Africa’s ‘country risk’ is not always what it seems

When it comes to valuing businesses and assets in Africa, the conversation often turns to “country risk”—but whose risk are we really talking about? For decades, Western investors have viewed Africa through a lens of caution, sometimes missing the nuances that local players understand all too well.

Ask a London-based analyst about investing in Nigeria or Kenya, and you will likely hear about political instability, currency volatility, and regulatory uncertainty. These risks, often amplified in global headlines, can lead to higher discount rates and lower valuations for African assets.

But speak to a local entrepreneur or investor, and the story changes.

While they acknowledge challenges, they also see opportunity, resilience, and a deep understanding of how to navigate local realities. For them, what outsiders perceive as “risk” is often just the cost of doing business – and sometimes, it is overestimated.

Western perceptions of African country risk are often shaped by a few persistent perceptions, such as limited data: a lack of transparent and reliable information can make risk assessment difficult; historical bias: past crises or negative news stories can overshadow recent progress; and one-size-fits-all models: applying global risk models to Africa often fails to capture local context.

For example, the Fitch Solutions 2024 country risk index still places Nigeria and Ethiopia in the “high risk” category, citing currency devaluation and political uncertainty.

Yet, Nigeria’s tech sector attracted $1.3 billion in venture capital in 2023, according to the Africa: The Big Deal report, making it the top destination for tech investment on the continent.

As one Western fund manager put it in a 2024 Financial Times interview: “We have to build in a significant risk premium for African investments, simply because we don’t have the same visibility as we do in Europe or North America.”

Local investors, on the other hand, bring on-the-ground knowledge that is first-hand experience with regulatory environments, business networks, and cultural nuances; adaptive strategies that track record of managing volatility and finding creative solutions; and a long-term view, which is often behind the continent’s long-term potential, often backed by significant economic benefits.

Take Kenya’s Safaricom, for example: Despite concerns about regulatory changes and a challenging microeconomic environment, Safaricom’s M-Pesa platform recorded over sixty million active customers, according to the company’s annual report. Local investors have continued to back Safaricom, recognising its resilience and adaptability.

The disconnect between Western and local perceptions of risk has real consequences.

Overstated risk premiums can stifle investment, limit access to capital, and undervalue African businesses. Conversely, underestimating risk can lead to costly missteps.

For instance, a 2023 World Bank report found that African SMEs often face interest rates up to 22 percent higher than their global peers, due to perceived risk rather than actual default rates. Meanwhile, the African Private Equity and Venture Capital Association (AVCA) reported that default rates on African private equity investments remained below 5 per cent in 2023, challenging the narrative of excessive risk.

The solution? Greater collaboration and dialogue between international and local stakeholders. By combining rigorous analysis with local insight, valuations can become more accurate and more reflective of Africa’s true potential.

Africa’s story is one of complexity, resilience, and growth. As the continent continues to attract global attention, it is time to move beyond stereotypes and see country risk through a more balanced lens.

After all, in Africa, risk and reward often go hand in hand, and those who understand both sides of the story are best placed to succeed.

John B. Okumu is a Senior Associate Director at Deloitte East Africa. The views presented are his own and not necessarily those of Deloitte. He can be reached at jbokumu@deloitte.co.ke.

Read the originial article on Business Daily here.