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Opinion

COVID-19 and Africa: Protecting Investments in a Global Pandemic

Kwadwo Sarkodie, Ed Bentsi-Enchill, and Thomas Ajose, Mayer Brown
July 23, 2020, 9:48 p.m.
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The COVID-19 pandemic struck Africa later than other regions of the world, but its effect on African economies should not be understated. The World Bank has predicted that the continent will face its worst recession in 25 years, write Kwadwo Sarkodie (pictured), Partner, Ed Bentsi-Enchill, Associate, and Thomas Ajose, Associate, Mayer Brown.

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The COVID-19 pandemic struck Africa later than other regions of the world, but its effect on African economies should not be understated. The World Bank has predicted that the continent will face its worst recession in 25 years, write Kwadwo Sarkodie (pictured), Partner, Ed Bentsi-Enchill, Associate, and Thomas Ajose, Associate, Mayer Brown.

We explore below some of the key issues facing African nations, and look at how investors might best protect their positions and mitigate risk.

Thus far, the rates of COVID-19 infection and mortality have, thankfully, been low in Africa. This is likely in part due to reduced air-traffic, early lockdowns, the build-up of contact tracing and the prior-experience in dealing with pandemics. However, the fact that many African economies are highly dependent on exports, particularly of commodities, means that global economic headwinds have outsized effects on the already high levels of debt held by African nations.

Countries with diversified economies and fiscal resilience may, to some extent, be able to cushion themselves against the worst of the impact. Ghana, for instance, which has secured US$1 billion in budget support under the IMF's Rapid Credit Facility, may be able to call upon historic petroleum revenues and offset lower earnings from oil and cocoa exports with returns from gold.

However in Nigeria, collapsing oil prices have forced the government to review its 2020 budget, as the fiscal deficit is expected to widen. The IMF approved US$3.4 billion in emergency financial assistance under its Rapid Financing Instrument to address the decline in oil prices. This could lead public debt levels to increase sharply, risking currency fluctuations and a downgrade of sovereign debt. The picture is similar in South Africa, where the central bank has predicted a 6% economic contraction in 2020 as the pandemic hits the agriculture and mining sectors.

Elsewhere, countries whose economies are more dependent on tourism are also suffering. For example, in Kenya, yields on outstanding Eurobonds increased in Q1 2020, and in March trading halted on the Nairobi Securities Exchange as the index suffered a 15% drop. However, healthy foreign exchange reserves and a well-capitalised banking sector suggest that a recovery in 2021 is possible.

What does this mean for investors?

Worsening economic conditions, falling commodity prices and the broader effects of the pandemic can all serve to undermine the economic rationale of investments.  Where there is a State counterparty (as is often the case in large-scale mining, energy and infrastructure projects), financial pressures and changing priorities might lead to delays, contract breaches or even expropriation of the investment.

This serves to highlight the importance of clearly addressing and allocating risks in the project documentation, including by way of ‘material adverse effect’ and ‘force majeure' clauses – careful compliance with the contract provisions, and serving correct notices, is also vital.  At the same time, however, it is also important that investors be prepared engage with their counterparts constructively.  This might extend to agreeing to share some 'pain', in order to maintain the viability, and long term benefits, of an investment or commercial relationship.

This also underlines the importance of clear and effective dispute resolution provisions.  Offering flexibility, confidentiality and relative ease of international enforcement (via the New York Convention), international arbitration is commonly provided for.  However, in order to ensure effectiveness, attention is needed to the proper drafting and framing of the arbitration provisions, including the most appropriate governing law and supervising jurisdiction (the 'seat of arbitration').  Thought too must be given to where, in the event of obtaining an award, enforcement might be pursued.

Investors may also potentially have recourse to bilateral investment treaties, which serve to protect investments from arbitrary or discriminatory measures by a State, can offer recourse to arbitration and may effectively protect investors from expropriation. However treaty protection is dependent on there being a treaty in place between the domicile of the investor and the country where the project is located.  Further, the project would need to comprise a 'qualifying investment' under the applicable treaty's terms.

Against the backdrop of the pandemic, it is more important than ever that potential investors plan carefully to effectively protect their investment. This should include carefully scoping and operating the contractual provisions, ensuring effective dispute resolution provisions and at the same time maintaining a willingness to take a collaborative approach. Though the situation is unprecedented, it is still possible for investors to manage their risk exposure, while fostering, and benefiting from, economic development across the continent.

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