Political Risk Map 2020: Mid-Year Update for Middle East and Africa
To date, Africa’s experience with the pandemic has not been as intense as in Asia-Pacific, Europe, and the Americas. However, the economic impact has still been large, particularly as resource-dependent economies suffered from a simultaneous drop in global prices, and collapse of tourism activity.
Similarly, the Middle East has faced rising fiscal pressures as a result of reduced oil revenues. Many governments across the region face particularly acute debt and fiscal pressures. Almost half (47%) of countries in the Middle East and Africa have seen their country economic risk rating increase by more than 1.
The pandemic and its economic impacts are also contributing to rising risks of civil unrest, as standards of living fall and governments cut social spending. Around half (52%) of countries in the region experienced a rise in their strikes, riots, and civil commotion rating between January and July 2020.
We provide updates on political and economic risks in some of the region’s most important economies. South Africa, an early adopter of lockdown measures, accounts for most cases in Sub-Saharan Africa, exacerbating an already weak economic and debt environment.
Although Egypt’s government is expected to maintain its hold on power, the economic outlook is challenging given a downturn in revenues from tourism, remittances, and the Suez Canal. Weak performance in the oil sector is straining hard currency availability in Nigeria.
Egypt’s country economic risk rating increased from 4.7 to 5.4 in January-July 2020 (see Figure 1). COVID-19 suspended activity in economically crucial sectors. The demand side shock to tourism, a decline in remittances, and loss of revenue from the Suez Canal will cause growth to decelerate sharply in 2020.
GDP growth is set to slow to 2.5% in the fiscal year 2019/20, and 3% in 2020/21 — a marked deceleration from the 5.6% growth rate recorded in 2018/19.
As in many emerging markets, COVID-19 caused sharp capital outflows from Egypt in the first half of 2020, increasing liquidity risk. At the peak of investor risk aversion, in March-April 2020, capital outflows from Egypt totaled USD16 billion.
The combination of capital outflows and greatly reduced economic activity placed significant pressure on the balance of payments in the first half of 2020. However, as a net oil importer, Egypt will benefit from lower energy prices, strengthening the country’s balance of payments position over the second half of 2020.
Egypt’s foreign-exchange reserves are probably sufficient to avoid the introduction of capital controls or a run on the Egyptian pound in 2020. Foreign reserves are worth 6.3 months of import cover, up from 5.9 months of import cover in 2019. As a result, currency inconvertibility and transfer risks have increased only moderately, from 5.1 to 5.2. Egypt also benefits from a USD5.2 billion loan under a 12-month standby agreement with the IMF, made in June.
Egypt raised USD5 billion in eurobonds in May, thereby increasing total foreign currency reserves to USD38.2 billion at the end of June 2020, up from USD36 billion at the end of May.
Egypt’s risk of strikes, riots, and civil commotion risk rating increased from 5.3 to 5.8. This was the eighth-largest rating increase in the last six months of all 197 countries rated by WRR.
This increased risk is largely due to sporadic protests by health care workers and activists against the government’s handling of the pandemic. Public hospitals in Egypt have been overwhelmed with the rate of COVID-19 infections.
A disproportionately high number of COVID-19 deaths have been among health care workers, which will continue to provoke small, sporadic protests for the duration of the pandemic. However, President Abdel Fattah el-Sisi has established a firm grip on power, and the authorities should be able to manage protest risks.
Nigeria’s country economic risk rating increased from 5.3 to 6.3 in January-July 2020 (see Figure 2). The low oil price environment will compound COVID-19’s economic impact on the country. Real GDP is forecast to contract by 3.5%.
Weakening global oil demand and declining domestic oil production will weigh heavily on Nigeria’s external position, as oil accounts for more than 90% of the country’s total goods and service exports. The collapse of global oil prices in the first quarter of 2020 led to the value of Nigeria’s exports contracting sharply — falling by 19%. Over the course of 2020, the value of Nigeria’s oil exports is expected to reduce by USD26.5 billion.
