Reality check for investors in African growth story
SOUTH of the Sahara, economies have flourished over the past decade, earning the continent the name “Africa Rising”. But growing pains are clouding the short-term outlook for a region that has become a magnet for foreign investors.
On the surface, all looks well. Regional growth is expected to rise to 6% this year from 5% in 2013, the International Monetary Fund estimates, making it second only to developing Asia in pace of expansion. Inflation remains under control, having stabilised last year at 5.5%, compared with 47.4% 20 years ago.
But hitherto rising African stars, including Ghana, Nigeria, Uganda and Zambia, are experiencing economic, social or political troubles — or a combination of all three.
Add to this the turbulence in emerging markets as the US Federal Reserve tapers its monetary stimulus, and a Chinese slowdown that has triggered a decline in commodity prices, and the investment com- munity has to be asking itself if it got carried away.
“With global monetary conditions set to tighten over the coming years, investors are now paying closer attention to the region’s vulnerabilities,” said Shilan Shah, Africa economist at Capital Economics consultants. “Some countries may now be required to tighten policy in line with rising global interest rates, leading to a period of softer growth.”
Sub-Saharan Africa was one of the big beneficiaries of the search for yield. This enabled the continent as a whole to issue a record $10-billion in US dollar-denominated sovereign bonds in 2013, up from $1-billion a decade earlier.
Although investors have held onto this dollar-denominated debt, capital inflows to local currency debt markets have slowed. This year, as US tapering started, the Nigerian naira, Ghanaian cedi and Zambian kwacha hit record lows. South Africa’s central bank raised rates to bolster the falling rand. Zambia and Ghana also tightened monetary policy to counter rising inflation and depreciating currencies. As capital flows slowed, economic policy flaws emerged.
Commodities are a big revenue source, but the price of copper, for example, has fallen to less than $6 500/ton, down more than a third from a 2011 peak of $10 190.
Willard Manungo, secretary of finance in Zimbabwe, which mines platinum and diamonds, warned: “If commodities prices come down [further], we will have a problem.”
As Bank of Zambia official Kanguya Mayondi pointed out, capital inflows have “played an important role in financing” current accounts. Indeed, the aggregated current-account deficit of the region is expected to hit 4.1% of GDP this year, up from 1.6% a decade ago. The number masks bigger individual deficits, such as in Ghana and Uganda, forecast to reach 10.7% and 13.9% respectively.
Meanwhile, normalisation of interest rates globally will force governments and companies to pay higher rates to attract foreign investment.
The complex trends are challeng- ing policymakers to tackle lingering problems if they want to move forward from being designated risky frontier markets.
Nigeria is a good example: its economic growth remains robust, and the IMF has forecast that it will accelerate to 7.3% this year, up from 6.4% in 2013. But the recent suspension of Lamido Sanusi, the central bank governor, after he exposed an alleged multibillion-dollar hole in the oil account has unsettled investors.
South African finance minister Pravin Gordhan remains optimistic about the outlook for the continent, thanks to its billion-strong pool of consumers. He concedes, however: “You are going to have dips in the curve every now and again.”
Short-term flows into debt markets might be slowing, but equity investors are still pouring money into regional exchanges, although many are worried about sky-high valuations for the most popular banking and consumer goods companies.
Perhaps more telling is that longterm investment by companies continues apace. The UN estimates the region attracted a record of $42billion in foreign direct investment last year, up 10% from 2012.
The immediate future is brighter for some. Investors are bullish about Kenya, Ethiopia, Ivory Coast, Tanzania, Mozambique, Botswana and Angola.
There is no single-speed rapidgrowth trajectory for “Africa Rising”. As David Cowan, Africa economist at Citibank, said: “From time to time, we are going to have a bump in the road.” — © The Financial Times, London