Africa is set for a busy year of elections - and it has already experienced an old-fashioned coup. Charlotte Adlung assesses the political risks behind the investment opportunities

Africa is a beautiful continent. But it is also a continent afflicted by election-time ‘histrionics’. It is reasonable to say that political risk in sub-Saharan African economies is not simple to measure and quantify. A keen appetite for risk, agility and an open mind could be considered the bare necessities for an interested investor - bravery and luck will come in handy, too.

The environment for business continues to improve: the correlation between better governance and transparency and a strong economy is becoming clearer in the minds and actions of politicians. But there is still a long way to go. A Heritage Foundation report ranking the world’s economies named Switzerland, Hong Kong, Singapore, Australia and New Zealand as ‘free’. Of the sub-Saharan economies, only Mauritius attained a ‘free’ or ‘mostly free’ ranking.

While Mauritius rubbed shoulders with the likes of Germany, Macau and Chile, Zimbabwe was sandwiched between Cuba and North Korea, as ‘repressed’. Nearly two-dozen sub-Saharan economies were ranked as ‘mostly unfree’. Election time in the region presents the media with a narrative of mayhem, vote-rigging, old duffers hanging on to power, fraction and confusion with the opposition - including the odd motor-mouthed demagogue - blaming the West for a particular country’s ills. The headlines can appear histrionic, but elections are a measure of political risk. A Standard Bank report, ‘African Markets Revealed’ published in the beginning of this year, states: “Political risk derived from a series of elections will remain a key differentiator in 2012.”

Political elections are scheduled to be held in 18 sub-Saharan African countries this year. Senegal, Burkina Faso, The Gambia, Guinea, Ghana, Equatorial Guinea, Togo, Sierra Leone, Cameroon and Congo Brazzaville are listed to go to the polls. Mali’s planned election was thrown into disarray when a mutinous faction in the army jumped the gun and changed the country’s leadership through an old-fashioned coup. The regional economic body, ECOWAS, reacted by suspending Mali from its ranks. The deposed leader, Amadou Toure, democratically elected twice in the last decade, was seemingly statesman-like about the crisis, saying that he would be “open to any solution that could restore peace in our country and preserve democracy in our country”.

Anna Osborne, senior analyst at Maplecroft, says: “Although the coup was unexpected, [we recently] warned about the risk to internal stability from increasing activities of the rebels following the crisis in Libya and the influx of highly-sophisticated weaponry.” Mali is an example of an unexpected event that investors, ideally, ought to be able to withstand. “The majority of investors are strongly aware of the risks before entering the market. Given project timeframes and long-term investments, companies need to take a long term view. Companies are likely to have strategies in place to mitigate potential risks to ensure supply chains and security in case of events such as this coup.”

Randgold Resources, a major foreign investor in the mining sector said, immediately after the coup, that its operations had remained unaffected. Standard Bank believes the coup will cause direct operational disruptions, but that security in large extractive projects is unlikely to be a risk in the short term. “A review of contracts perceived to have been dubiously awarded nonetheless remains a possibility if the coup remains in place,” the bank warns. “However, given that gold accounted for 75% of total exports in 2011, the coup’s leaders are unlikely to be willing to jeopardise continued foreign investment in the sector through immediate seizures. In the longer term, higher taxation aimed at funding counter-insurgency against the heavily armed Tuareg uprising is a risk.”

Sudan and Kenya are also scheduled to hold a referendum on the Darfur region and parliamentary elections, respectively. Voters and foreign investors in Kenya are bracing themselves ahead of the polls scheduled for later this year or early 2013. Those elections will follow the ratification of a new constitution as well as the murderous fallout of the 2007 elections.

Mike Davies, an associate director at Maplecroft, says: “For Kenya, this year is one of heightened uncertainty.” Another key element to the Kenyan story is the decision by the International Criminal Court in The Hague to issue a summons on several very prominent politicians for allegedly instigating the 2007 post-election havoc. Entrenched interests within the political class remain a concern to investors, who will be watching for signs of rivalries that could lead to post-election violence and a repetition of the violence of 2007, says Davies.

Tullow’s discovery of crude oil in northern Kenya has reportedly been met with ‘delight’ by President Mwai Kibaki. This was an understandable reaction to this new source of revenue and investment opportunities for Kenya. However, considering the corruption in Kenya’s recent past, this news will set imaginary alarm bells and cash-tills ringing.

With its vast amounts of oil and natural gas, Nigeria has appeared to be vulnerable to regular flashes of insecurity and unrest. The deadly actions of the Islamist group, Boko Haram, have made newspaper headlines and so presented the country as high risk. Of Nigeria, Sven Richter of Renaissance Asset Management, says: “There are times when there is a lot of noise coming out of a country such as Nigeria, but it important to remember that things have improved a great deal. There has been a democratically elected government in place for the last decade, as opposed to military rule as it was in the past.”

Anger at the government’s fuel subsidy plans and trade-union denunciation of the high levels of corruption, which resulted in demonstrations that were met with restraint, point to active democracy at work, Richter observes. “A few years ago no one would have thought that possible in Nigeria.”

Finally, Lesotho, Zambia and Angola will hold parliamentary elections and a referendum. There is uncertainty around who will succeed the current leader of the MPLA ruling party, President Jose Eduardo dos Santos. There is speculation that he will run again for office, which may mean business as usual in an economy the Heritage Foundation has ranked as ‘repressed’.

Political risk in sub-Saharan countries has so far been exemplified by the case of Impala Platinum, where the Zimbabwean government has forced the company to sell a 51% stake to state-approved agencies as part of the government’s so-called ‘indigenisation’ drive.

However, the region is undergoing significant change. A young population, a growing middle-class demanding goods and services, and technological innovation are buoying up and pushing economic growth. As Richter says, investors want to know what is changing - change can create value, especially when others might not see it.

“I believe we will see the same type of growth in the frontier markets as we have seen in what are now the emerging markets,” Richter says. “There are the same opportunities but the only difference is that we will see faster growth in the emerging markets. This is because the technology of today has speeded [things] up tremendously.”

There may come a time when the noise and din created by political events quietens down, and the region’s political risk subsides. For now, despite the vagaries of politics, the search for investment opportunities in sub-Saharan frontier markets continues.