SPECIAL REPORT: POSITIVE RISK TRENDS TO ANTICIPATE IN AFRICA AND THE MIDDLE EAST IN 2023
It’s not all doom, gloom, and recession in 2023 – African and Middle East economies will exceed global growth averages on the back of resilient commodity prices. Distressed debt will be treated to avoid chaotic default scenarios, while more foreign investment will return as diverse investors seek higher yield. Maturing democratic systems ensure that socio-economic grievances will increasingly be aired in the political arena, i.e., at elections, rather than on the street. Similarly, some of Africa and the Gulf’s deadliest conflicts will edge towards resolution in 2023. Pangea-Risk identifies some of the most exciting and positive risk trends to look forward to in these regions.
In 2023, most countries in Africa and the Middle East region will see economic growth well above the global average rate, thus reverting to more optimistic pre-pandemic trends, at least relative to the rest of the world. Buoyant or resilient commodity prices, continued external support from multilaterals, and – in some cases – managed debt restructurings will underpin the economic recovery of countries still suffering the long-term impact of the COVID-19 pandemic. External risks persist, including the effects of the war in Ukraine, a resumption of travel restrictions due to the pandemic, continued disruption to trade and global supply chains, and the lagged peaking of inflation rates in emerging markets. But overall, Africa and Middle East countries should see an improved economic outlook for 2023.
The political risk outlook is subsequently also improving, as reflected in our latest quantitative country risk score update ahead of the first quarter of 2023, with more countries rated in lower risk categories, as calculated by Pangea-Risk’s proprietary methodology. This positive trend is mostly due to a probable peaking of civil unrest risks in countries that saw persistent protests in recent years, as well as the maturing of democratic systems in countries that are due to hold elections this year and the continued support of both multilateral and development finance institutions to provide fiscal relief and to guide the restructuring of distressed sovereign debt. Both elections and debt treatment should be viewed as constructive mitigants of risk, rather than purely as threats to commercial interests.
In terms of the security outlook, while some conflicts will persist through 2023, there has been a notable improvement in some parts of Africa and the Middle East. For example, the probability of a rebel capture of major cities in eastern Democratic Republic of Congo (DRC) is reduced by a multilateral military deployment. In the highly volatile Horn of Africa, a truce in northern Ethiopia is tentatively holding, some of Sudan’s stakeholders are returning to state-building, and Somalia’s counteroffensive against Islamist militant groups is showing results. Across the Red Sea, the ceasefire in Yemen may turn into a formal peace deal in 2023 as living conditions are gradually improving in one of the worst conflict zones of the 21st century.
PANGEA-RISK assesses the outlook for the African continent and the Middle East region in 2023, based on political, security, and economic indicators.
FIVE KEY RISK TRENDS FOR 2023 IN AFRICA AND THE MIDDLE EAST
PANGEA-RISK has identified five key trends that will drive risk and opportunity across the African and Middle East regions.
1) Economic growth to outpace global average
Despite slowing demand globally, commodity prices will remain high in 2023. After a dip in late 2022, oil prices are expected to average above USD 80 per barrel this year, which is good news for existing crude oil producers in the Gulf and nascent producers in Africa. This trend will ensure record levels of economic growth, high export revenues, and flush sovereign wealth funds in Gulf states such as Saudi Arabia, the United Arab Emirates (UAE), and Kuwait. We should be on the look-out for massive financial commitments by Gulf states in Africa and elsewhere in the Middle East region, including credit facilities, direct investments, and foreign reserve swaps. Such deals will offer lifelines to countries that are otherwise struggling to secure IMF and other support.
Perhaps worryingly, some of Africa’s largest oil producers will fail to benefit from higher prices as output continues to drop in Angola, Republic of Congo, and Equatorial Guinea. Yet, Nigeria’s efforts to curb crude oil theft may be reversing a long-time downward export trend. Meanwhile, new fossil fuel projects in East and West Africa are more likely to be signed off as long-term gas and oil prices remain high. Mozambique, Senegal, Mauritania, and Guinea will start natural gas exports in 2023, while Tanzania may see a long-anticipated final investment decision on gas projects. Investment commitments on major oil and gas infrastructure, including pipelines and East and West Africa, should also be expected this year – some deals more contentious than others.
Metals prices will remain volatile, but a floor under base metal prices will be kept in 2023. Gold started the new year with prices at a six-month incline and analysts believe the rally has further to go in 2023. This is good news for major producers Tanzania, Ghana, and South Africa, although divestments are ongoing in Mali and Burkina Faso due to insecurity and reputational risks. Major producers of fourth industrial revolution metals such as DRC will see concrete benefit to their economies as demand for components remains scarce globally. Agricultural commodities will remain influenced by developments in the Black Sea region, which has a direct impact on food security in both Africa and the Middle East, which are the pre-war largest buyers of Russian and Ukrainian grain. That said, both World Food Programme shipments and private grain consignments are averting the worst-case famine scenario projections.
