The outcome of Democratic Republic of the Congo’s (DRC) December 2018 election has resulted in an opposition candidate taking the presidency. However, the ruling party is expected to remain dominant and outgoing President Joseph Kabila will retain extensive influence. In the near-term protest risks will be elevated, and the legal and regulatory environment is unlikely to improve. The risk of a rapid deterioration in internal security will contribute to elevated sovereign credit risks.
Opposition candidate Félix Tshisekedi was declared the surprise winner of DRC’s long-delayed presidential election, which was held on 30 December 2018. Tshisekedi of the Union for Democracy and Social Progress secured 39% of the vote.
On 20 January 2019, the Constitutional Court dismissed legal challenges to the result, following allegations of voting irregularities by rival opposition candidate Martin Fayulu. Leaked data suggests that Fayulu actually won with approximately 60% of votes cast. It has been suggested that Tshisekedi reached a deal with Kabila in order to keep Fayulu out of power. This will ensure Kabila's continued influence over politics in 2019.
The disputed election will generate protest risks. Fayulu supporters have already staged protests in western DRC, resulting in clashes with police and at least 34 deaths. Further incidents are likely, generating business disruption risks. However, the authorities appear confident that widespread unrest is unlikely, restoring internet services on 20 January 2019, which had been suspended on 31 December 2018.
The security services will be able to effectively contain demonstrations and an outbreak of civil conflict is not expected. The election results will serve to divide the opposition and prevent any serious threat to the government’s position.
The domestic political situation will drive increased militia activity in the near-term, with risks concentrated in North Kivu, South Kivu and Kasai. The risk of post-election protests will draw security forces to urban centres, and away from rural areas affected by armed insurgencies.
This will allow rival militant groups to target security forces, mining operations and cargo with small-arms fire and heavy machine guns. Militant attacks elevate the likelihood of property damage, death and injury, although oil activities concentrated in western DRC will face a lower risk.
DRC’s mining sector is expected to perform well in 2019, 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%. This outlook is unlikely to be immediately affected by the election result, as mining investors refrain from withdrawing investment in DRC until there is greater clarity about the political situation.
As a result, real GDP growth is forecasted at 4.5% in 2019, up from 2.6% in 2018. However, significant risks to the longer term outlook remain. Regulatory amendments and persistent insecurity will weigh on private consumption, and prevent higher growth rates.
DRC’s fiscal deficit is likely to widen in 2019, as political risks hamper revenue collection and force higher spending. The Ebola outbreak in the east will mean that spending on healthcare will remain elevated, with health spending accounting for 11.4% of expenditure in 2018. The activities of DRC’s approximately 70 armed groups will also hamper tax collection. As a result, the fiscal deficit is forecasted to widen from 0.9% of GDP in 2018 to 1.3% in 2019.
However, the deficit is likely to narrow in the longer-term outlook, as revisions to the mining charter in 2018 will increase taxes in the sector and ensure structurally higher revenues, with the deficit expected to average 0.5% of GDP between 2019 and 2027. DRC benefits from a high proportion of sovereign debt that is held on concessional terms, while total government debt is relatively low at an estimated 15.5% of GDP in 2019.
Moreover, currency risks are limited, with 80.4% of debt denominated in special drawing rights. However, a sudden deterioration in internal security would seriously undermine this outlook, and this uncertainty contributes to elevated sovereign credit risks.
Despite an opposition candidate winning the presidential election, the prospect of business-friendly reforms is limited in DRC. Tshisekedi will have a weak mandate, given the disputed nature of his victory and the continued dominance of the ruling Front Commun pour le Congo (FCC) in the National Assembly.
The FCC secured 350 of 500 seats, while Tshisekedi's party will hold just 70, meaning that the prime minister will also be drawn from the FCC. Moreover, Kabila is likely to maintain extensive influence over government and the economy, given his appointment as a senator for life.
As a result, the regulatory environment for foreign firms operating in DRC is unlikely to materially improve in the medium-term outlook. Tshisekedi will find it particularly challenging to reverse alterations to the mining charter, which were passed into law in March 2018.
The amendments increased mineral royalties, and removed protections for license holders from any future law changes introduced in the next decade. Tshisekedi criticised these amendments as ‘anti-investment’ during his campaign, but will be unable to enact any reforms in the one-year outlook.
Any efforts to reduce government corruption will face similar challenges, and firms operating in the country will be exposed to endemic bribe-taking, particularly when seeking government contracts.
* Pricing variable depending on sector/location.
** Pricing reflective of mining sector 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 Ecuador, China, Tanzania and Mozambique 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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