Burundi: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Growth suffering under political crisis, low commodity prices and infrastructure shortcomings
The political and security crisis as well as the fall in coffee prices (down 40% between September 2014 and September 2015) triggered a recession in 2015. Growth is expected to recover in 2016 driven by the construction industry which should feel the benefits of planned public infrastructure projects, in particular hydroelectricity, and supported by an IMF Extended Credit Facility. In addition, increased integration with the EAC (East African Community) should also encourage investment in the retail sector. Activity, however, is largely dependent on agricultural production, which accounts for more than one-third of GDP and employs almost 80% of the population. Agricultural output continues to suffer from low productivity, the difficulty of accessing finance and disruptions associated with the political instability. Despite the adoption of a new mining code at the end of 2013, the development of industrial nickel mines remains blocked by problems of supplies in terms of energy and the lack of infrastructures. The services sector could suffer as a result of company closures and the withdrawal of investments because of political instability and security issues. The high level of demand for imports arising from the lack of capital for the construction sector and the need for food products, oil and gas will continue to be a burden on activity.
Inflation increased in 2015 under the impact of relaxed budgetary policy ahead of the elections and the security crisis leading to restricted access to food and therefore a resulting rise in domestic food prices. This should lessen in 2016 if a stabilization of the political situation occurs.
Public and current account deficits exacerbated by political crisis
The public deficit increased in 2015 and is likely to remain at a high level in 2016. Public spending in the areas of goods and services, mainly imported, in infrastructures and military spending remain high. Public employee wages are also likely to remain high. On top of this, revenues are tending to move downwards, in particular because of the harmonizing of corporate tax with that of the EAC and the political and security crisis which is pushing donors to make their aid conditional on improvements in the political situation. The country is extremely dependent on international aid and any reduction or withdrawal of these would have serious implications in terms of the budget deficit and the Burundi economy.
The current account deficit excluding grants is likely to remain very large in 2016. In terms of the balance of trade, imports are as much a concern as exports, which, dominated by tea and coffee, remain very limited. In addition, low coffee prices as of the beginning of 2015 are set to continue with negative consequences for the balance of trade. On top of this, external financial aids (grants) are likely to continue declining given the security situation. The maintenance of large public and current account deficits, together with the level of dependence on international aid, is leading to a risk of excessive debt in the coming years. These deficits are also causing pressure on the Burundi franc, which is likely to continue slowly depreciating against the dollar despite interventions by the Central Bank in support of its currency.
A country on the verge of civil war
Whilst there have been significant political changes in Burundi in favor of increased democracy since the end of the civil war in 2005 and with all the economic indicators on green, the country would appear once again to be on the verge of collapse. The situation in Burundi deteriorated very suddenly following the re-election of the President, Pierre Nkurunziza, on 21 July 2015.
Having already served two terms of office, he contravened the Constitution by running for a third term of office. His election gave rise to a large number of demonstrations by the opposition as well as the population, all the more so as the conduct was widely criticized by international observers. The tensions between the ruling party, the CNDD-FDD, and the opposition, as well as with civil society, are running extremely high. These have been further inflamed by several assassinations including those of the head of police, Adolphe Nshimirimana, right-hand man of President Nkurunziza, and C. Harerimana, chairman of the ruling party, in early August 2015. Now deemed to be a militia by international organizations, the youth wing of the CNDD-FDD, loyal to the party in government, has organized attacks within the country as reprisals. Violent confrontations occurred in December between the army and young insurgents killing more than 90 people. Given this context, the business climate will remain seriously compromised. The crisis in Burundi, and the fleeing of some 200,000 refugees since the summer of 2015 according to the UN, presents a danger of contagion for other countries in the Great Lakes region, already struggling with porous borders, political instability and ethnic conflicts. In this context, diplomatic relations between Burundi and Rwanda worsened towards the end of 2015. As the country contributes to the African Union mission in Somalia, it is also under threat of terrorist attacks by Al-Shabaab.