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Tanzania: Expropriation Reinforces Investment Risks

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Tuesday, November 14, 2017 8:59 AM / BMI Research

 

BMI View: A recent dispute between the Tanzanian government and the London-listed mining company Petra Diamonds highlights the challenging operating environment in Tanzania which will only further stymie investor confidence in the African state. Indeed, while the mining sector has been hardest hit by regulatory changes in the country, we believe investors in other sectors are also adopting a more cautious stance, which will offer headwinds to growth in the long term.

 

The Tanzanian government's recent seizure of nearly USD15mn worth of diamonds reinforces our long-standing view that elevated operational risks are likely to temper investment and growth in the country over a multiyear time horizon. On August 31, the government confiscated the diamonds from Williamson Diamonds, a local firm majority-owned by the UK-listed Petra Diamonds.

 

In explaining its reasoning, the government cited suspicions that the company was undervaluing its exports in order to lower its tax bill – a charge which Petra denies. This latest move by the Tanzanian government follows the enactment of a number of less favourable policies on the mining sector as well as the issuing of an USD190bn fine against Acacia Mining (the biggest gold miner in the country) following a dispute regarding the imposition of an export ban export of unprocessed metals, enacted in March (see 'Protectionism And Populism Threaten Economic Trajectory', September 1).

 

We have already revised down GDP growth from 6.3% in 2017 and 6.5% in 2018 to 5.3% and 5.7%, respectively, on the back of the more challenging business environment, and we could revise it down again should we see further measures.

 

Protectionist Policy Preferences Here To Stay

Since his November 2015 inauguration, President John Magufuli has enacted a number of protectionist measures – including a crackdown on tax incentives for foreign companies, a ban on the export of unprocessed metals, and legislation forcing mining firms with special licenses to list 30.0% of their shares on the Dar Es Salaam stock exchange.

 

With many of the policies receiving broad domestic support, we see little scope for an abrupt change in tactics in the near future. The president won office by presenting himself as a strident anti-corruption and anti-government waste advocate, playing up his reputation as a ''bulldozer'' that he had built during his time as interior minister in order to highlight his efficiency in pushing forward policies.

 

Recent measures have likely been embraced by Magufuli, in part, because they reinforce the persona he has cultivated and feeds into the current popular resentment toward international mining firms. Indeed, a recent survey (conducted in June 2017) indicated that seven out of ten (71.0%) citizens approve of the performance of the president.

 

While our core view is that the government will come to an agreement with the major mining companies to remove the ore export ban by the end of the year, we cannot rule out the risk that the ban remains in place for a more prolonged timeframe should negotiations hit an impasse. Moreover, even if an agreement is reached on that one piece of legislation, we still think the government will prefer a more protectionist policy mix going forward.

 

Weaker Business Environment Will Offer Economic Headwinds

This increasingly challenging business environment will likely weigh on growth in the years ahead. Indeed, we forecast average real GDP growth of 6.0% over the next decade which, while above the regional average, is lower than the 6.3% average seen over the last decade.

 

The continued embrace of resource nationalism will hit the mining sector especially hard, feeding through to continued headwinds for growth. We have already seen the March export ban result in a halt to production at Acacia Mining's mine in Bulyanhulu. This has seen our Mining revise its gold production forecasts from 1.5mn ounces down to 1.4mn. Over the longer term, the continued stringent measures against the sector will likely undermine the government's goal of rapidly expanding the mining sector, from contributing less than 4.0% to overall GDP to 10.0% by 2025.

 

Indeed, while we believe the recent regulatory shifts are part of a strategy by the Tanzanian government to support local businesses, our Mining team has noted that the domestic based industry does not have the capacity to fill the gaps left if foreign firms begin to significantly reduce operations.

 

Meanwhile, even firms outside of the mining sector are likely to be negatively impacted by recent government measures. While the mining sector has been hardest hit by the government's embrace of more protectionist policies, other industries – including hydrocarbons and telecommunications – have also been subject to changing regulations.

 

Signals by the government that it effectively intends to double down on its current policies – such as the seizure of Petra's diamonds – will increasingly reinforce investor caution. Tanzania's business environment has long lagged behind many of its East African neighbours, with the country scoring lowest in both our Operational Risk Index and the Trade & Investment sub-index (see 'Weaker Business Environment Will See Growth Slow', August 25). A continued embrace of more protectionist policies will only exacerbate the country's woes.

Proshare Nigeria Pvt. Ltd.

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