Expert opinion: Political and social risk overview for Sub-Saharan Africa

Mark Rosenberg, Political Economist and CEO of Geoquant tracks social and political risk vulnerabilities in Sub-Saharan Africa.

The ongoing surge in global inflation has sparked concern, among lenders and analysts alike, regarding political and social stability in sub-Saharan Africa, a region where many economies are particularly vulnerable to recent spikes in food and fuel costs exacerbated by Russia’s February 2022 invasion of Ukraine.

Here we use the GeoQuant data system – which tracks 31 fundamental governance, social, and security risks across 127 countries on a daily, forward-looking basis – to highlight inflation-driven political and social risks in the region.

The first figure summarises 10 August’s topline ‘Political Risk’ for all the sub-Saharan African countries in the GeoQuant system. Note that ‘Political Risk’ is a 0-100 score derived from a weighted aggregate of the governance, social, and security risks referenced above. A higher score denotes higher risk.

^{AGO: Angola, BEN: Benin, BFA: Burkina Faso, CIV: Cote d'Ivoire, CMR: Cameroon, COD: Congo (DRC), ETH: Ethiopia, GAB: Gabon, GHA: Ghana, KEN: Kenya, LSO: Lesotho, MOZ: Mozambique, NAM: Namibia, NGA: Nigeria, RWA: Rwanda, SEN: Senegal, TZA: Tanzania, UGA: Uganda, ZAF: South Africa, ZMB: Zambia, ZWE: Zimbabwe.}

We also include our forecast for topline political risk through year-end. Note that while some relatively low-risk countries (for instance Ghana, which is suffering from an economic crisis) are forecast to see increasing risk in the coming months, risk is forecast to decline in higher risk countries such as Burkina Faso (post-coup consolidation) and Ethiopia (lower conflict levels in Tigray) despite high exposure to higher food and fuel prices.

Given the direct, historical implications of higher food and fuel prices for social stability, we focus the remainder of the analysis on ‘Social Risk’. Per the figure, ‘Social Risk’ is (i) structurally far higher in sub-Saharan Africa than other developing regions; and (ii) this risk has accelerated further upward due to the COVID-19 pandemic. As such, the current inflationary ‘shock’ comes at a time of already-elevated levels of ‘Social Risk’ across the region.

Higher food and fuel prices have already sparked a wave of (sometimes violent) social protests and anti-government demonstrations across the region. The next figure helps summarise which countries in the region are most at risk from further social unrest from higher wheat prices (note we include countries which have wheat import and export data available from the Food and Agriculture Organization).

The x-axis tracks each country’s current level of ‘Social Risk’, while the y-axis summarises the correlation between the risk score and wheat price day/day from 1 January 2020 to date. Of particular concern are those in the top right quadrant of these plots owing to two factors: (1) already high ‘Social Risks’ and (2) a strong positive correlation between wheat prices and risk. While Uganda is most exposed to Russia wheat imports, Kenya, Burkina Faso and South Africa screen as countries with the highest risk of related social unrest in this analysis.

In order to bring down inflation and to defend against currency devaluation, many regional central banks are hiking interest rates at a rapid clip since January 2021. Unlike most other frontier and emerging markets, African rates have not increased much more aggressively than during the previous two EM rate hike cycles (January 2012 to January 2016; January 2016 to January 2019). [Note, interest rates in sub-Saharan Africa are already high relative to other frontier and emerging markets]. Nonetheless, and per below, they have increased in all major

economies.

While tighter monetary conditions may help improve social conditions in the long run through greater price stability, in the near-term they generally constrain growth, leading to greater socio-economic duress and ‘bottom up’ pressure on policymakers. As a result, social instability becomes more likely. Even inflation-driven protests are unlikely to be quelled, and could well be exacerbated, by the higher interest rates meant to address inflation. In short: we expect to observe a positive relationship between change (namely, increases) in interest rates and change (increases) in our daily measure of Social Risk across the region (and emerging/frontier markets more generally. As per the chart, we do indeed find this relationship across all three cycles.

Notably, this positive relationship has eased (no pun intended) in the current cycle.

Nonetheless, we note that several countries have seen both relatively large increases in interest rates and ‘Social Risk’ since January 2021, including major economies such as South Africa, Nigeria, and Ghana, along with Mozambique.

In sum:

1. There is a particularly high level of ‘Social Risk’ in sub-Saharan Africa relative to other regions, with the risk of social instability in a wide range of countries increasing markedly since the outbreak of the COVID-19 pandemic and the recent increases in food and fuel prices exacerbated by the Russia-Ukraine war. On a regional level, risk events such as anti-government demonstrations, economic (especially food and fuel price) protests/riots, ethno-religious/xenophobic clashes, strikes and blockades, among others, are more likely. [Notably, ‘Social Risk’ has actually increased more rapidly in South America than sub-Saharan Africa since March 2020, albeit starting from a lower base].
2. These risks will increase to the extent (i) fuel and food prices continue to increase; and (ii) central banks hike interest rates aggressively in order to counter the resulting inflation.
3. With the region, countries where ‘Social Risk’ is relatively high and particularly correlative with higher food prices – including Kenya, South Africa, and Burkina Faso – screen as especially high risk for further instances of social instability.
4. The same is true for countries where interest rate hikes are most positively associated with increases in ‘Social Risk’: Nigeria, South Africa, Mozambique and Ghana.