While the African political scene is maturing rapidly, a coup in Mali, an upsurge in violence in Cote d’Ivoire, and bloodshed at a South African platinum mine have reminded the investment community that the continent can still be a volatile place.
Alkan Shenyuz is a Managing Director for Veventis, a political risk management services firm focused on providing risk management to private equity investors and large-scale project developers in emerging markets.
Here he explains the concept of political risk and how Africa investors can take it into account when putting their money to work on the continent.
Can you define political risk for us? What exactly does it entail?
Alkan Shenyuz: In very broad terms, we see political risk as any political event or activity which has a negative impact on a large-scale project or investment and which could lead to a financial loss of some description. Political risk is usually present where there is volatility or wide-spread instability in the governing process. Obviously, clients will need to refer to the terms of their insurance contracts for any particular definition as no two situations are the same.
How do you measure political risk?
AS: We use a combination of research tools and intelligence data at our disposal. Initially, we look at the macro political environment and then we seek to understand what the client is trying to achieve within that environment.
We also track certain indicators used to measure a variety of key factors like governance, ease of doing business and so on. These help us to build an understanding of the challenges faced by our clients in terms of the political framework. The Transparency Index, World Bank’s Governance Indicators, and other publicly available sources can also be helpful for our purposes.
In your view, does the global investment community overestimate or underestimate Africa’s political risk?
AS: Risk is a question of perception.
Often, investors who have deep ties with a particular market take the position that political risk is one which can be managed without an insurance program. Other investors, perhaps those new to the given market, take a very different view altogether and make a conscious effort to put a risk management solution in place.
In reality, both types of investors are probably just as likely to suffer financial losses as a result of some form of political instability. Statistically speaking, in a region like Africa, political upheaval in some shape or form usually appears in 3 – 5 year cycles at the national level. At a general level, the African continent is in a transitory phase and episodes of political instability will continue to mark that phase for some while to come.
In our experience, the issues facing Africa today and the lessons learned from the global economic crisis have led investors to think very differently about the impact of political risk on their potential returns.
Which Sub-Saharan markets do you believe are most fragile right now?
AS: The situation is in constant flux but at this particular time Mali and the Democratic Republic of Congo are causing our clients some concern. In the case of these two countries, Veventis has been able to arrange innovative political risk management programs that have allowed each client to continue their operations without a huge impact on their profitability.
Are there industries on the continent that you see as particularly risky?
AS: I would not single out any one particular industry but I would say that any industry which has the potential to be used as a political football is sometimes a cause for concern. This is especially the case where the particular industry may not have benefited the local population or there is a perception of imbalance between the benefit gained by the foreign investor relative to that gained by the local population.
You’re in the business of providing political risk management services for private equity investors. Many readers of this blog are individual investors in African stock markets. Do you have any advice for them on how to protect themselves from or to mitigate political risks?
AS: Yes, I do. First of all, investors in public stocks should ask whether the company has political risk insurance in place as part of their own research process. This is very important for a company operating in some of the more unstable parts of Africa.
More generally, investors should seek to understand for themselves the political environment in which the company operates and the political situation on which their long term returns may be contingent.
While political instability may not be good news for investors, the ensuing change can sometimes lead to increased stability and create more favorable operating conditions. This is true of a number of countries in Africa which have made a transition to a democratic process of government.
To learn more about political risk management in Africa, visit Veventis.