Africa’s GDP needs Nige­ria and SA to up their game, says Razia Khan

The Star Early Edition - - BUSINESS REPORT - Razia Khan

LAST YEAR gross do­mes­tic prod­uct (GDP) growth in sub-Sa­ha­ran Africa is es­ti­mated to have been the weak­est since the 2008-09 global fi­nan­cial cri­sis. This was largely be­cause of the weak per­for­mance in its two largest economies, South Africa and Nige­ria, which to­gether make up about half of sub-Sa­ha­ran Africa’s GDP.

Although oil and min­ing economies were hurt by the com­mod­ity slow­down, much of east Africa as well as oil-im­port­ing Fran­co­phone economies such as Ivory Coast and Sene­gal man­aged ro­bust rates of growth of more than 6 per­cent. The slow­down in Africa was not uni­form.

But what are the prospects for African economies this year?

Hopes for faster growth rest on prospects in the re­gion’s two largest economies. In South Africa, re­cov­ery after a se­vere drought last year and im­proved elec­tric­ity gen­er­a­tion should pro­vide a mod­est lift. But pri­vate sec­tor con­fi­dence re­mains weak, and ris­ing debt lev­els mean that South Africa re­mains at risk of los­ing its in­vest­ment grade credit rat­ing. With lit­tle room to scale up pub­lic in­vest­ment, a tepid re­cov­ery is likely, at best.

Faster growth will be needed to con­tain ris­ing pub­lic debt. South Africa faces its next round of rat­ing re­views in June, but it will be dif­fi­cult to achieve any­thing mean­ing­ful by then.

In Nige­ria, fol­low­ing a prob­a­ble con­trac­tion of GDP last year, it will not take much to drive growth to pos­i­tive lev­els this year. But higher oil prices alone – we fore­cast an av­er­age of $66 (R892.50) a bar­rel this year – are no panacea. Oil out­put and Nige­ria’s abil­ity to curb mil­i­tancy in the Niger Delta will also mat­ter.

Even more im­por­tant are prospects in the non-oil econ­omy, which makes up 92 per­cent of Nige­ria’s GDP. Ac­tiv­ity in the non-oil sec­tor has been slug­gish, ham­pered by poor pol­icy choices, in par­tic­u­lar a poorly-func­tion­ing for­eign ex­change mar­ket.

De­spite sev­eral flawed at­tempts at cur­rency flex­i­bil­ity, Nige­ria has never fully em­braced a lib­er­alised for­eign ex­change regime.

The au­thor­i­ties are un­com­fort­able with al­low­ing de­mand and sup­ply to de­ter­mine the value of the Nige­rian naira. Growth prospects will de­pend on how quickly un­sus­tain­able for­eign ex­change bot­tle­necks are re­solved. This year is likely to bring a cycli­cal re­cov­ery to sub-Sa­ha­ran African economies. But this will not mean a restora­tion of pre­vi­ously ro­bust growth rates.

Much un­cer­tainty sur­rounds the likely eco­nomic im­pact of a Don­ald Trump pres­i­dency in the US. In re­cent weeks, global eq­uity and com­mod­ity mar­kets have ral­lied in an­tic­i­pa­tion of more ex­pan­sion­ary fis­cal pol­icy and the pos­si­bil­ity of faster US eco­nomic growth. The US dol­lar has strength­ened against other cur­ren­cies, es­pe­cially those of emerg­ing mar­kets, which are seen as es­pe­cially vul­ner­a­ble to a po­ten­tial trade war.

Many worry about how the US will af­ford more in­fra­struc­ture spend­ing. Bond

Over the last two decades, Africa’s trade with emerg­ing mar­kets has grown rapidly, at the ex­pense of its trade with more de­vel­oped part­ners.

mar­kets have sold off (with prices fall­ing and bond yields ris­ing), re­flect­ing the con­cern that larger fis­cal deficits may be needed to en­able any spend­ing stim­u­lus.

Each of these fac­tors will have im­pli­ca­tions for sub-Sa­ha­ran African economies this year. Over the last two decades, Africa’s trade with emerg­ing mar­kets has grown rapidly, at the ex­pense of its trade with more de­vel­oped part­ners. A slow­down in global trade would be a neg­a­tive for trade-de­pen­dent emerg­ing mar­kets.


To counter this, African economies will have to re­dou­ble ef­forts to boost in­trare­gional trade. While un­likely to com­pen­sate for a global trade slow­down, it might mit­i­gate some of its more neg­a­tive ef­fects.

Plans for an African tri­par­tite free­trade area − en­com­pass­ing 26 economies from the Com­mon Mar­ket for Eastern and South­ern Africa, East African Com­mu­nity and South­ern African De­vel­op­ment Com­mu­nity − should get un­der way this year.

Poor in­fra­struc­ture links and weak trade com­ple­men­tar­i­ties ham­pered ear­lier trade ini­tia­tives.

How­ever, faced with the threat of new dis­rup­tions to ex­ist­ing trade pat­terns and sup­ply-chain in­te­gra­tion, it is even more im­por­tant that African economies start trad­ing more among them­selves.

In the years fol­low­ing the 2008-09 global fi­nan­cial cri­sis, African economies took ad­van­tage of cheaper fi­nanc­ing to is­sue record amounts of traded ex­ter­nal debt.

Many of these coun­tries are now only five or six years away from a large amount of this Eurobond debt ma­tur­ing.

Or­di­nar­ily, bor­row­ing coun­tries would be look­ing to re­fi­nance their ex­ist­ing debt, is­su­ing more long-term debt some time be­fore their ex­ist­ing debt is due to ma­ture.

But ris­ing US in­ter­est rates and higher bond yields may com­pli­cate this process as global in­vestors will likely de­mand even higher re­turns for in­vest­ing in sub­Sa­ha­ran African debt, which is per­ceived to be more risky.

Weak growth in re­cent years has im­pacted the health of the bank­ing sec­tor in dif­fer­ent sub-Sa­ha­ran African economies.

Weaker com­mod­ity prices and slug­gish fis­cal rev­enue re­sulted in many gov­ern­ments fall­ing be­hind on pay­ments to sup­pli­ers and con­trac­tors.

Pop­ulist poli­cies have also played a role in weak­en­ing the per­for­mance of the fi­nan­cial sec­tor.

In Kenya, the full im­pact of the adop­tion of loan rate caps and reg­u­lated loan-de­posit spreads, in­tro­duced last year, will only be seen this year or be­yond.

While Africa’s economies face more dif­fi­cult ex­ter­nal con­di­tions this year, many of the poli­cies that have con­trib­uted to weaker eco­nomic growth are home grown.

The good news is that av­er­age re­gional growth should re­cover this year. Razia Khan is Stan­dard Char­tered’s chief economist for Africa.

Pedes­tri­ans walk past a dis­play show­ing for­eign ex­change rate be­tween Ja­panese yen and US dol­lar in Tokyo yes­ter­day after US Pres­i­dent Don­ald Trump’s for­mal with­drawal from the Trans-Pa­cific Part­ner­ship. The for­eign ex­change mar­kets re­acted after Trump at­tacked Ja­panese car mak­ers.

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