Democratic Republic of the Congo (DRC)’s political environment will remain weak in 2019, as long delayed elections are likely to result in a disputed government victory. Protest risks will be elevated in the aftermath of elections. However, robust performance in the mining sector should mitigate the near-term economic impact of political instability, ensuring strengthening growth and a narrowing current account deficit.
Long-delayed presidential, legislative and provincial elections are scheduled for 23 December 2018, but a further delay until April 2019 cannot be ruled out. President Joseph Kabila has faced pressure not to seek a third term in office, leading to the emergence of ultra-loyalist Emmanuel Ramazani Shadary as presidential candidate and Kabila’s apparent successor. However, Kabila is likely to remain dominant in the political sphere beyond the elections and will continue to drive the policy agenda in DRC.
Elections will destabilise an already fragile political situation in DRC, with a disputed victory for Shadary the most likely outcome. A Shadary victory is likely to be rejected to by opposition and civil society leaders, who have already objected to the exclusion of opposition candidates and the reliability of new voting machines.
This scenario would significantly increase protests risks in major cities, such as Goma and Kinshasa. Protests are likely to turn violent, elevating property damage and injury risks, but are unlikely to force a change in government.
The security forces will be able to effectively contain protesters, using tear gas and live fire, while the opposition’s ability to organise large and sustained protests has been weakened in recent years. However, the government may be forced to move forces from restive regions to tackle protests, allowing the country’s approximately 70 rebel groups to operate more freely in Orientale, Nord-Kivu, Sud-Kivu and Maniema.
In 2019 DRC’s economy will benefit from significant production growth in the mining sector, as prices rise and production capacity is increased. Cobalt production is forecasted to rise by 25% in 2019, copper production by 15% and gold production by 8%. As a result, real GDP growth is forecasted at 4.5% in 2019, up from 2.6% in 2018.
However, the economy will not reach its potential in the coming year. Destabilising elections and on-going conflict will weigh on private consumption, the largest sub-component of GDP, acting as a drag on headline growth. Sovereign credit risks may also moderately rise in 2019, as the fiscal deficit is expected to widen to 1.3% of GDP from 0.9% in 2018. An Ebola outbreak in eastern DRC and security risks will force increased government spending.
However, debt is largely held on concessional terms, and only 19.6% is held in US dollars. This should limit foreign exchange risks and the risk of sovereign default in the 12-month outlook. Moreover, the combined trends of increased mineral exports and reduced domestic consumption will generate upside risks for the current account, with the deficit expected to narrow from 1.4% of GDP in 2018 to 1.2% in 2019.
In March 2018, Kabila signed a revision of the 2002 mining code mining code into law. The code will increase royalty rates on gold from 2.5% to 3.5%, copper from 2% to 3.5%, and raise royalties on “strategic” metals, including cobalt, to 10%. The new mining law also introduces a tax on windfall profits, halves the guaranteed contract stability period to 5 years, and doubles the government’s take in new mining projects to 10%.
Mining firms will continue to operate in DRC despite the regulatory amendments, given the country’s significant reserves and the favourable nature of the previous regime.
Contract alteration risks will also be elevated in the mining sector in the 12-month outlook. State-controlled mining company Gécamines’ financial situation is weak, elevating the risk that it will seek to increase its revenues by altering contracts with joint venture partners or increasing signature bonus demands.
For example in June 2018, Glencore-owned Katanga Mining wrote off approximately USD 5.6 billion of debt in an equity swap, following a long-running dispute with Gécamines. Gécamines has since announced that it will seek to discuss the terms and conditions of its mining contracts with partners in a restructuring effort.
* Pricing will vary depending on sector and location.
** Pricing is reflective of a project in the mining sector. Many markets are unwilling to write these risks.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Brazil, Indonesia, Ukraine and Thailand all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com.
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