in the economic system.”

But Angola faces a range of other challenges: Lourenco will be inheriting an ailing economy, severely hit by the downward commodity spiral, which has diminished its foreign exchange revenues.

“Angola is a country that has become more difficult for trade credit insurers and anyone facilitating cross-border trade to operate in, because of the foreign exchange shortages in the country,” says Natznet Tesfay, director of African analysis at IHS Markit. “So it’s less of a big question as to who will succeed President dos Santos. The bigger question is, will Joao Lourenco change his stance in terms of engagement with the IMF and World Bank, and fully implement reform around anti-money laundering and concerns of its restricted access to US dollars.”

Both Exx Africa and IHS predict that the 2017 election in Angola will come with a higher risk of unrest as a result of a deteriorating economic situation for the average Angolan.

“For many of the people who would usually vote MPLA, or would be happy with them staying in power as long as they have money in their pockets, these people are now more likely to go to the streets to protest,” Besseling says. “They can turn into violent demonstrations in major cities like the capital Luanda and can cause disruption for several days to cargo flow for aviation, for example. The oil sector is off-shore, so it’s unlikely to be affected, but many other sectors can be affected.”

Kenya

Kenyans will go to the polls to elect their president in a two-round voting system in August. The race is tilted in favour of incumbent President Uhuri Kenyatta, although he is facing an energised opposition coalition, the Coalition for Reforms and Democracy (Cord).

“Kenyatta’s patronage structure is so vast and powerful that he’s got a very strong base to win the election,” Besseling says. “Secondly, he is likely to win because the economy has been performing very well during his first term in office. Thirdly, he has made an almost formidable ethnic alliance,” he says, referring to Kenyatta’s mainly Kikuyu and Kalenjin Jubilee Party.

Besseling adds that while various opposition parties are now beginning to form a widespread ethnic alliance, they still have much work to do to present a real threat to Kenyatta. “It is still very nascent and they are running out of time to form it, to fund it properly and put a proper electoral agenda together, let alone choose one presidential candidate.”

Preparations for the vote in Kenya have not been smooth, and tensions around the poll are already heating up. Opposition leaders have accused the country’s Independent Electoral and Boundaries Commission (IEBC) of being inept and acting fraudulently to affect election outcome, which could weaken the credibility of the vote and increase risk of violence. Protests against the IEBC have already turned into clashes with the police.

The shadow of Kenya’s past violent elections is still looming large. Due to the ethnic nature of the rival political parties, the 2017 elections are likely to see violence between rival ethnic groups in the immediate lead-up and around election time, Besseling explains.

“Unlike the previous elections that we saw four years ago, they are likely to be a bit more violent, with ethnic violence in certain parts of Kenya, like Nairobi and Mombasa as well as the Great Rift Valley, but nothing like we saw two elections ago,” he says.

Besseling adds that while Kenyatta’s Jubilee Party will probably win the vote in August, the ruling alliance is likely to fall apart once the elections are over due to ethnic-political rivalry in the government. This could present a variety of new challenges to businesses operating in the country.

“The Kalenjin, who support Kenyatta, will want payback: they want their top man, the current deputy president William Ruto, to be put forward as the next presidential candidate. The Kikuyu are unlikely to let that happen. So even though they might stay together for these elections in August, the next day we will most likely already see splits in that coalition,” he says, adding that the divide could lead to disruption to legislative agendas, delays to government decision-making and longer bureaucratic processes.

Rwanda

Rwanda is considered one of the more stable countries in which to do business in Sub-Saharan Africa. President Paul Kagame, who has ruled the country since 2000, will be seeking his third term in August.

Kagame is hugely popular in Rwanda, credited with transforming the country from a battleground to a prosperous, stable country. He won the 2010 election with 93% of the vote, and in December 2015 98% of the population voted in favour of a referendum that allows him to run for the 2017 election and two more terms, which means he could stay in power until 2034.

