Guinea: Mining returns might enhance junta’s grip on power

Event

In early April, Guinea’s junta demanded that bauxite-mining companies make plans for the construction of refineries. All mining contracts are supposed to hold provisions for developing local refining capacity. Neglecting this aspect would constitute a breach of contract. Moreover, in March the government temporarily suspended works on the enormous Simandou iron ore mine as the contract arrangements at that moment did not benefit national interests. A subsequent agreement gave the Guinean state a 15% share in all transport infrastructure and mining of the Simandou project, while it also threatens to revoke licences if development falls behind schedule.

Impact

Guinea is the world’s largest bauxite (source of aluminium and gallium) exporter and holds one of the biggest and most lucrative iron ore deposits in the world. Nevertheless, a history of contract revisions and legal disputes has kept Guinea’s expropriation risk in Credendo’s second-worst risk category of 6/7. For the MLT political risk, Guinea has been classified in the highest risk category – 7/7 – for years due to political turmoil, conflicts, structurally large current account deficits and liquidity issues. After a period of large nationwide protests and harsh state-led crackdowns, Guinea witnessed a military coup in September 2021 – which received wide popular support – ousting President Condé. Regional bodies (such as ECOWAS and the African Union) are still insisting on a short transition to constitutional rule, but the junta has not confirmed any road map yet. The installation of a technocratic cabinet has somewhat eased concerns of external partners and mining investors, who managed to continue their operations despite the coup. The US suspension of Guinea from the African Growth and Opportunity Act (AGOA) in January 2022 as a response to the coup, will nevertheless have a negative impact on current account revenues.

The final political impact of the coup remains uncertain until today. There has been growing popular discontent with the slow transition from military to civilian rule. Demanding larger national benefits from the thriving mining sector could become a way for the junta to raise popular support. Still, power blackouts and huge environmental danger connected to bauxite refining are major hurdles for generating added value in the mining sector. Moreover, Guinea’s high import dependency for essential goods seriously exposes the country to the impact of the Russia-Ukraine crisis on food and energy prices. Social unrest over the rising cost of living could therefore become more forceful in the short term. Soaring metal prices on the other hand, might outweigh the negative effect of rising import costs on the current account and fiscal balances. Guinea’s short-term outlook will depend on the evolution of international commodity prices and the population’s hinge towards democratic transition, which could possibly lead to renewed mass protests. Either way, high external demand for bauxite, gold and diamonds will continue to drive GDP growth projections despite the current unstable political environment.

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