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PREVIEW
Smaller countries outpace giants such as Nigeria and South Africa but progress on regional integration and industrialisation is lacking
Economic conditions in Africa this year might best be symbolised by the new railway boom, over a century after the failure of a colonial plan for a route between Cairo and Cape Town. Today's routes are less ambitious. Instead of colonial expansion, they are a belated attempt at integrating the continent's 54 national economies and fostering intra-continental trade.
The railways are usually built by Chinese engineering firms, whose costings and financing deals undercut all rivals for now. Yet China's economic slowdown and diminished appetite for African commodities is held up as a leading cause of lacklustre growth across Africa over the past two years.
That is why Foreign Minister Wang Yi has been touring Africa in the new year assuring governments of Beijing's continuing commitment to the continent in a period of growing nationalism and protectionism elsewhere. He's promising more railways. The latest on offer is a rehabilitation of the legendary Tanzania-Zambia line. The Tan-Zam (or Tazara) was legendary because it seemed to have no commercial logic. That has changed with Tanzania's recent faster economic growth, spurred by the exploitation of its gas and mineral reserves (AC Vol 58 No 1, The power and the glory).
Wang also breezed through Abuja, telling Nigerians about China's offer of a US$40 billion plan for more railways, roads, ports and power stations. To a recession-hit country, this offered some relief. For President Muhammadu Buhari's government, the main question is how quickly the finance can be tapped. Its budget this year has to bridge a financing gap of around $10 bn., despite better prospects for the economy thanks to a higher world oil price (AC Vol 58 No 1, Partisan politics runs riot).
As the United States and Europe turn in on themselves, the only other substantial economies targeting Africa are India, Japan and Russia. India, another great builder of railways, is hosting the African Development Bank (AfDB)'s annual meeting in May in Gujarat, the home province of the very business-minded Prime Minister Narendra Modi. His country is now Africa's fastest growing trading partner, even if its financial muscle is way behind China's. Now it's true to say that Africa's eastern seaboard looks to Asia – to China, India and Japan – for most of its trade and investment.
Asian markets
Ethiopia, which cultivates and sometimes juggles strong ties with Beijing, New Delhi and Tokyo, exemplifies the new Asia networks. It wants access to the mega-markets of Asia but it also wants them to invest in processing and manufacturing operations (AC Vol 57 No 21, Ruling party ploughs on). The new industrial park with shoe and textile factories just outside Addis Ababa may be tiny compared to China's manufacturing cities but it sets down a marker.
This week, Ethiopian Prime Minister Hailemariam Desalegn opened a new railway between the capital and Djibouti port. Djibouti's President Ismaïl Omar Guelleh beamed through the ceremony: he has wrung almost every ounce of diplomatic and commercial advantage out of his country's location and the region's geopolitics. Although Djibouti hosts the militaries of China, France, Japan, Germany, Russia, Saudi Arabia, and the USA, this tiny country also needs a big African friend (AC Vol 57 No 15, Saudi wants one too). Its neighbour Ethiopia, with 90 million people and one of the fastest growing economies in the region, fits the bill. The new railway, which will become the main exit route for landlocked Ethiopia's growing agricultural and manufactured exports, has cemented the relationship.
In a few months' time, well before August's general elections, Kenyan President Uhuru Kenyatta is due to open the new Nairobi-Mombasa railway. This is another Chinese project, as was the line between Nigeria's political capital, Abuja, and the sprawling northern city of Kaduna.
Many more such projects are needed, not just to connect cities and trading hubs in the longer term but to create desperately needed jobs in the short term. Africa's slower growth and falling employment levels are fuelling a socio-economic crisis in some of the world's fastest growing towns and cities. This year, most economists forecast a modest improvement in African growth rates but not a return to the commodity boom years of 2005-15 (see Charts).
The latest forecasts for Sub-Saharan Africa's growth in real gross domestic product in 2017 from the World Bank and International Monetary Fund (2.9% and 2.8% respectively) are edging up, after growth of approximately 1.5% in 2016 according to Bank figures. Yet, emerging and developing Asia's average expected 2017 GDP growth of 6.4% is expected to be at least twice as fast as Africa's – and most of the rest of the planet's. Although African economies are forecast to continue their gradual recovery in 2018, they still face five significant areas of risk (AC Vol 57 No 2, After the 'rising' – now reform and realism):
• China's economic rebalancing and slowdown;
• Volatile commodity prices;
• Stringent Western financial requirements for African borrowers;
• Problematic political and security climate;
• Extreme weather exacerbated by climate change.
More recent risks include the uncertain growth and policy outlook in Europe in the wake of the United Kingdom's vote to quit the European Union, widely known as 'Brexit'. London's Overseas Development Institute calculates that that vote could initially cost developing economies, many of them in Africa, some $350 million a year. A 15% depreciation in sterling has cut the value of remittances from Britain (hugely important for Africa's capital inflows) and cut the value of its aid budget.
Nor does the message for Africa from the new US government under Donald Trump, taking over on 20 January, sound more hopeful. The new team's economic policies could include currency competition with China, protectionism, a fiscal expansion and a massive domestic infrastructure programme, none of which look likely to encourage US companies to invest in Africa.
Falling international commodity prices, particularly oil, slowed many African economies last year. The four biggest economies – Nigeria and South Africa, trailed by Egypt and Algeria – all face pressure on their main commodity exports. With their more diversified economies and manufacturing sectors, South Africa and Egypt should be better placed to navigate sluggish commodity prices but those advantages will not be enough to lift South Africa's economy, held back by blockages on policy and damaging factionalism in the governing party (AC Vol 58 No 1, Power struggle goes nuclear).
