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Vol 59 No 2

Published 26th January 2018

Two steps forward…

Earnings may increase but sluggish growth looms for the continent's big players and the danger of a debt crunch is increasing

Economies across Africa will grow haltingly, by about 3% on average in 2018 and 3.5% in 2019, according to the latest World Bank forecasts. And the International Monetary Fund warns that in extreme cases such as Nigeria, servicing the debt is consuming more than 60% of government revenues. The latest forecasts from the World Bank, IMF and African Development Bank differ on the precise numbers for 2018 but broadly agree that export commodity prices will strengthen and inflation will slow.

AFRICA ECONOMIC FORECASTS – COUNTRY BY COUNTRY • Chart Copyright © Africa Confidential 2018

The World Bank reckons that per capita GDP growth, which has been shrinking for the past two years, should turn positive again. But this growth will not cut poverty significantly or create enough jobs to keep pace with new entrants to the labour market. Changing this will require more productive investment, both from governments and from international companies whose enthusiasm has diminished significantly. That is due in part to the 2007-08 financial crisis and its aftermath, and growing competition for funds. Consequently, finance and planning ministers will face four pressure points in 2018:

• Commodity export revenues will grow slowly at best;

• Sharp growth in public indebtedness limits borrowing options;

• Tighter monetary policies in the United States, Europe and Asia will further raise the cost of finance in Africa;

• Sharp cuts looming in concessional finance and other sources of aid.

Africa's financing crisis has been a long-term drag on growth. Domestic savings average 15% of GDP, among the lowest in the world. According to Nigeria's former Finance Minister Ngozi Okonjo-Iweala, Nancy Birdsall of the Centre for Global Development, and the IMF, investment rates will average 21% over the next five years. That implies a financing gap of at least 6% at current rates of economic expansion. But if Africa is to follow the development path taken by South-East Asia, its economies would require investment rates of roughly 30%. That leaves an annual funding gap of about US$275 billion.

AFRICA'S TRADE, BUDGET AND DEBT • Chart Copyright © Africa Confidential 2018

Moving towards that level of financing requires far better management of natural resource revenues and the blocking of illicit flows, Okonjo-Iweala says, but above all there will have to be a comprehensive plan to raise tax revenues. That has started, with several countries, such as Ghana, beefing up their revenue authorities. Eliminating loopholes at the South African Revenue Service will be a priority for the new government.

Tax revenues average 15% of GDP across Africa, against 24% in OECD countries. But in resource-rich nations such as Angola, Chad and Nigeria, tax revenues from non-oil sectors amount to less than 5% of GDP. Africa's hoped-for locomotive economies will have to load up on fuel. Slowish growth in 2018 – 2.5% for Nigeria, 1.6% for Angola, 1.1% for South Africa – will drag down the continental average. More importantly, it will hold back smaller neighbouring countries.

Cyril Ramaphosa's election as president of the African National Congress in December and anticipation that he will take Jacob Zuma's place as state president within the next few months have caused renewed optimism about South Africa. Investment funds are now tipping local companies as well as South African projects in the region. Goldman Sachs goes further, arguing that the country could be the most dynamic emerging market this year (see South Africa Feature, Big change, no fanfare).

For Nigeria and Angola, as in other oil-producing countries, pressure on the exchange rate will continue, a hangover from the stagflation of 2016 that followed the oil-price crash. Symptoms to monitor are the gap between official and parallel-market rates and shortfalls in supply of forex. In both countries, companies argue that the partial exchange-rate adjustments are inadequate.

At the official level, there is some ambivalence. One faction wants to wait out the oil market in the hope that higher export prices will negate the need for rate adjustment. Another wants a still lower oil price to force adjustment and diversification.

A senior official in Abuja told Africa Confidential that he 'would be happy with prices at $30 a barrel'. He attributed the huge growth in rice and sugar production in northern Nigeria to a new reality: 'that we can no longer afford to live on imported foodstuffs'.

That official is in a minority in the government as the All Progressives Congress gears up for the 2019 elections and prepares to shovel out money for road, rail, bridge, port and power station projects that will, the party hopes, win over voters again. 

With Angola's election behind it and an unexpectedly decisive João Lourenço installed as President, its prospects have improved. This has started with better management of the state oil company and plugging of many leakages through which hundreds of millions of dollars flowed. But the reforms this year will be tough, politically and financially.

Growth in North Africa remains sluggish with a couple of exceptions: the microstate of Djibouti (7% in 2018), which in practical terms is an economic annex of Ethiopia, and Egypt. Buoyed by funds from the Gulf linked to a jumbo loan from the IMF, Egypt will grow by 5% this year, the best performance by a big economy in the region. Many investors reckon that President Abdel Fattah el Sisi's authoritarian style will allow him to push through tough reforms, even if the military's grip on the treasury through state subsidies is unlikely to slip.

