African Governance Scores: Who’s Up, Who’s Down (and Why Investors Should Care)

This post is sponsored by Veventis – Risk Solutions for Emerging and Frontier Markets.

Key to Africa’s growing popularity among both portfolio and direct investors is its improving governance.

According to the Mo Ibrahim Foundation, 94% of the continent’s people live in countries that have improved their overall governance since the year 2000.

But as recent events in the Central African Republic and South Sudan amply demonstrate, the progress is as uneven as Lesotho’s Maloti Mountains.

Nina Hall of UK-based risk manager, Veventis, explains how weak governance impacts foreign investment.

Poor or deteriorating governance can create a myriad of problems for Africa investors.

Weak public procurement policies, for instance, are more likely to to cause confusion, and create reputational and political risks for investors especially if there is a change of government.

Moreover, generally low standards of governance can put an investor at risk of a sudden increase in taxable profits or threaten the viability of a long-term project. Lack of transparency in administrative processes is a source of concern when trying to obtain licenses and so on.

Financial investors are particularly susceptible to the consequences of deteriorating governance if it begins to undermine the rule of law and the legal process affecting rights over assets or profits. International banks doing business in Africa face this kind of problem fairly regularly and, in turn, this can push up borrowing costs.

To mitigate hazards, many foreign investors opt for political risk insurance or hedge their bets with small investments relative to their overall size.

Good Governance = Good Returns

Improving governance, on the other hand, amplifies the performance of good businesses.

Consider this. Of the ten African stock markets for which I have performance data, the five with the highest governance scores averaged a total dollar return of 76.1% over the past five years, while those with the lowest averaged just 40.2%.

Positive changes in governance also appear to predict good share performance. In 2012, markets based in countries with the most improved governance scores between 2006 and 2011 outperformed those with less improved governance 35.9% to 22.2%.

So, which countries, should investors with an eye for good governance be considering? And which ones should they be avoiding?

Risky Business

We’ll start with the bad news. Here are five countries that according to the 2013 Ibrahim Index of African Governance have seen their governance deteriorate the most over the past five years.

Madagascar (IIAG score: -12.8)

Life in Madagascar got a whole lot tougher in 2009 when a military coup put Andry Rajoelina in power. The country became an international pariah and foreign donors withdrew their support. In the resulting economic collapse, violent crime soared. Fortunately, the country could be poised for a turnaround following the inauguration of a democratically-elected president in January.

Who’s doing business in Madagascar? Shoprite operates eight Malagasy stores, and the two big Mauritian banks, Mauritius Commercial Bank and State Bank of Mauritius are also active there.

Guinea-Bissau (IIAG score: -6.0)

Military coups and presidential assassinations don’t make for a hospitable environment to do business, and this small West African nation has experienced both within the past five years. It also became a notorious transit point for drug trafficking between South America and Europe. Needless to say, the rule of law has become but a vague concept, but elections are scheduled for March this year.

Who’s doing business here? MTN and Sonatel control the wireless market and infrastructure firm, IHS, is mulling a purchase of Sonatel’s mobile towers.

Eritrea (IIAG score: -5.2)

This isolationist East African nation is one of the continent’s poorest. Eritreans have suffered severely during the 20-year reign of Isaias Afewerki, whose regime is accused of widespread torture and other human rights abuses. Desperate for a better life, thousands of Eritreans attempt dangerous sea voyages to flee the country each year.

Who’s doing business here? SABMiller is reportedly mulling an investment in the local beverage sector and Qatar and Yemeni Airways are considering regular flights to the capital, Asmara.

Mauritania (IIAG score: -5.2)

Following a bloodless coup in 2008, measures of safety and the rule of law dropped sharply in this arid West African nation. The coup’s leader, a general in the military, has since won an election and some key foreign supporters, including the United States. This and neighboring Mali’s return to stability suggest the nation’s governance could rebound in the years ahead.

Who’s doing business here? Tullow’s looking for oil, Maroc Telecom controls some of the mobile market, and First Quantum Minerals is digging up copper.

Mali (IIAG score: -3.1)

An insurrection, a coup, and fighting between rebel groups plunged Mali into turmoil in 2012, stalling years of steady economic progress and development gains. While the conflict in the north still simmers, the government has, with the help of the French military, recaptured most of its lost territory and a newly elected president now leads the country.