The country’s currency inconvertibility and transfer risk rating increased by 0.4, from 6.4 to 6.8, in the last seven months. Portfolio outflows and reduced export revenues have exerted significant pressure on the naira in 2020, leading the central bank to cut its official USD exchange rate by 15% in March.
Hard currency shortages are likely to remain throughout 2020, as foreign exchange earnings remain suppressed and pent-up import demand is released as containment measures are eased. As foreign exchange reserves look set to remain under pressure in the remainder of 2020, additional capital controls are possible.
The risk of social unrest is likely to rise due to deteriorating economic conditions, as the government may be forced to cut expenditure. Although the government has been granted permission to increase borrowing by USD22.8 billion, a weak fiscal and debt position will make it difficult to secure financing on capital markets.
At the same time, in July, Minister of Finance Zainab Ahmed indicated that the government met just 56% of its target revenue collection in the first five months of the year. Emergency IMF funding of USD3.4 billion will provide some support, but with sources of revenue and financing under pressure, it is unlikely that the government will be able to deliver fiscal stimulus or maintain spending at current levels.
Any cuts to social spending are likely to drive civil unrest, and the country’s strikes, riots, and civil commotion rating has already increased from 6.7 to 6.8. A number of violent riots have already been reported in response to government lockdown measures.
COVID-19’s impact in Nigeria will be exacerbated by a challenging investment environment. Long delayed regulatory reform of the oil and gas sector does not look set to be approved in the near term, discouraging much-needed investment. At the same time, to reduce demand for hard currency, Nigeria has taken a protectionist stance to regional trade, restricting certain imports since 2019. In July 2020, the central bank restricted access to foreign exchange for corn imports.
The South African economy was already grappling with a number of structural imbalances before COVID-19. The fallout from the pandemic will compound these challenges. South Africa’s GDP is forecast to contract by 7.1% in 2020, as the pandemic weighs heavily on consumption and activity in key manufacturing and mining sectors.
South Africa’s country economic risk increased by 0.9, from 4.8 to 5.7, in the first seven months of 2020 (see Figure 3).
A sharp decline in trade and tourism revenue, and additional COVID-19-related spending will put pressure on already weak public finances. The budget deficit is expected to reach 15.6% of GDP in fiscal year 2020. This will result in a 19% increase in the government debt burden, to 89.9% of GDP by year-end.
This outlook contributed to its sovereign credit risk rating increasing from 4.7 to 5.1 between January and July 2020. Rising sovereign credit risks also stem from the vulnerabilities of South Africa’s struggling state-owned enterprises (SOEs). SOEs have a combined debt load of ZAR1.6 trillion, of which ZAR670 billion is guaranteed by the government in the event of default.
With credit conditions tightening, many SOEs will require government financing assistance over the next few years. This will weigh on public finances and further depress growth heading into 2021 and 2022.
The worsening economic backdrop has also caused concern among international investors. The South African rand has been one of the worst-performing emerging market currencies in 2020 to date. It lost 19.5% of its value against the US dollar in the first half of 2020, driving an increase in currency inconvertibility and transfer risk rating from 3.7 to 4.
Non-resident sell-offs in rand-denominated portfolio investments totaled around USD7 billion net, 2.5% of 2020 GDP, in the first half of 2020. The second half of the year could see economic activity pick up and boost commodity prices, if the pandemic is brought under control. This would allow the rand exchange rate to strengthen to around ZAR15.75/USD1 over 2020.
About this report
This update to the Political Risk Map 2020 draws upon data from the Marsh JLT Specialty’s World Risk Review platform. Our country risk platform provides risk ratings for 197 countries across nine perils covering the security, trading, and investment environments. Ratings are updated on a monthly basis, and work on a 0.1-10 scale. 10 represents the highest risk, 0.1 the lowest risk.
All risk ratings referenced in this report were produced by Marsh JLT Specialty’s World Risk Review. The Country Economic Risk rating is an indicator of the propensity for economic adjustment including significant devaluation and/or high inflation and increases in the level of credit defaults among domestic businesses. The Country Economic Risk peril index assesses the risk of economic instability, and the potential effects this may have on businesses operating in the country or territory.