Methodology

Africa presents numerous opportunities for South African business as well as international corporations and fund managers, but is also a continent fraught with challenges. Conflict, drought, poverty, HIV/AIDS, military coups and unstable governments still dominate the landscape. The operating environment is improving, but challenges remain.

Corporate activity in Africa depends as much on a keen understanding of political and social dynamics as on analysing the macroeconomic environment, pure business transactions, due diligence and binding contracts. In this regard, we measure both economic and political risk. In providing both macroeconomic and political analysis, NKC African Economics monitors developments much more effectively in order to add real value for investors as well as detect potential risks before they become a reality.

Economic Risk

The macroeconomic environment is measured using a risk model developed to monitor key criteria in three crucial areas of economic stability:

• Economic Policy Risk
• Economic Structure Risk
• Liquidity Risk

The sub-criteria are weighted and scored on a descending scale where the lower the score the more stable the overall key section. Key areas of focus include monetary, fiscal, exchange rate, regulatory and trade policy, economic growth, debt, the current account and financial structure.

Political Risk

With the legacy of both the colonial era and failed socio-political experiments, as well as the fragility and insecurity of relatively young states now embracing democracy and liberalised markets, political research is far more important in Africa than in most other global regions.

Our political analysis team monitors key criteria in four crucial areas of political stability:

• Political stability, political regime legitimacy and its capacity to endure
• Government capacity. The capacity and ability of state institutions on first, second and third tier levels to adequately perform the functions they were instituted to perform
• Security. The distribution of military weaponry, the levels of internal and external conflict, law and order and legal framework
• Civil society. The role, capacity and effective functioning of key elements of civil society and the relationship to government.

Each weighting scores up to 15 sub-criteria on a descending scale where a low score indicates stability. These weightings are constantly revised to eliminate over- and under-weighting.

Our assessment of economic and political risk is not comparable to the credit risk ratings issued by international ratings agencies as we do not rate the attractiveness of sovereign debt instruments, but rather express a view on overall macroeconomic and political country risk.