Archive | May, 2011

Why North Africa? Towards a Greater Capacity for Risk Management

26 May

David Kuranga, Ph.D.

One of the many questions that remains unanswered in the wake of the political shifts and instability sweeping North Africa is, why has this region that was believed by many to be among the more stable areas on the continent, actually proven to be the opposite? Further, what should investors look for to avoid being exposed to such political risks in Africa and elsewhere in the future? The answer may lie in one of the most commonly overlooked variables by investors and investment analysts. Another primary issue is a need for a shift in thinking in investment analysis on Africa away from conventional wisdom when it comes to investing on the continent.

In a previous article on risk management, I note how international investors “play favorites” when it comes to investing in Africa. Outside of commodities and infrastructure, South Africa and North African countries have been among the most popular destinations for FDI on the continent. In the case of North Africa, the close proximity to Europe and access to the Mediterranean made it an attractive destination for international investors from Europe and the Middle East. While energy has been the single largest FDI sector in the region, manufacturing has also increased in areas such as electronics, textiles, and consumer goods. By 2010 Tunisia sustained five years of double digit growth in electronic manufacturing averaging 15%, partnering with firms in Germany, France, & Italy. Despite this, many international investors, much of whom not present elsewhere on the continent, failed to detect the potential for volatility and risk in the North African region. Despite claims that the wave of unrest across North Africa and the Middle East has come as a shock with little or no warning, there may in fact be clear indicators of the potential for regional political instability that investors should evaluate closely when planning expansions and investments.

Detecting Potential for Regional Instability
From 1960 – 1999 the most politically unstable region on the African continent has been West Africa. About 60% of all the unconstitutional transfers of power in Africa during this time period occurred in West Africa. In the 90’s, 12 West African leaders were either killed or removed from power by coups or failed coups. Similarly, there were 12 in the 80’s, 10 in the 70’s, and 16 in the 60’s. From 2000 to the end of 2009, only three West African leaders were removed in coups. One of the three in Guinea-Bissau, military rule lasted for less than two weeks and officers willingly withdrew as planned for a neutral civilian transitional leader, selected through regionally mediated negotiations to oversee the upcoming elections. The reason given for the coup was the repeated delay of constitutionally scheduled elections by the civilian leadership, which some in the political elite believed to be illegal, contradicting previous agreements and the state’s constitution.  Both of the other two coups, occurring in 2005 and 2008, took place in Mauritania. The probability of a coup occurring in the 16 West African countries before 2000 was around 8% while in the years 2000-2009 the probability of a coup occurring was less than 2%, a statistically significant reduction. Why, since 1999, has the likelihood of unconstitutional transfers of power reduced in West Africa? The answer to this question may also provide insight into why North Africa remained susceptible to instability.

The Economic Community of West African States (ECOWAS) was among the first regional organizations in Africa to address the issue of constitutional order stability in December of 1999 with the “Protocol Relating to the Mechanism for Conflict Prevention, Management, Resolution, Peace-Keeping and Security”. In the decade immediately following this action, there has been a dramatic reduction in the incidence of breakdown in constitutional governance in West Africa. Mauritania, the only country in the region no longer part of ECOWAS as a result of their withdrawal earlier on in the decade, was the only country to experience unconstitutional transfers of power twice. Since December of 1999 the region has taken deliberate action to monitor the political process in member states to ensure compliance with the established regional standards. Summits are held regularly and immediately to address political crisis in member-states such as those that occurred in North Africa. In addition special envoys and fellow regional heads of state frequently make trips to member states and at times are permanently stationed in the capitals of member states to monitor and mediate political disputes. The region also utilizes isolative measures to put additional pressure on regional decision-makers to conform to regional standards. The only state in region where this does not occur is Mauritania, because it is not a member state.

