South Sudan risk threatens FDI

South Sudan risk threatens FDI

Embroiled in conflict, South Sudan’s presents an high-risk investment environment. The conflict threatens FDI in its oil industry and its overall economic development.

The end of 2013 saw growing conflict within South Sudan, the world’s newest state. Fighting between rival groups of soldiers erupted in the capital Juba on December 15th 2013 and subsequently triggered clashes in half of South Sudan’s ten states, often along ethnic lines, with long-term consequences on the foreign investment and economic development. Industries are being severely affected, none more so than the oil industry, accounting for over 98 percent of GDP – a consequence the government can ill-afford.

The economic impact

The secession of South Sudan in July 2011 shifted 80 percent of the country’s oil wealth to the South and renewed prospects for potential oil exploitation. Major oil operations are underway in Unity state where the Greater Pioneer Operating Company, a consortium of Chinese, Malaysian, Indian and South Sudanese interests, run the extraction industry. Such businesses have been affected by the conflict. State reports claim that rebels have seized oil wells, and a significant proportion of expat workers (whom the industry rely upon) have been evacuated.

South Sudan hoped to partner with Western states in oil exploration initiatives. Indeed, both French and U.S. petrol firms have been in involved in negotiations to explore southern regions – the areas currently embroiled in conflict. At the beginning of December 2013, South Sudan’s President Kiir attempted to lure foreign investment, through a two-day business conference. Susan Page, the U.S. Ambassador to Juba, previously announced that U.S. companies were interested in South Sudan’s oil. Moreover, British Expertise conducted a scoping mission in March 2012 to South Sudan and is looking to begin another mission in conjunction with the South Sudan Business Association. There is interest, but Western countries are cautious to encourage investment in the current environment.

Resolution is on the horizon

South Sudan can ill-afford the duration and severity of the conflict. However, a failing South Sudan is an outcome which the international community are keen to prevent too. Neighbouring African states, the U.S., China and many Arab states have significant investment in the country. Since becoming independent, South Sudan has welcomed foreign investment  – even before becoming a state, 9 percent of land (5.7 million hectares) had been allocated to foreign investors.

The Abu Dhabi government holds rights to significant amounts of land. Report suggest they have purchased a 30-year concession for tourism initiatives in Boma National Park, which covers 2.3 million hectares and includes resorts and road networks. Egyptian private equity firms such as Citadel Capital also own around 100,000 hectares in Unity state, and aim to increase water supply to Egypt through revision of a major engineering project diverting the Nile around South Sudanese wetlands. China has oil interests within the new state as well. Since independence, the number of Chinese nationals and commercial actors in Juba has spiked dramatically.

East Africa and Horn of Africa peace brokers had already strongly suggested President Salva Kiir and the opposition leader Riek Machar begin face-to-face talks by the end of 2013. The U.S. has threatened to cut aid if the current government is toppled. China has announced it will send a special envoy to engage both sides. The UN has also doubled the number of peacekeeping troops deployed to South Sudan to a total of 12,500 soldiers from the UNMISS now present.

Unlike the conflict in Syria, which also can be drawn along ethnic lines, there is a consensus globally on wanting South Sudan to survive as a state, which could play a positive role in preventing unrest. However, the ethnic tensions on the ground make business difficult, as international companies and landowners inevitably become intertwined with local conflict. Even if China does manage to broker another peace deal, it will not address the underlying tribal clashes between the Dinka and Nuer.

Risks before the outbreak

Those who have opted not to invest in the fledgling state may be tempted to gloat. Yet, even before the recent conflict, there were significant risks and this did not deter considerable investment from emerging powers, entrepreneurs or commercial giants from entering South Sudan. Should they pause for thought now?

The oil industry in South Sudan is functioning poorly. Cantankerous relations with neighbouring Sudan already halted oil production earlier in 2013, partly attributable to Sudan losing a third of its income and 75 percent of its export earnings upon independence. This is particularly problematic for international oil companies as South Sudan is dependent upon pipelines through Sudan for export.

Financial and governance risk also limit investment appetite. Regulation is not always enforced, there is a scant monetary policy as parallel money markets created by dollars and a lack of formal trade instruments. Similarly, as state financial security is dependent on oil, South Sudan’s macroeconomic performance will be affected by closures of oil production. It could lead to high levels of inflation causing price hikes due to a weakened currency. Until the economy is diversified, there is substantial financial risk to investors.

Is there any opportunity?

Still, there are those that are willing to take substantial political and economic risk for large returns. As Citadel executives suggest, returns of up to 40-50 percent are expected for their land investment. In peaceful times, there is a demand for everything – there is little infrastructure, and it is only just opening up to international markets. Given that expats are brought in to offer expertise and knowledge, there will be a new market to cater.

Plans for the development of Sudan’s oil sector seem promising. There are hopes for an alternative pipeline through Kenya or Djibouti, which would mitigate the need to use more contentious infrastructure in neighbouring states. Moreover, in August 2013, a long-awaited petroleum bill aiming to improve transparency was passed by Parliament and is now pending President Kiir’s approval. If passed, it outlines how the government should spend its revenues, making it more investor-friendly.

About Author

Rebecca Cockayne

Rebecca is an international development professional working on projects across Africa and Asia. She holds a Masters in Global Politics from LSE and previously worked in global banking. All views are her own.