Who’s doing business here? Sonatel operates here. So does Bank of Africa and South Africa’s Illovo Sugar.

The Up and Comers

So, we’ve heard the bad news, let’s move to the other end of the spectrum. Here are the five African countries who’ve made the biggest strides since 2007, and potentially offer investors the biggest opportunities.

Liberia (IIAG score: +10.6)

The prize for most improved governance since 2007 goes to Liberia. Since her election in late 2005, Nobel Peace Prize-winning President Ellen Johnson-Sirleaf has quickly transformed the West African nation’s reputation from one of devastating civil war to one of rebirth. International lenders canceled the country’s debt, investment in vital energy and water infrastructure increased, and the government’s spending on healthcare more than doubled.

Who’s doing business here? Mobile operator MTN and the London-listed Equatorial Palm Oil. And Nigeria-based Dangote Cement is considering building a plant in the country by 2015.

Angola (IIAG score: +8.9)

It would be tough to argue that Angola isn’t a kleptocracy run by President Jose Eduardo dos Santos and his family, but there’s no denying that governance has improved since the end of the oil-producing nation’s 27-year civil war in 2002. Elections in 2008 and 2012 have laid the foundation for a democratic tradition in the country, and oil wealth is being plowed into much-needed infrastructure development. Big investments in healthcare have increased life expectancy dramatically – from 47 years in 2010 to 52 years in 2012.

Who does business here? South African retail giant, Shoprite, operates 28 stores in Angola and JSE-listed Consolidated Infrastructure Group owns an environmental services firm there.

Togo (IIAG score: +6.5)

Run with a firm grip by the Gnassingbe family, Togo nonetheless ranks among Africa’s biggest recent reformers. The abolition of the death penalty and a power-sharing deal with opposition leader Gilchrist Olympio in 2010 helped burnish the country’s image. The initiation of free primary education and steady advances in the reduction of poverty have also helped.

Who does business here? Togo’s most famous corporate citizen is Ecobank Transnational, the pan-African bank trades on the Ghanaian and Nigerian stock exchanges as well as on the BRVM. Morocco’s Attijariwafa Bank also does business in the country.

Niger (IIAG score: +5.2)

Five years ago, Niger was roiled by a violent rebellion in the north. Former president Mamadou Tandja attempted to capitalize on the unrest by changing the constitution to allow him a third term in office. The military intervened, ousting him from power and returning the country to civilian rule in January 2011. The election, a peace deal with the rebels, and the initiation of oil production brightened the country’s outlook immensely. Health, education, and public administration have all improved greatly, albeit from a very low base.

Who does business here? Check out Bank of Africa’s Nigerien subsidiary, which is listed on the BRVM. France Telecom is also active in the country through its mobile group, Orange.

Cote d’Ivoire (IIAG score: +4.9)

No doubt. Cote d’Ivoire has a very long road ahead to fully recover from its two recent civil wars. Crime rates are high, infrastructure is in sorry shape, and rural areas have been severely neglected. But the improving political stability has given business owners the confidence to invest in growth and there continue to be steady gains in education and health.

Looking for companies with exposure to this reviving West African giant? Then the Abidjan-based Bourse Régionale des Valeurs Mobilières (BRVM) is just the exchange for you. Most stocks listed here are Ivorian with a few from Togo, Niger, and Mali, too.

Other Rapid Improvers

You’ve likely noticed that of the five countries with the most improved governance scores, only Cote d’Ivoire is home to a stock exchange.

So where else can stock investors look to capitalize on this trend?

Here are four more countries that have progressed significantly in the past five years and each of them boasts a local stock exchange.

• Rwanda (IIAG score: +4.2)
• Mauritius (IIAG score: +3.9)
• Zimbabwe (IIAG score: +3.8)
• Zambia (IIAG score: +3.5)

Your Turn

Where do you see governance improving in Africa? Is progress being overblown or overlooked? Let us know your thoughts in the comments.

Related Reading

Veventis Blog
Africa’s Most Transparent Countries (and Why Investors Should Care)
Cautious Optimism: Political Risk Insurance in Africa

[Disclosure: Ryan has a beneficial interest in shares of Shoprite and Consolidated Infrastructure Group through his work at Africa Capital Group.]