Seeds of hope
This year's modest commodity price recoveries should help most of the smaller economies. Oil exporters lost revenue with average oil prices in 2016 at just over $40 a barrel. Africa's oil importers benefited commensurately, despite big inefficiencies in its refining and distribution sector. Nigeria and Angola are the continent's largest oil producers and are trying to manage the same fiscal pressures. President Buhari's first year in office saw oil revenue fall by over a third and the country also had to cope with a currency under attack from the markets, a manufacturing sector recession, worsening fiscal and trade balances and an overall economic contraction of around 1.5%, according to the IMF.
The signs are that there will be some improvement in 2017. The IMF and World Bank forecast that Nigeria will grow by about 1% this year, while an improvement will still drag down Africa's aggregate GDP growth and mean that Nigeria's GDP per capita falls again. Buhari's 2017 proposed budget assumption that Nigeria will produce an average of 2.2 million barrels per day looks unrealistic, being based on a sustainable resolution to the proliferation of militant attacks on rigs and pipelines in the Niger Delta.
Even the more optimistic predictions for Nigeria's growth this year, such as the 2.8% forecast by Standard Chartered Bank economist Razia Khan, are accompanied by concern about its current account deficit, foreign exchange policy and the risks to oil output. Citi economist David Cowan says that although Nigeria can manage with oil prices of $50 a barrel and could approach 2% GDP growth in 2017, its central bank will have to allow the currency, the naira, to fall further against the US dollar. Vice-President Yemi Osinbajo suggested a policy shift on 17 January, telling the Davos Forum in Switzerland that the government was determined to close the gap between the official and parallel exchange rates.
Angola's debt
Cowan is gloomier on growth and policymaking in Angola. It is holding general elections in August, also the beginning of the drawn out transition from the President of 38 years, José Eduardo dos Santos, to his successor. Meanwhile, Angola faces escalating debt service requirements which it has met in the past by selling forward its oil. Bankers and the IMF are also suggesting that Luanda should allow its exchange rate to adjust, downwards (AC Vol 58 No 1, The bad loans bite back).
Like Nigeria and Libya, Angola's growth outlook depends partly on the effectiveness of recent output agreements on boosting prices by the Organisation of the Oil Exporting Countries. The latest OPEC deal allowed Libya and Nigeria to boost production, in recognition of their own security problems (AC Vol 57 No 16, The scramble for the spoils).
South Africa's meagre forecast growth also affects its regional trading partners, including Angola, Mozambique, Zambia and Zimbabwe, all of which are already weakened by a combination of over-indebtedness and budgetary pressures. Infighting in the governing African National Congress is holding back economic policy reforms, especially those in the state-owned enterprises regarded as one of President Jacob Zuma's remaining fiefdoms. Although the World Bank and IMF peg South Africa's growth at or close to Nigerian levels, Standard Chartered expects it to grow at approximately half the rate of Nigeria. The Johannesburg-headquartered telecommunications company MTN Group is not alone among South African companies whose earnings and stock price partly depend on the spending power of Nigeria's consumers and the actions of its regulators.
Growth in Africa's third largest economy, Egypt, is forecast at close to 4% this year after it secured financial help from the IMF. It will have to contends with rising inflation after a swingeing devaluation agreed as part of its IMF programme. Domestic security threats could also affect new gas projects and hopes for more foreign investment (AC Vol 58 No 1, Elusive legitimacy).
New broom
With one of Africa's best records over the last three decades on political stability and pluralism, Ghana has a new government which aims to overcome its fiscal challenges and boost growth to over 7%. President Nana Addo Dankwa Akufo-Addo and the New Patriotic Party have a good relationship with neighbouring Côte d'Ivoire's President Alassane Dramane Ouattara, who was guest of honour at the swearing in ceremony in Accra on 7 January (AC Vol 58 No 1, New order tackles old debts).
Both countries await an international arbitration ruling on the disputed maritime border intersecting Ghana's Tweneboa-Enyenra-Ntomme (TEN) oil and gas fields. The Akufo-Addo-Ouattara axis makes a mutually beneficial agreement on the issue more likely. The IMF, World Bank and other economists expect Ivorian growth of around 8% this year, unless the instability, sparked by recent discontent in the military, escalate (see Feature).
As the World Bank notes, the world's largest cocoa producer, Côte d'Ivoire, is one of a group of fast growing agricultural exporters that should meet or exceed 6% growth this year. Others in the group include Ethiopia, Rwanda and Senegal: their growth levels will match Asia's faster growing economies.
Alongside Ethiopia, in East Africa Kenya and Tanzania are among the continent's best performing economies, growing on the back of higher agricultural exports, planned oil and gas production, and a more integrated regional market. Elsewhere, relatively low agricultural productivity is a concern. Although Africa has the world's largest expanse of uncultivated fertile land, its vulnerability to climate change and extreme weather necessitates a much more coordinated development strategy. Worst hit by drought this year could be Somalia, where the United Nations warns that over five million of its twelve million people face severe food shortages, on top of continuing conflict.
Africa's efforts to attract investment – in agriculture and manufacturing, and in major infrastructure and power projects – is its biggest medium-term priority. The constraints on such investment this year could include rising US interest rates, a continuation of the challenging 2016 for African bond issuers compared to other emerging markets, and banking sectors still largely unable to finance big projects without international partners.
The success of, and yield on, Nigeria's planned first-quarter Eurobond will be watched closely, as will its negotiations with China, India, the AfDB and the World Bank to fund its massive infrastructure spending plans. Meanwhile, the big corporate investors still have Africa on their radar screens although the strategy has changed from the commodity boom years of average growth rates of over 5% to a much more discriminatory approach, based on identifying the highest and most sustainable yields in an increasingly diverse economic landscape.
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