Several countries have taken a bet that borrowing heavily to finance power and transport mega-projects will speed up diversification and cut dependence on exports of primary commodities. That is proving risky because the dollar will probably strengthen, which will push up debt servicing costs.

Divested loans
Moreover, many loans have been diverted into current spending rather than productive investment. Sometimes they have financed blatantly fraudulent procurement, as in Mozambique in 2015-16 and more recently in Zambia (AC Vol 58 No 25, Stumbling into a debt crisis).

Two areas of strong growth stand out. The first is West Africa. The World Bank says that, of the economies forecast to grow fastest, Ghana (8.3%), Senegal (6.9%) and Côte d'Ivoire (7.2%) are heading in the right direction, investing in power stations, roads and agro-industrial projects for local and export markets. Burkina Faso, Guinea and Mali are catching up.

But Ghana's Finance Minister, Ken Ofori-Atta, is yet to extricate the country from perilously high debt – still around 68% of GDP – inherited from the previous government. With the government searching for ways to finance its popular free secondary education programme, all state spending is coming under heavier scrutiny.

On the other side of the continent, Ethiopia remains a star performer, for now (growth should reach 8.2% in 2018), but Prime Minister Hailemariam Desalegn faces a sea of troubles at home with rising opposition activism in Oromia and Ogaden. The regional picture for Addis Ababa is also problematic. Rivalries with Egypt over the effect on the Nile of the Grand Ethiopian Renaissance Dam are getting deeper (AC Vol 57 No 14, Dam fine).

In Somalia, Al Shabaab militants, too, are keeping up their terror against the Mogadishu government, with forays into other countries in the sub-region. At the same time, several of the countries with troops in the Amisom peacekeeping force – Burundi, Kenya, Sierra Leone and Uganda – are threatening to withdraw, which would make regional security more precarious.

Insecurity aside, the six-month confrontation over Kenya's elections has affected growth and policy-making badly, according to companies and officials. Politics in Uganda and Tanzania, which are building an oil pipeline from Lake Victoria to the Indian Ocean, is equally problematic for these economies.

The opposition in Uganda appears to be gathering steam again, raising questions about President Yoweri Museveni's plans to secure yet another term in power and doubts about erratic policy-making in the oil and gas sector (AC Vol 55 No 23, Loans for oil). In Tanzania, President John Magufuli has used populist tactics infused with resource nationalism to drive a harder bargain with international companies such as Barrick Gold (AC Vol 58 No 13, Risks for all in mining row), but there are doubts whether this would work elsewhere.

Tanzanians are hard pressed and Magufuli's anti-corruption campaign seems a vote-winner. He has strengthened his grip on the governing Chama Cha Mapinduzi and is pushing back the opposition, at times with brute force. Yet such methods are not popular with the new companies he was trying to attract and critics fear that the approach could start to backfire, slowing the economy.

Certainly, the strongest warnings for 2018 from the international financial institutions relate to debt. Africa is more indebted today than it has been since 2005, near the start of the commodity super-cycle and at the tail end of several years of internationally backed debt reduction schemes.

Debt ratios up
The median debt-to-GDP ratio rose to 48% in 2016 from just 34% in 2013, according to the IMF's Abebe Aemro Selassie. In its most recent Economic Outlook, published in November last year, the IMF calculates the ratio for 2017 will be 49.6%. Several banks and ratings agencies forecast it will exceed 50% this year.

The World Bank says that such is the increase in sub-Saharan African government debt in 2006-08 and 2015-16 that most countries would have to generate another year's worth of tax income to make the larger repayments. The AfDB breaks the figures down by region: Southern Africa (over 48% external debt to GDP); East Africa (over 41%); Central Africa (over 30%); but North and West Africa on average well below 25%.

IMF debt figures point to differences between various oil and gas economies. Mozambique's debt-to-GDP ratio rose to 90% after it was found to have concealed $2 bn. in loans, but Nigeria, which has launched a borrowing programme, has a debt-to-GDP ratio of 21%. Nigeria's biggest problem is managing repayments in the short term; servicing costs will rise further after taking more than 60% of state revenues last year. Debt ratios in South Africa and Angola will be much higher (53% and 65%, respectively) but foreign payments to both countries will face closer scrutiny under their new leaders.

Going beyond the standard caution, the Bank and the Fund are turning up their warnings on debt. The IMF advises specifically that an increase in borrowing to levels last seen in 2014-16 would not be sustainable. Oil economies would be hardest hit, unless there was a turnaround in the market.

Some veteran bankers are predicting yet more trouble: another sovereign default after Mozambique in 2017. For now, most eyes are on Zambia, whose combination of helter-skelter borrowing and bad procurement seems sure to trigger a crisis within months.

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