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Vol 60 No 3

Published 8th February 2019

Glitches in the growth

A pan-African market will boost the region but governments are lagging behind on policies to create jobs and diversify the economies

When African Union leaders meet in Addis Ababa to ratify the continent's free trade area on 9-10 February, it will be against a backdrop of gloomy forecasts about global economic trends. In part, that environment has added urgency for the regional economic communities to speed up policy convergence between members states and encourage investors into these expanded markets.

Copyright © Africa Confidential 2019

For African policy-makers three international developments stand out this year. First, United States-China trade tensions, which could still escalate into longer-term disruption, are slowing down trade and pushing down commodity prices. But some advocates of de-globalisation, with some desperation, argue that it might encourage more Chinese and US investment in other regions including Africa.

Second, Britain's planned exit from the European Union was seen by many in Africa as boosting trade opportunities, but the political disarray in London over the negotiations raised new problems in the short term. Whatever the outcome, Africa will remain the EU's third biggest trading partner after the US and China.

The third aspect is Africa's access to trade and investment, which will be constrained in the wake of many financial institutions closing down credit lines in the wake of the tougher Basel banking regulations. This will favour new entrants, the so-called medium powers such as Turkey, Brazil and India, seeking to step up trade and investment in Africa as well as the use of more non-orthodox financing mechanisms such as barter and countertrade.

All the major financial institutions forecast a faster growth tempo across Africa this year but not enough to boost per-capita incomes by more than just over 1% on average, or create enough jobs to cut current unemployment levels, let alone meet demand from school-leavers.

Projections down
In January, the International Monetary Fund (IMF) downgraded its 2019 sub-Saharan Africa growth projections from 3.8% to 3.5%. The African Development Bank projects SSA 2019 growth of 3.7%, with 4% for Africa overall including the North African region expanding at 4.4%.

The World Bank now projects that SSA should achieve 3.4% this year, marginally above the Bank's forecasts at the time of October's IMF/World Bank annual meeting in Indonesia. These figures remain constrained by slower-than-hoped expansion in the major SSA economies, Nigeria and South Africa.

The AfDB says in its latest African Economic Outlook that Africa's investment/GDP ratio remains below two-thirds that of emerging and developing Asia. And it estimates that Africa's infrastructure financing gap might exceed US$100 billion a year. Growth in unemployment remains a major concern with most economies still dominated by informal employment and trying to adapt to new technology.

The AfDB projects that Africa will, overall, fall substantially short of the employment-stabilising growth that it needs to absorb the jobless over the next two years. This chimes with previous IMF warnings that Africa needs to create 20 million jobs a year, double current levels (AC Vol 59 No 21, Struggling to keep pace).

Changing those trends will require some new policy thinking as the plethora of planned jobs and education summits suggests. But there are other economic policy questions dominating government agendas in several countries. These include:

Fast-rising debt service obligations and reductions in debt refinancing ability;  

Falls in commodity prices;

Worsening illicit capital outflows;

Slower tempo of economic and fiscal reforms;

Political and security risks in countries like Congo-Kinshasa, Sudan and Zimbabwe;

Extreme weather, whether short-term events or longer-term concerns over climate change.

Debt question
The IMF warned last year that Africa's debt-refinancing risks could be substantial in 2019-20. The World Bank echoes this, forecasting at least $5bn in international debt redemptions in SSA economies this year and over $8bn next year. These figures do not include domestic debt or substantial interest payments on both external and domestic debt.

Although the Mozambican and Zambian economies, for example, have stalled due to a combination of corruption and misreporting of debt and other financial obligations, these national problems have not morphed into a wider systemic debt crisis across the region such as in the structural adjustment era in the 1990s.

Claims by US officials that debt problems within China's domestic economy and slower growth could encourage China to be more stringent with African borrowers have been downplayed by some economists.

Carlos Lopes, the former Executive Secretary of the UN's Economic Commission for Africa who now leads the AU policy team negotiating with the EU, argues that as China's investments in Africa barely exceed 5% of its global investment portfolio it has no need or interest in downgrading its Africa operations.

The debt question, says Lopes, should be seen in a context of financial options for Africa as historical sources of trade and investment have dried up or become too restrictive. The expected ratification of the African Continental Free Trade Agreement (ACFTA) should pull in more trade and investment, he predicts, initially at the level of regional groups such as the East African Community and Economic Community of West African States which are due to speed up trade, fiscal and monetary policy convergence.