2) Managed debt treatments to mitigate default risks
At its autumn 2022 meetings, the IMF did not add any countries to its list of debt distressed countries, or those at risk of falling into debt distress. That will probably change at the April 2023 meetings jointly held by the Fund and World Bank – expect more African countries and perhaps Middle East states to make the debt distress shortlist. Sub-Saharan African long-term loans have more than doubled to USD 636 billion in the decade to 2021 — that exceeds the combined gross domestic product (GDP) of more than 40 African nations. Given the elevated debt levels, African governments are allocating a larger share of their revenues to servicing external debt. The compounding effects of high debt service costs along with a domestic currency depreciation have increased exchange rate risks for countries with high external debt. Eurobonds and Chinese loans are at highest risk of default – African nations owe China about USD 84 billion, by conservative estimates.
The World Bank says that support for international debt restructuring might be required. Last year, Pangea-Risk accurately assessed that at least six African countries would restructure their debt, namely Kenya, Nigeria, Ghana, Chad, Ethiopia, and Zambia. All six countries have since commenced some form of domestic or external debt treatment, while Chad has completed its external loan reprofiling – at least for now. This may be a positive development, as multilaterally coordinated and well-managed debt treatments are more likely to avoid chaotic defaults such as those in Mozambique in 2016 and Zambia in 2021. A calibrated debt reprofiling in Angola and Republic of Congo have turned around these countries’ economies and rendered their debt to more sustainable and affordable levels. Eurobond holders and commercial creditors may fear significant haircuts on African obligations, but without restructuring, more debt is more likely to default and trigger a wider financial crisis.
3) Elections to vent socio-economic frustrations
Some 16 African countries are scheduled to hold elections over the coming year, plus Turkey in the Middle East region. In 2023, several hotly anticipated votes are taking place in the backdrop to rising costs of living, tight fiscal regimes, and broader insecurity. Some of these elections may trigger political instability and, potentially, unrest. In fact, we have identified more than ten countries where upcoming elections may drive insecurity that should be monitored over the course of this year. Meanwhile, preparations for about 13 more elections in Africa in 2024 alone will also drive similar risks of political instability, civil unrest, and policy uncertainty this year.
However, elections should not always be interpreted as a “risk”, which is a common perception by country risk analysts. Indeed, notable polls in 2022, including in Angola and Kenya, portray an increasingly steady political climate and a democratically mature trend developing on the African continent, which will set the tone for upcoming votes in 2023. Elections increasingly offer a chance for electorates aggravated by inflation, debt, and other grievances to vote out incumbents and seek political renewal, thus avoiding broader instability. Country risk analysts too often warn of elections as indicators of insecurity and political instability, which is generally a fair assessment. But let’s not forget the opportunity that elections hold for both local electorates and foreign investors. Elections can and do often mitigate political risk, rather than drive it.
4) Peace to return to long-time conflict zones
The Horn of Africa faces an improved security outlook following the ceasefire and peace deal agreed in late 2022 to resolve a two-year civil war in northern Ethiopia that also dragged in neighbouring countries like Djibouti, Sudan, and Eritrea, as well as Middle East military powers, such as the UAE, Iran, and Turkey. The Ethiopian peace deal with Tigray state is slowly being implemented despite a multitude of obstacles and challenges, including the intentions of neighbouring Eritrea which seeks to weaken the Ethiopian state, as well as domestic opposition to the peace deal and the uncertain status of contested territories. However, if fully implemented, the peace deal should entice foreign investors to Ethiopia and calm tensions in the wider region.
Similar trends can be observed in other parts of Africa and the Middle East, including a political agreement in Sudan to end years of unrest, the tentative withdrawal of Rwandan and Ugandan-backed rebels from eastern DRC, and a more than eight-month-old truce in war-torn Yemen. Moreover, Somali armed groups have made notable progress in their fight against Islamist militants in 2022. However, serious violence hotspots remain in the Sahel, Libya, northern Mozambique, and other pockets of insecurity. In 2023, previously considered safe areas of the Sahel region will become exposed to greater insecurity militant activity shifts southwards, with contagion risks to Gulf of Guinea states. Moreover, express kidnap and other post-pandemic criminal activity is spiking in major African cities, such as Nairobi, Maputo, and Johannesburg. Insecurity will persist in most of Syria and parts of Iraq, while the destabilisation of the Iranian state has broader security implications.
5) Foreign investment to become more diversified
In December 2022, US President Joe Biden welcomed dozens of African leaders to Washington for the U.S.-Africa Leaders Summit. The Summit implicitly intended to reset relationships with the continent after the previous administration’s antipathy and the growing presence of other geopolitical players, such as China and Russia, in the region. Among the major takeaways was the creation of the President’s Advisory Council on African Diaspora Engagement in the United States, the first-ever U.S.-Africa Space Forum, the formal announcement of Biden’s support for the African Union to become a permanent member of the G20, and a commitment of USD 55 billion to advance shared Africa and US priorities in the framework of the African Union’s Agenda 2063.
The return of the US to Africa should be seen in the context of a scaling down of Chinese engagement in Africa, and other emerging markets, as well as growing instances of default on Chinese loans. The US has spotted an opportunity to compete with established investment and trade partners, such as Europe and China. Asian powerhouses such as India and Japan are matching commitments, while the Middle East is accounting for the highest growth in investment and financial support to Africa. Countries such as Saudi Arabia, the UAE, Turkey, and Iran are increasingly looking to Africa for new commercial and diplomatic opportunities. In 2023, yield-hungry investors will again look towards African and Middle East markets, seeking new opportunities. The pool of investment will become more diverse and thus more sustainable.