AFRICAN RISK: NARROWING THE GAP BETWEEN PERCEPTION AND REALITY by Alistair Mcleod, JLT Specialty Limited



Africa offers sizeable rewards for investors. Rallying commodity prices and higher consumer spending will underpin stronger economic growth in Africa in the next 12 months. The continent has recovered from 2016’s slump, and growth in Sub-Saharan Africa (SSA) is forecasted to rise from 2.6% in 2017 to 3.5% in 2018. This will continue to generate opportunities for investors, along with the continent’s pressing need for infrastructure, large consumer market, and recovering prices of metals and Brent Crude. Despite this bright outlook, the United Nations Conference on Trade and Development’s 2018 World Investment Report indicated that foreign direct investment to Africa fell by 21% between 2016 and 2017. Many investors are being deterred from entering African markets by a belief that elevated political, economic, regulatory and security risks across the continent outweigh the potential rewards. What truth is there in this perception of African risk? Is this an accurate view of risk in the continent in the 21st Century?

By examining JLT Specialty’s claims data it is possible to uncover an alternative view of African Credit and Political Risk. When looking at actual claims paid to clients between 2008 and 2018, the value of claims paid for risks in SSA is not remarkable. On Credit Risk, paid claims totalled around USD 30 million in SSA, far below the approximately USD 95 million paid on Asian risks. No payments were made in relation to Political Risk or Contract Frustration for SSA risks in this period; instead the greatest value claims were in MENA, Asia and Latin America. Moreover, when looking at claims notifications, SSA saw the third-highest number of notifications between 2008 and 2018, behind both Europe and Asia. As a result, JLT Specialty’s own claims experience highlights that, contrary to many investors’ perceptions, Credit and Political Risk does not disproportionately affect SSA economies. Instead these are global issues, with potential losses occurring in all regions.

This should prompt investors to challenge their own assumptions about Credit and Political Risk in Africa. This can partly be achieved by taking a more nuanced approach to risk, looking at political and economic trends that are likely to impact the risk environment at a regional and national level. For example, 2018 has seen a number of diverging trends in political risk across SSA. While confidence in South Africa was buoyed by the elevation of Cyril Ramaphosa to the presidency in February 2018, the country has since fallen into recession and there is a growing risk of land expropriation. Elsewhere in SSA, developments have been more positive in 2018. Angola’s President João Lourenço has been pursuing an anti-corruption agenda, while Namibia’s government is planning to ease local content requirements for mining companies. Investors should be aware of these national-level trends, if they are to narrow the gap between perceived and actual risks in Africa.

Firms should also consider the economic specificities of the country in which they are operating, given varying levels of economic resilience across the continent. Many SSA economies remain heavily leveraged to a single commodity, elevating the likelihood of wider economic turmoil in the instance of a price downturn, while some governments have ramped up debt in recent years to fund infrastructure development programmes. Firms should therefore challenge their perception of economic risks in Africa, and evaluate how operations may be affected by a rapid deterioration in economic conditions at a national level.

By drawing upon JLT Specialty’s claims data the perception of African risk can be challenged, helping to narrow the gap between actual and perceived risk. This should make investors confident that, if they understand and manage the specific risks facing their operations, it is possible to effectively balance risk and reward in Africa.

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