Gauging sub-Sahara African economic growth

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 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.

Concern

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 sub-Saharan 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. — Online.