Political instability challenges and risk management in African markets

Businesses and investors have grappled with significant challenges and uncertainty amidst the recent military coups in sub-Saharan Africa. From the conflicts in Sudan, Libya, and Ethiopia to terrorism in Somalia and other parts of the Sahel region, the instability in certain areas of West Africa has become nerve-wracking for corporations in the continent.

And no matter how we look at it, this has far-reaching consequences, potentially causing broader conflicts or spillover effects that impact regional stability. Regional conflicts negatively affect African industries, creating difficulties for successfully implementing the AFCFTA, a proposed initiative to establish an integrated single market in Africa.

This has necessitated that organisations operating in Africa must now acknowledge and mitigate the potential impact of political instability on productivity and business growth. As a result, they are compelled to stay informed to monitor and reduce the political risks and instability effectively.

For instance, the conflict in northern Ethiopia resulted in infrastructure damage totaling $22.7 billion and productivity losses of $6 billion between November 2020 and December 2021, equivalent to approximately 26% of the country’s GDP. The Tigray conflict caused a humanitarian crisis and impacted Ethiopia’s economy. It affected food security, human development, employment, inflation, education, health, macroeconomy, and MSMEs. By 2022, Ethiopia witnessed a sharp rise in inflation, reaching 33.6%. The conflict directly impacted its foreign trade, resulting in significant losses in export revenue. During the crisis, Ethiopia faced monthly export revenue losses of up to $20 million due to the closure of industrial facilities in the Tigray region.

SBM Intelligence released the inaugural edition of the Africa Country Instability Risk Index (ACIRI) to bridge this gap in October 2023. To provide valuable insights into the instability risks and shocks faced by each African country, excluding North Africa, a comprehensive report was prepared to benefit businesses, multilateral organizations, investors, and stakeholders. This study covers 47 countries spanning West, Central, East, and Southern Africa.

Since August 2020, Africa has witnessed the occurrence of seven military coups, affecting Mali, Guinea, Sudan, Burkina Faso, and Niger. Political instability entails the potential negative impacts on businesses due to regime changes, conflicts, and uncertainties in government policies, laws, and regulations, which affect industries and a nation’s economic and governance landscape. Political uprisings and social instability in certain parts of Africa pose challenges for investors and organisations willing to enter the market, prompting careful considerations before investing in Africa.

For instance, the conflict in northern Ethiopia resulted in infrastructure damage totaling $22.7 billion and productivity losses of $6 billion between November 2020 and December 2021, equivalent to approximately 26% of the country’s GDP. The Tigray conflict caused a humanitarian crisis and impacted Ethiopia’s economy. It affected food security, human development, employment, inflation, education, health, macroeconomy, and MSMEs. By 2022, Ethiopia witnessed a sharp rise in inflation, reaching 33.6%. The conflict directly impacted its foreign trade, resulting in significant losses in export revenue. During the crisis, Ethiopia faced monthly export revenue losses of up to $20 million due to the closure of industrial facilities in the Tigray region.

Starting from the highest risk, the report categorised risks as Red Watch, Warning, Critical, Vulnerable, Stable, and Safe. According to the report, Botswana, Mauritius, South Africa, Seychelles, Cape Verde, Lesotho, Namibia and Tanzania are Safe. Meanwhile, Ghana, Zambia, Liberia, Malawi, Kenya, Senegal, Benin, Gambia, Nigeria, and Sao Tome Principe are stable. The remaining 29 countries are spread across Vulnerable, Critical, Warning, and Red Watch categories.

No doubt, instability has been a significant factor in sub-Saharan Africa’s GDP, falling from 4% to 3.3% between 2022 and 2023. In addition, double-digit inflation rates are prevailing in approximately one-third of the countries in the region. This is a source of concern.

Aside from the country-specific analysis, the ACIRI gave the risk evaluation in the focus regions.

Despite political instability, security threats, economic inequality, and climate change, West Africa holds economic promise and opportunities in agriculture, mining, and tourism. For Central Africa, the history of coups, civil wars, ethnic tensions, and economic vulnerability to global oil price fluctuations hinders development and stability. The DRC conflict, for example, armed groups in the Central African Republic, and terrorism, pose additional risks.

However, the East African region combines fast-growing economies with fragile states experiencing ethnic and religious tensions, such as recent clashes in Kenya. Despite challenges, it offers opportunities in agriculture, tourism, and telecommunications. Its location at the intersection of Africa, Asia, and the Middle East makes it strategically important for trade and endearing for investment.

The risks in Southern Africa, particularly in South Africa and Zimbabwe, include economic inequality and political instability in Eswatini and Lesotho. However, due to abundant natural resources, Botswana and Angola present opportunities for businesses and investors.

However, a few countries have a high-risk environment due to factors like political instability, security issues, and regulatory complexities. Africa presents abundant natural resources with business potential, making it an attractive destination for investors. Navigating this dynamic market requires cautious and adequate information.

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According to a report from Goldman Sachs, Nigeria has the potential to be among the global economic powerhouses, projected to surpass South Africa as the largest economy in Africa and potentially become the world’s fifth-largest economy by 2075. However, like any other economy, there are associated risks with potential investments in Nigeria.

Investors, stakeholders, and policymakers must thoroughly understand the causes and consequences of political instability to ensure sound decisions and effective strategies. This knowledge is vital in navigating potential risks and fostering stability. By engaging in political risk management, organizations can effectively track and respond to potentially damaging policies or conflicts and identify and see potential opportunities for their business.

Economic growth and political stability are deeply connected. Therefore, in today’s global market, business leaders must consider political and economic risks as they navigate the complex landscape of investing in emerging markets.

Most importantly, governments at all levels must create an enabling environment to foster peace and stability in their areas so that businesses and economic activities can thrive.