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Vol 57 No 2

Published 22nd January 2016


After the 'rising' – now reform and realism

The new year started with a host of commodity price crashes, runs on currencies and warnings about mounting debts

Bankers' bets, based on glossy analytical reports about Africa's lion economies and a doubling of its gross domestic product by 2025, were discreetly torn up last year. In their place are downbeat prognoses about Africa's position in a much harsher global economic and political climate (AC Vol 56 No 1, New ideas, harder times and a few surprises).

Chart © Africa Confidential 2016

For the irrepressible optimists, this year's hard times will concentrate minds. Take Nigeria, where President Muhammadu Buhari's government says it is determined to combat the falling oil prices with an expansionist or Keynesian programme of capital investment and to restructure the economy to end its chronic dependence on oil exports. It would certainly help if Nigeria's top industrialist, Aliko Dangote, has as much success with his oil refining and petrochemical businesses as he has with cement production. Thanks to Dangote's astute financial calculations and political diplomacy, he has made Nigeria a net exporter of cement. He plans to do the same with petroleum products and petrochemicals, if he can hold his nerve. The value of his investments have already fallen by over 20% on the Nigerian Stock Exchange.

Business people and oppositionists chant similar mantras about restructuring in South Africa and Angola, and there is more interest in the dirigiste model of economic restructuring developed by Ethiopia, Morocco and Rwanda, and the more market-led developments in Kenya.

World Bank economists reckon that the downward trajectory started in 2014, when average GDP growth in Africa fell to 4.6% and its latest report notes a further slowing to 3.4%. For this year, the Bank offers a modicum of optimism with a forecast rise to 4.2%.*

Five developments fuel the gloomier outlook for Africa. Firstly, China's economic rebalancing and slowdown. By some measures, China is already the world's biggest economy and for Africa, it is certainly the most influential one by dint of the more than US$200 billion annual trade account with the continent's 55 economies. As agile as any Western spin doctors, Chinese officials went to great lengths at last December's Forum for China-Africa Cooperation to promote a new package of $60 bn. worth of investment and loans to Africa, as they explained some of the consequences of their country's economic restructuring. As trade between China and Africa slows in the short term, Beijing's officials made much of the prospects for cooperation on big industrial projects on the continent. That, though, is very much a medium-term prospect.

Secondly, the commodity price crash cannot all be blamed on China and it is not blighting all Africa's exports. For example, export earnings from cocoa, coffee and tea look set to hold up in both the increasingly lucrative specialist markets and in the traditional bulk purchase markets. In other areas, the commodity news is undeniably grim: the millions of extra barrels of oil on the international market seem destined to push down prices further, short of a spectacular political shock such as the collapse of the monarchy in Saudi Arabia. With United States' and European sanctions lifted against Venezuela, Iran and perhaps Russia, the prospects are for yet more and cheaper oil.

Mining companies are laying off workers across Africa: at least 50,000 people in South Africa and tens of thousands in Congo-Kinshasa and Zambia. Here, the forecast demand for copper, cobalt and iron ore is more complicated because of the long lead-time to develop a mine. More optimistic analysts argue that India – now the fastest growing big economy in Asia – could replace China as the most important metals buyer for Africa. Again, that is more of a medium-term prospect. Just as international oil companies are cancelling exploration and production operations in Africa and elsewhere, big mining projects, such as the Simandou iron ore project in Guinea, will struggle to raise finance (AC Vol 56 No 22, Condé consolidates as opposition regroups).

Thirdly, the Western-dominated financial sector will impose tougher terms on African borrowers and raising finance for big capital projects will get harder still. With a stronger dollar and higher domestic interest rates, more cautious financiers are returning to the US markets. Not only will African countries have to pay higher interest rates on fresh sovereign bond issues, the costs of servicing existing debts are likely to rise sharply. Already, the vulture funds of Wall Street are eagerly surveying the market for bargains.

Fourthly, the political and security climate is scaring off Africa's many short-term investors and fair-weather friends. More liquid equity and money markets such as South Africa's have lost billions in value over the past year, partly because of self-inflicted wounds but also due to growing corporate nervousness about the reality behind those Panglossian reports about Africa's fast growing middle classes. More robust responses from governments and institutions such as the African Development Bank to counter to some of the nonsensical swings in international sentiment on Africa could help. So could much better data and statistics, as well as an African ratings agency that can evaluate political risk with inside knowledge, rather than long-range speculative assessments.

Although Africa's security crises are most serious in the Horn, the Sahel and Libya, few foreign assessments make those distinctions. Accordingly, the tourism and service industries have been heavily hit by the wave of Islamist attacks over the past couple of years and the growing sense of threat across the region. In places such as Kenya's Coast Province, this reinforces a cycle of economic and political insecurity when terror attacks close down tourist facilities, weakening local economies and exacerbating grievances.

Fifthly, the extreme weather – longer droughts and heavier flooding – associated with climate change is doing increasingly serious damage to agriculture in Africa as well as worsening social conditions more generally. Despite the celebrations around the climate change treaty in Paris in December, there were few guarantees of new money to enable African economies to adapt to global warming. However, some of the bolder sustainable energy projects in Africa – such as solar power in West Africa and the 'green energy corridor' in East Africa – point the way to new economic strategies which could give the commodity-dependent countries a much needed boost.

How are African governments likely to react to the tougher conditions? Some politically vulnerable governments are planning more social protection schemes while others are looking for ways to pull in more foreign investment. We hear that Nigeria's new Trade and Investment Minister, Okechukwu Enelamah, wants to cut through the country's business bureaucracy (AC Vol 56 No 23, Buhari resets the clock). Currently, Nigeria is 169th out of 189 countries surveyed by the World Bank's 'Ease of Doing Business' ratings.

Central bankers, too, will look much harder at the viability of the commercial banking sectors as bad debts grow, in some cases due to mounting payment arrears on state contracts. State treasuries will face their own problems in coping with rising foreign debt burdens, made heavier by a stronger dollar and rising interest rates. The IMF warns of a decline in the competitiveness of Africa's economies and poor performance of its manufacturers, hit by unreliable power, poor transport links and again, bureaucracy.

The IMF believes inadequate infrastructure, despite falling transport cost, high wages and over-valued exchange rates are partly to blame. It adds that most governments lack the financial buffers that they had in 2009 to weather that financial crisis. Then, substantial reserves and modest deficits allowed governments to introduce projects and programmes – counter-cyclical spending – to protect the poorest. This time, those buffers don't exist.

The IMF also reckons that oil producers such as Angola and Nigeria will have to make 'sharp fiscal adjustments' and will see growth levels sharply down (see Chart). It also predicts growth of more than 6% for several countries, such as Kenya, Ethiopia, Tanzania, Mozambique, Rwanda, Côte d'Ivoire, Congo-Kinshasa and Chad

* Global Economic Prospects, Spillovers and Weak Growth, the World Bank, Washington, 2016.



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