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Smart businesses must anticipate potential political risks, manage them

Friday January 20 2017

As the new year takes shape, pundits have tried to forecast the future of the business environment across Africa. Of course, no one can claim to have a crystal ball that will predict definitively how the year will turn out. Forecasting business risks and opportunities in the 54 African countries is a difficult undertaking.

However, a combination of risk analysts will agree that political and macroeconomic risks largely shape the business environment over 2017.

The cliché has always been that Africa is a high-risk environment for business and investment. International credit and country risk rating agencies buttress this perception too.

Potential foreign investors are encouraged to exercise extra caution while considering investing in Africa. This is true and false. True, because many African economies have been mismanaged for eons. This has, therefore, made the macroeconomics largely unpredictable.

Fluctuations in the foreign exchange markets, erratic inflation and unpredictable interest rates among other factors make it difficult to take a long position in these markets. However, at times this perception is exaggerated, because although the degree may vary, these challenges bedevil many global economies including Europe, Latin America and Asia.

According to a survey by consulting firm Protiviti and the North Carolina State University Enterprise Risk Management Initiative, the global business environment could be riskier in 2017 than it was in 2016.

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Top 10 global risks this year

The survey concluded that at microbusiness level, the top 10 global risks in 2017 will be: Economic conditions; regulatory changes and scrutiny; cyber threats; speed of disruptive innovation; privacy or identity management and information security; succession challenges; global market and currency volatility; organisation culture hindering escalation of risk issues; resistance to change operations and sustaining customer loyalty and retention.

At the macro level, the position may change slightly but these key risks will have a huge bearing in the business environment.

Undoubtedly, sub-Saharan Africa has for ages suffered from an exaggerated risk perception. Many lenders ask for mitigants such as political risk insurance cover over and above the conventional loan guarantees. Doing business, therefore, becomes expensive. Investors and lenders factor in exorbitant risk margins, putting the cost of financing beyond the reach of the majority.

Lenin once remarked that “Politics always obediently follows economics.” It is very hard to divorce the two key issues. They are twin sisters.

A recent public survey by Afrobarometer concluded, “Nothing kindles democracy’s energies, anxieties, hopes and frustrations like an election. The quality of an election can spell the difference between a cooking fire and an explosion.”

A peaceful transition is largely hinged on how the masses trust the electoral structures and systems. Elections are largely about perception. If the majority believe in the electoral structures in place, the confidence levels are equally high and vice versa. 

The survey by Afrobarometer further concluded that on average across 36 surveyed countries, just half of the voters trust their electoral commissions “somewhat” while 25 per cent do so “a lot.”

That’s why governments must strive to ensure electoral systems are above reproach and that all participants feel fairly treated. This way, the threats of post-election violence are greatly mitigated. Ghana has over the years demonstrated that investors need not worry about their investments once an election cycle kicks in.

Elections always open up uncertainties due to the major policy changes that at times accompany a change of guard. This is not unique to Africa; it cuts across the board.

A case in point is what happened in the US in November 2016. As the president-elect Donald Trump ascends to power, the anxiety is palpable.

Many investors — globally are adopting a wait-and-see attitude towards America. They want to know if it will be business as usual or how to adapt to the new environment. If what Trump promised at the campaigns is anything to go by, sweeping changes on the economic and diplomatic fronts are expected. No analyst will be able to accurately forecast the impact of these changes but the fact is many businesses are on the look-out.

Risk management

This is an electioneering year in Kenya. History has shown that elections in Africa almost always raise political temperatures. This effectively increases the inherent political risk in an economy.

Risk management is all about assessing the probability and severity of an event. Some risk events may not be highly probable but if they occur, the severity could be very high. The 2007/2008 post-election violence in Kenya was such an event. Smart businesses must always factor in political risk in their plans.

This is the reason all stakeholders need to ensure that such sensitive events in a nation’s calendar are professionally managed. Consensus building is critical to ensure that the risk of events that may push the economy over the edge are mitigated.

At a business level, it is not enough to sit back and wait for whatever comes out of the process. The English say prevention is better than cure. Businesses need to put in place an effective political risk management system.

First, the system should be able to help in better understanding how political events can affect investments. Second, such a system should be able to help the business grab opportunities that could become profitable if accompanied by robust mitigants to inherent political risks.

Last, the system should also help in making better decisions to ensure the business survives with few losses if any, in case unfavourable outcomes are experienced after such political events.

Macharia Kihuro is a financial risk practitioner based in Nairobi. E-mail: [email protected]

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