Similar to ECOWAS in West Africa, other regions in Africa, namely Southern Africa, Central Africa, East Africa, and North Africa all have a regional body. The North African regional body called the Arab Magrheb Union (AMU) consists of Tunisia, Libya, Algeria, Mauritania, and Morocco. AMU remains the most inactive regional body on the continent, deeply divided as a result of internal conflicts among member states, mostly emanating from previous border conflicts and the dispute over Western Sahara. While other regions in Africa maintain relatively active regional instruments that have been able to address regional instability, North Africa has very little aside from the African Union which works throughout the continent to support all the regional bodies. The Arab League, which North African states are also members, continues to do very little to set standards or intervene in internal political disputes throughout the region.

Lessons for Investment Analysis
In an increasingly globalized world, where the potential exists more so now than ever for political unrest and instability to spread beyond national boundaries, proper analysis of the political and economic risk in a country should also look into regional instruments that address those  risks. In a globalized world it is now possible that an unstable country within a strong regional framework may pose less of a risk to investors than supposedly stable countries within weak regional systems as is the case in North Africa.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2011 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga; Ph.D., MA, Ilc., BA
Managing Director
Kuranga & Associates Global Consultancy
Phone: 212.363.0936
david.kuranga@kaglobal.net
https://kurangaandassociates.wordpress.com/

Risk Management: The Key to Capitalizing on Business in Africa

19 May

The buzz words among many venture capital and emerging market investors is that “Africa is the New Frontier” for growth and development. Presently there is an immense potential to capitalize on the rapid growth in the African region. Some of the fastest growing economies in the world are on the African continent. The key for investors is to manage and avoid exposure to risk, in particular political and economic risks. Proper risk management includes projecting risks and addressing potential exposure before it occurs. Accurate risk projections when investing in Africa can be vital and save investors by limiting their exposure in a region that has high stakes alongside the potential for high-levels of risk exposure.

There are several strategies that investors employ when seeking to enter the African marketplace. Among the most common strategies, especially among new investors, is to take a clearly-defined well-traveled path to establish a “hub” in Africa, and then use it as a gateway to the rest of the continent. For over a decade, South Africa has been a favored destination among such novice investors. The process of establishing an “African hub” in South Africa for an established international brand is quite similar to the process of entering other markets in Europe and North America. An established international firm can enter the African market using this method easily without having to learn or adapt to many the specificities of doing business on the continent. In many cases international investors are able to form partnerships or buyout established firms based in South Africa, thus reducing their relocation adjustments to almost zero. While this has proven to be an effective means of entering the African market, it is not necessarily the most profitable. The South African market is saturated with international brands and investors seeking to launch their African start-up ventures. Quite often international brands are forming partnerships with the same South African firms that their competitors are using in their start-up ventures. Developing a competitive advantage and a unique niche in the marketplace determines the longevity and ultimately the success of a start-up venture. Needless to say, by utilizing the same strategy and often the same partners to establish business in Africa, international investors jumping on the South Africa bandwagon may find themselves outpaced and outlasted by either the earlier entrants in the market and by those who dared to venture elsewhere.

Among the primary reasons new investors to Africa flock to South Africa is to limit their exposure to risk, particularly political and economic risk, found elsewhere on the continent. Establishing a South African hub is not the only means of reducing risk exposure when investing on the continent. Most political and economic risks can be managed and addressed throughout all the major regions on the continent utilizing thoroughly researched risk projections and assessments by regional experts. Many newer investors in Africa do not have risk management specialist on Africa that are able to research, project, and assess the major risk variables associated with investments and thus reduce their overall risk exposure. The key to capitalizing on business in Africa is proper risk management, to first open up investors to the vast opportunities outside South Africa, as well as reducing risk exposure and potential losses. An Africa-focused risk management capacity is a vital tool that will enable investors in Africa to navigate the exploding continent, establish a competitive niche and ensure an intermediate to long-term presence.

If you have any questions or comments on the utility of risk management in Africa feel free to contact me.

Kuranga and Associates Global Consultancy is a political and economic risk management firm with a principle practice area of Africa. To learn more about Kuranga and Associates go to www.kaglobal.net. © Copyright 2011 David Kuranga. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

David O. Kuranga
Ph.D., MA, Ilc., BA
Managing Director
Phone: 212.363.0936
david.kuranga@kaglobal.net

Kuranga & Associates Global Consultancy