Democratic Republic of Congo: Credendo’s political risk classifications

MLT political risk in category 7/7

The Democratic Republic of Congo is in the highest MLT political risk category 7/7. It is a fragile state trapped by political instability, weak institutional capacity and poor governance. Almost half of the country’s provinces are dealing with insecurity and violent conflicts due to the presence of multiple armed groups. Despite vast natural resources, DR Congo is one of the poorest countries in the world, prone to humanitarian crises and conflicts. It ranked 175th out of 189 countries in the 2020 UNDP Human Development Index. DR Congo’s per capita income remains very limited at USD 550 in 2020, much below the Sub-Saharan African average (USD 3,810). Data quality and transparency issues have complicated the analysis for years, although this has improved since the rapprochement with the IMF in 2019. Since July 2021, DR Congo has had a new 3-year Extended Credit Facility IMF programme, which should provide financial support in return for socio-economic structural reforms (export diversification, job creation, inclusive and sustainable sources of growth, central bank independence, anti-corruption measures, etc.). Scaling up reforms ahead of the presidential elections in 2023 and capacity development are crucial focus points of the IMF programme. However, the run-up to these elections might hinder the government in implementing such reforms.

Economic growth projections are relatively strong, around 6% over the coming years, while the population is expected to grow by about 3% annually in the forthcoming years. The domestic savings rate is traditionally low, but is expected to increase over the coming years (projected at 15% of GDP in 2022 and coming from 8% in 2019), constituting a gradually improving growth potential. Despite improved Covid-19 vaccine availability, deep mistrust and scepticism are major obstacles to widespread vaccination in DR Congo, while North Kivu is dealing with another Ebola outbreak.

DR Congo is Africa’s top copper producer and has large cobalt endowments, fundamentals for enormous growth and export potential. However, the exploitation of DR Congo’s mineral riches fuelled violent conflicts and undermined governance and institutions for decades. Around 90% of the country’s official export revenues stem from mining and oil, exposing the country to terms of trade shocks and great instability. In fact, current rising international inflation could reduce mineral demand and FDI in the domestic mining sector, although the net effect might still be positive, taking into account the rising demand for climate transition minerals in the coming years.

The overall fiscal deficit has been limited for years and is projected to balance around 1% of GDP from 2022 until 2024. Nevertheless, fiscal space for public investment and development spending is narrow as mining-related revenues that actually end up on the state budget account are limited, while access to external financing/donor support is curbed. Public revenues merely reached 10% of GDP in 2021 but under the new IMF programme, reforms are being put in place to help raise this level to – hopefully – 13% by 2024. The huge mining-related revenues should be channelled towards the government budget by introducing far-reaching anti-corruption measures and sector reforms. Nonetheless, fiscal loosening poses a risk that could lead to central bank financing of the budget, as it did in the past, leading to spells of high inflation. The official public debt level has remained low since the 2010 HIPC debt relief, at merely 16.5% of GDP in 2021 (although it represents more than 200% of yearly public revenues). Domestic public debt consists of large arrears owed to government suppliers, contractors, state-owned enterprises and public wages. Total external debt levels (private and public) reached only 17% of GDP in 2021 and projections are set to stabilise around this level. These favourable debt ratios are partly explained by very limited financial access and years of distorted data reporting.

When looking at Credendo’s country risk assessment, the financial and economic position has remained relatively stable over the past decade, while the political and security situation is the foremost concern, and negatively impacts the MLT political risk. Under the new IMF programme, the general projections are for DR Congo’s economic and financial indicators to gradually improve over the coming years, hinging on the effective implementation of an ambitious reform programme. Credendo’s MLT political risk outlook is stable for now and no upgrade is anticipated for DR Congo’s MLT political risk classification in the near term. The detrimental domestic security situation in large parts of the country continues to dampen economic development prospects. Also the political situation is fragile, despite President Tshisekedi consolidating power at the expense of Kabila by establishing his Sacred Union of the Nation. The 2023 presidential elections could become another flashpoint of instability, while the election campaign might delay the implementation of the ambitious reform agenda and weigh down on the relatively positive projections. Moreover, given DR Congo’s extreme dependency on mining sector revenues, commodity price fluctuations could seriously destabilise the financial and fiscal outlook.

Short-term political risk in category 6/7

Credendo classifies DR Congo in the second highest ST political risk category (6/7) and the outlook is considered stable for now. In March 2019, it was decided to upgrade the country from 7/7 to 6/7, incited by a moderation in short-term debt levels and gradual stabilisation of the country's limited current account deficit. In 2017, donors cut their support in response to delayed elections, leading to fiscal monetisation by the central bank, followed by a 54% inflation, sharp depreciation of the Congolese franc and a large accumulation of domestic payment arrears. Monetary policy adjustments together with higher copper and cobalt prices helped stabilise the local currency ever since. In 2020, the impact of the global Covid-19 pandemic led to renewed pressure on the currency and to a 15.8% inflation, which moderated back to 5.2% in 2021. Economic recovery in 2021 was stronger than initially projected, mainly driven by high demand in the extractive sector.

The current account deficit reached 3.6% and 2% of GDP in 2020 and 2021 (12% and 5% of export receipts) respectively, while the financial account was strengthened by sizable investment inflows in 2021. Large capital outflows are still leading to financing shortfalls on the external balance of payments. Nevertheless, foreign exchange reserves increased sharply in 2021 and reached their highest nominal level in years, supported by the exceptional IMF SDR allocation in August 2021 (USD 1.5 billion) and higher central bank foreign exchange purchases. DR Congo has been struggling with very narrow foreign exchange reserves for years, and they still merely reached 1.5 months of import cover at the end of 2021, while access to external funding remains limited. Due to the country’s vulnerability to external shocks and high levels of dollarisation in the banking sector, the low reserves are especially problematic. Domestic lending to the private sector is very limited and few international banks are active in DR Congo, which can partly be explained by the stifling restrictions and sanctions. Only one bank attracts about 70% of all USD transactions, reflecting how limited corresponding bank relations actually are in DR Congo. Therefore, reforms in the dysfunctional banking sector are essential for improving the country’s economic prospects.

Analyst: Louise Van Cauwenbergh – l.vancauwenbergh@credendo.com