Can Burkina Faso’s interim leader salvage investor confidence?

Can Burkina Faso’s interim leader salvage investor confidence?

Just a few months ago, KPMG listed Ouagadougou as one of West Africa’s three up-and-coming investment cities. Burkina Faso was seen as a hot new frontier market. But with the fall of President Blaise Compaoré, followed by a short-lived military coup, the political situation is uncertain until elections in November 2015.

On October 31, Blaise Compaoré’s 27-year long rule abruptly ended as he was forced to resign following large public protests. While the government had been increasingly oppressive of political opposition over the past few years, the straw that finally broke the camel’s back was Compaoré’s attempt to pass a constitutional amendment that would allow him to run in the upcoming 2015 elections. Protestors stormed the streets, and in a symbolic move, set fire to the legislative building. The message was clear—the Burkinabé people would not put up with Blaise any longer.

In what many have called a coup, Lieutenant Colonel Isaac Zida named himself Head of State in a television address on November 1st.  Zida ruled for two weeks, flouting the international community’s demands that power be returned to civilian authority. Talks between military, opposition, and civilian leadership stalled as the parties could not agree on an “eminent civilian personality” to lead the transition.

Finally, just hours before the African Union’s deadline for civilian rule to be restored, diplomat Michel Kafando was announced as interim president. Kafando, a former Foreign Minister and Ambassador to the United Nations, is supported by both the opposition and military. However, it remains to be seen whether he has a strong enough supporting coalition to preside over a country reeling from 27 years of a single-party state.

Since the opposition in Burkina Faso is incredibly fractured and weak. preparing for a national election in one year will be a substantial challenge. Moreover, Zida’s role in the transitional government is still questionable—will he continue to stir the pot like Mali’s Amadou Sonogo or take a back seat and let grassroots democracy take shape?

What does this spell for the Burkinabé economy?

Though Burkina Faso’s political situation is uncertain, it will likely stabilize after the 2015 elections. In the meantime, the agriculture and mining sectors will continue undisrupted, providing the government with much-needed revenue, and the stability of the West African CFA franc will prevent high inflation.

However, the Burkinabé economy may incur lasting negative impacts from a year of political instability, however, especially in the telecommunications, financial, and energy sectors. The greatest threat to economic stability comes from potential sanctions causing a suspension of donor aid, which currently represents about 70 percent of government expenditures.

The Gold and Agriculture Sectors

With high GDP growth rates over the past several years and improvement in the investment climate, Burkina Faso has seen an influx of foreign investment and economic activity, particularly in mining. Gold mining has expanded rapidly, and Burkina Faso has become the 4th largest gold producer in the world.

With many potential deposits yet to be explored, this sector has even further potential for foreign investment and increased government revenue. The current political upheaval will likely cause a halt in exploration making . However, current gold production will likely continue without disruption, unless the new transitional government reneges on Compaoré’s reforms of mining sector laws.

Though gold is Burkina Faso’s largest export, cotton and other agricultural goods are the largest source of income for most Burkinabés. The agriculture sector should also remain stable. Unless there is an escalation of instability that impacts the movement of goods or labor, existing production and export of agricultural products should not slow.

It is especially important to ensure these sectors are not affected, as an escalation of instability to the countryside could cause disruption in food production and a spike in domestic food prices.

Telecommunications, Energy, and the Financial Sector

While the extractive and agricultural industries can function relatively normally in the face of instability, investments in sectors such as energy and finance rely more on a stable government regulatory environment. The current political instability has already strained Burkina Faso’s financial sector and threatened investments in energy and telecommunications.

The West African Ratings Agency (WARA) has placed its rating of Burkina Faso’s largest telecommunications company, Onatel, and the locally headquartered Corris Bank International under surveillance for 90 days. This move has negative implications for the companies, which are both listed on the West African regional stock exchange in Abidjan. A downgrading of could lead to a decrease in investment, which is especially concerning for Onatel.

The telecommunications sector in Burkina Faso is perhaps one of the most dynamic economic sectors, with subscriptions growing at a rapid pace since Onatel was privatized in 2006. A downgrading of the rating for Corris Bank International, one of Burkina Faso’s only domestically headquartered international banks, would also be a large blow for the already constrained financial sector.

Additionally, continued instability risks recent innovative investments in Burkina Faso’s energy sector. A little over a month ago, the European Investment Bank provided the Burkinabé government with a €23 million loan backing the construction of a 30-megawatt photovoltaic solar power plant. This plant was set to be the largest solar power station in sub-Saharan Africa and a model for future solar investments in the region. A Canadian company, Windiga Energy, also recently signed an investment agreement for a separate 20-megawatt solar plant.

If the political situation in Burkina Faso does not stabilize, there is a risk that these investors will pull out, resulting in a massive missed opportunity for the Burkinabé economy.

Whether Burkina Faso is able to salvage investor confidence or not will ultimately be decided by the former military government and incoming transitional leadership. If the parties maintain peaceful coexistence, the country may barely hold on to its frontier market potential until a new government is elected in 2015.

About Author

Marina Tolchinsky

Marina Tolchinsky has previous experience with economic policy research in sub-Saharan Africa and monitoring and evaluation of development programs. She has lived and worked in Liberia, Ghana, and South Africa. Marina is currently pursuing a Masters degree at the Johns Hopkins School of Advanced International Studies (SAIS) concentrating in International Economics and African Studies.