Nigeria and South Africa: Country Risk Ratings

Nigeria (NGA)

Nigeria faces a very high overall risk. Since President Bola Tinubu took office in August 2023, he has confronted numerous challenges, with security and economic issues standing out and contributing to a very high risk of political violence. In terms of security, the country is contending with extremist groups like Boko Haram in the northeast, separatist movements such as Biafra in the southeast, and widespread kidnappings and abductions. These hurdles extend beyond political violence; for instance, there are permanent threats to farms, food transport trucks, and warehouses. Additionally, companies face obstacles from frequent power outages, port congestion, infrastructure gaps, cumbersome customs procedures, and adverse climate conditions, which have negatively affected the country’s Q1 2024 GDP. Thus, the supply chain disruption risk is deemed very high. In terms of economic developments, the IMF expects Nigeria’s economy to grow 3.3% in 2024 and 3.0% in 2025. These expectations are associated to better prospects in terms of oil production and gains in the non-oil sector (e.g. agriculture). Likewise, the Fund foresees the country’s public gross debt to reach 46.7% and 47.0% of GDP in 2024 and 2025, respectively. The main economic challenges are two-folded. Firstly, inflation hit a 28-year high in May due to rising food, rent, and transport prices. Secondly, the naira has swung wildly in recent months and is 56% down against the USD over the past year. These factors have incentivized several multinationals to leave the country and reflect a high risk of doing business and of exchange transfer. When President Tinubu took office, he started implementing economic policies which were praised by investors, such as eliminating the fuel subsidies and liberalizing the exchange rate. These measures, however, have had a negative impact on the cost of living, and the positive impact on investors’ expectations seems to be fading away. The government is now working on a series of measures to respond to the economic pressures it faces; for example: i) the IMF reported that the government plans to partially reverse its pledge to eliminate fuel subsidies, ii) the government is contemplating a six-month suspension of import duties on some essential items, iii)  the Nigeria Electricity Regulatory Commission instructed power distribution companies to reduce energy prices for certain urban consumers, iv) the country will benefit from a USD 2.25 billion package from the World Bank that is aimed at stabilizing the economy. In this context, the government’s inability to provide stimulus and the sovereign non-payment risks are cataloged as medium and medium-high, respectively. Looking forward, Nigeria is set to benefit from boosting tax revenues – coming from better tax enforcement, a broader tax base, and a hike of the Value Added Tax – and improving revenue administration. Critical in this transition will be minimizing legal and regulatory risk, which remains at a high level. While some actions have been implemented in the line of expediting permit processes, digitalizing document registration, and simplifying tax payments, corruption seems to remain rooted in the system. For instance, the U.S. government highlights in Nigeria’s 2023 Human Rights Practices report that “President Tinubu appointed former governor Abubakar Bagudu the Minister of Budget, despite Bagudu’s widely reported history of helping then-President Sani Abacha steal hundreds of millions of dollars from the government in the 1990s”.

South Africa (ZAF)

South Africa’s overall risk score is at medium, while the risk of political violence remains high mostly due to income inequality and poverty. There have been no changes in any of risk levels in this reporting period. The political interference risk is at medium-high, and legal and regulatory risk remains medium after the general and presidential elections held on May 29. The ruling African National Congress (ANC) lost its majority for the first in country’s history, and a Government of National Unity (GNU) was formed involving 11 different parties led by ANC and the Democratic Alliance (DA), which will likely be weaker than a one-party government for some time. Former president Ramaphosa on June 19 became the new president for his second term, and announced the new cabinet on June 30 while the parliament will open on July 18. We envisage this coalition will likely be less able to undertake necessary fiscal reform policies abruptly and deal with power cuts (load shedding). Moderate and temporary political volatility continues to set the scene in South Africa, as the coalition talks and power sharing discussions took longer and harder than expected. The ease of doing business, which remains at medium-high, will be helped by the investor-friendly coalition but the government will likely be unable to accelerate the reform process quickly, at least during H2 2024. Another major economic issue to be solved is putting the government debt/GDP ratio on a downward path and this will have to wait until the expected budget in late July as sovereign non-payment risk is at medium-high rating. Apart from the economic matters, exchange transfer risk and supply chain disruption remain at medium level. The inflation outlook is still assessed to the upside as acceleration in fuel and electricity prices continue to present inflationary risks, along with logistical constraints and power cuts, though the economy is still supported by a trade surplus. ECB easing in June and Fed’s likely easing in September could help South African Rand (ZAR) more broadly, and can also increase investor’s appetite for South Africa. The banking sector vulnerability remains at medium-low, showing the relative strength of the financial sector despite macroeconomic problems.