But Kagame is also under growing pressure from within the political establishment, and from the international community. Human rights organisations have accused him of restricting free speech, silencing dissidents and committing other human rights violations. According to Exx Africa’s forecast, the severe restriction of opposition participation, as well as the side-lining of critics from within the regime’s ranks, will leave the government increasingly vulnerable to rising instability.

“People have to be more aware than what is showing up at first appearances,” Besseling says. “Most people have seen the economy grow at a record rate, and they know that the ruling party of Kagame is almost guaranteed to remain in power. But at the same time there are groups within the ruling party, the Rwandan Patriotic Front (RPF), and senior leaders in the military and intelligence agencies who also want a shot at the top leadership position.”

Pressure from the international community, Besseling says, is another factor that could have a negative impact on the Rwandan economy.

“Major donors to the government – the US, UK and EU – have at several stages suspended or threatened to suspend their aid to Rwanda because of human rights violations, the crackdown on freedom of speech, etc. If distribution of international aid is slowed or suspended by big donors, that of course impacts the balance of payment situation for the Rwandan government,” he says, adding that international isolation could further motivate a push for political change in the country.

However, the emergence of disruptive street protests or riots that would threaten government stability is unlikely to happen.

“People don’t want conflict; they still remember the 1994 genocide and the civil war afterwards,” Besseling says. “Most of it will play off behind the scenes. It will be triggered by the 2017 August election and is going to play out in the years to come after that. And that is going to raise the risk of political instability, of coups, of military mutinies. It’s not a sustainable system and the cracks in it are already beginning to form.”

Democratic Republic of Congo (DRC)

It is still unclear when in 2017 – if at all – elections will take place in the DRC.

The country was due to hold presidential and parliamentary polls in November 2016 – elections that would determine the successor to President Joseph Kabila. The DRC’s ruling party and opposition leaders eventually signed an agreement on New Year’s Eve, according to which Kabila will step down after elections have been held by the end of 2017. The deal followed violent protests erupting after Kabila’s constitutionally-mandated term ended on December 19, in which several people were killed, and hundreds arrested.

“The pressure of the opposition is off for now,” Besseling explains. “The immediate threat of widespread street protests has subsided, at least in the next few months. They are essentially just delaying the ultimate confrontation between the opposition and President Kabila. The confrontation will happen at some point. We will very likely see an outbreak of unrests, of terrorism and of insurgencies in the country over the next year, that is for sure.”

The likelihood of elections taking place in 2017 is very low, given that the national election commission has said it would take at least 17 months to complete voter registration processes and hold the election.

The postponed vote, and uncertainties about when it will take place, could have a severe negative impact on an economy that is already strained due to the global dip in commodities prices. “You don’t just have the political uncertainty, but you also have a country that’s highly reliant on copper revenues, and so it’s affected by lower copper prices and instabilities,” says Tesfay at IHS Markit.

She adds that the longer the uncertainty about a future political agreement and the final settlement of an election date drags on, the operations that aren’t already affected by the commodity price slump will start to slow down too, which would worsen the country’s economic situation even further.

Added to this, as a result of the violent crackdown on protesters and Kabila’s overstaying in office, the US has imposed further targeted sanctions on members of Kabila’s inner circle, while the EU has put forward sanctions for the first time. This could pose huge challenges to anyone dealing with the country.

“It will make it very difficult for dollar or euro transactions to occur,” Besseling explains. “Most of the key institutions in the DRC are affiliated in some way or another to individuals who are now under sanctions.”

At the pan-African insurer ATI, the DRC is considered the most volatile of the four elections that GTR has reviewed. “It presents more uncertainty from our perspective,” Muga says.

Yet he sees a good future for the country, should the elections take place peacefully: “I think what’s important to mention is that the DRC economy is over time a fairly stable place to do business. The fundamentals of the economy are strong, and in fact our expectation is, should the elections be peaceful, there is a good future for investments, for trade finance, etc.”

Enjoyed this feature? Not a subscriber? Get your free 7-day trial and stay on top of global trade, commodity and export finance news, with full online access to GTR magazine features, GTR+, the GTR app and more.