SA’s risk-and-reward profile deteriorated in September compared with a year ago, pointing to an increase in the country’s risk premium, which makes investors doubtful of a country’s ability to repay its debts.
It undermines SA’s ability to attract local and foreign investors.
A report by Control Risks, a specialist risk consultancy in partnership with Oxford Economics Africa, shows SA’s rewards score declined to 4.49 out of 10 in September from 4.99 a year ago, while the country’s risk profile increased to 5.06 out of 10 in 2023 from 4.69 a year ago.
The Africa risk-reward index combines risk and reward scores. It integrates economic and political risk analysis and illustrates the evolution of the investment landscape in big African markets.
The index provides a grounded, long-term outlook of key trends shaping investment in these economies and offers a comparative snapshot of market opportunities and risks across the continent, allowing organisations to develop an informed strategy for investing in Africa.
Oxford Economics’ head of Africa Macro Jacques Nel said increased geopolitical tension has made it difficult for African countries to navigate the diplomatic pitfalls and manage the delicate transition to a multipolar world.
Nel said companies operating across the continent will need to dedicate increasing time and resources to monitoring and understanding the impact of geopolitical shifts on their operations.
This is as heightened scrutiny on supply chains place companies operating in Africa in a number of crosshairs including a rising number of sanctions, export controls and other trade restrictions imposed by countries on their geopolitical rivals.
SA for instance “found itself at the centre of a geopolitical storm in May after the US alleged that it had supplied arms to Russia”, Nel said. “The threat of sanctions loomed over SA in a way that it had not before, especially as US lawmakers threatened to suspend the country’s preferential access to US markets under the Africa Growth and Opportunities Act (Agoa) to demonstrate the downside of being too close to Russia.”
He said SA’s experience signals the potential consequences of these new dynamics.
Another issue investors and operators should be aware of is the rising international scrutiny of illicit financial flows, Nel said.
The greylisting of SA and Nigeria, two big African economies, by the intergovernmental watchdog the Financial Action Task Force (FATF) highlights that growth in Africa’s financial services industry has not come without risks,” he said.
“Greylisting indicates that there are strategic deficiencies within a country’s anti-money-laundering and countering the financing of terrorism frameworks. Though governments will take steps to prevent the proliferation of illicit flows and step up their scrutiny of transactions in the coming years, the process will be slow given limited capacity among regulators. Investors will therefore be required to thoroughly vet any local financial services partners”.
Nel said countries such as SA require billions of dollar in external funding. An increased risk profile with a dithering reward score increases the country’s risk premium and undermines the country’s ability to attract local and foreign investors.
The Africa risk-reward index combines political and economic determinants, Control Risks says. Political risk factors include political stability, social cohesion, international relations, a country’s business environment, the security environment as well as political ideology.
Economic risk includes a country’s credit, trade, exchange, market demand and market cost risks.
The report shows that Nigeria’s reward profile was slightly higher than that of SA at 5.50 in September. The first-mentioned country has a much higher risk profile than SA at 7.65.
While the risk profile is relatively high, the report shows Nigeria has many positives, including one of the continent’s largest GDPs. The country’s central bank was also the third monetary authority to issue an official digital currency — the eNaira — after similar moves by the Bahamas and the Eastern Caribbean Central Bank.
Nel said many Nigerians are familiar with the use of digital currencies, with Nigeria generally considered to be the world’s third-largest user of cryptocurrency after the US and Russia.
He said investors will be watching Nigeria closely where resistance from large banks has constrained the uptake of mobile money services in recent years.
“New President Bola Tinubu is likely to seek to remedy this situation — potentially with the aid of foreign and regional financial investment — to achieve wider financial inclusion,” he said.
Control Risks associate director Patricia Rodrigues said the increased geopolitical competition will translate into new opportunities for the continent as geopolitical powers seek to extend their influence through financing and investment.
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