Standard Chartered's Africa chief economist Razia Khan claims China will act like any other commercial creditor if repayment arrears build up on sovereign debt or project lending in Africa. For several reasons, she says, China's major infrastructure projects in Africa have offered terms more favourable than standard commercial ones.

Referring to a precedent when Sri Lanka defaulted on the Hambantota port development loan from China and had to transfer ownership of the facility, plus 15,000 acres of land, to China on a 99-year-lease, some bankers suggest that Kenya could face similar pressure over the Mombasa port should it default on its substantial loans from China Exim Bank. But Khan says her understanding is that China Exim will be repaid out of port revenues.

Concerns persist over Zambia's worsening debt service crisis and its need to reschedule its commitments to China (AC Vol 60 No 2, Debt and discontent). Government negotiations are continuing with some suggesting that offers of equity in local resources and enterprises to Chinese companies could be part of a deal this year. Some Chinese enterprises are already contracted to directly receive company revenues should debt repayments stall.

Undaunted by critics who claim that its growth statistics have been manipulated to downplay debt levels, Kenya is set to continue its high borrowing campaign with plans to issue Eurobonds worth over $2bn this year. Its financial managers say market conditions still favour such a strategy, given current trends in international interest rates. Some bankers cite Nigeria's $2.8bn Eurobond last November which was heavily oversubscribed, in support of Kenya's plans.

Current AfDB calculations foresee little impact on African growth this year from global trade contraction but see a heavier impact in the medium and longer term if governments don't respond with effective policies.

Low prices remain a major source of uncertainty for Africa's oil producers, even as the latest OPEC/non-OPEC output arrangement appears to have allowed a partial 2019 oil price recovery even if not to October 2018 levels in the region of $80 per barrel.

While, for example, a further price downturn would further undermine Nigeria's proposed, pre-elections, 2019 budget, oil importers would, as before, benefit. Standard Chartered forecasts Nigerian 2019 growth approaching 3%, assuming robust oil prices and the absence of a political crisis after national elections this month. The IMF, World Bank and AfDB are less optimistic, forecasting 2%, 2.2% and 2.3% respectively.

Pace of reform
The pace of policy change and restructuring state-owned enterprises in South Africa after national elections in May will be critical for the country's growth and job creation. Citi's chief Africa economist David Cowan remains hopeful but uncertain whether the capable economic team of President Cyril Ramaphosa will be able to implement key reforms in the second half of the year.

Much attention will focus on the planned partition of Eskom, the debt-ridden state-owned electricity corporation into three entities – generation, distribution and transmission – with an increasing role for commercial companies but stopping short of the sort of radical privatisation tried in Nigeria.

Ramaphosa was expected to refer to the rebuilding of Eskom in his state of the nation address on 7 February in Cape Town but is unlikely to spell out details of any private sector involvement before the elections in May. We hear that the Eskom restructuring will follow the broad outlines of a plan first mooted over a decade ago but will see a much greater role for renewable energy and off-grid power.

Although officials in South Africa forecast growth of around 2%, many institutions, including the IMF and World Bank, think that growth will stay under 1.5% this year. Even with oil-producer Angola predicted to recover from a disappointing, negative-growth 2018, during President João Lourenço's second full year in power, its projected 2.9% growth (World Bank) is modest in per capita terms.

This means that out of Africa's five biggest economies, only Egypt will see growth rates of over 5%, boosted by mega loans from the IMF, World Bank and the Gulf states.

Citi's Cowan argues that domestic fiscal policy will be more important for the economic prospects of South Africa and other African economies than international events and risks.

The fiscal position of several African economies is set to improve according to the World Bank. It forecasts that, on average (median), SSA oil exporting economies will move into a fiscal surplus this year.

Regional, political and resource differences mean that economic performance across Africa will be highly differentiated this year in terms of growth, fiscal deficit, debt levels and current account balances, as the data indicates (see chart). The fastest growing economies this year, as in 2018, will be in East and West Africa, with the other three regions of the continent lagging in percentage terms.

The big political and economic story this year will be Ethiopia and whether its barnstorming Prime Minister Abiy Ahmed can maintain the momentum of reform as he devolves power from the highly controlled state system (see Feature). There will be substantial investor interest if he presses ahead with selling equity in the state-owned telecommunications and power companies. There has also been a wave of textile and clothing companies setting up in Ethiopia, producing both for the European and the African markets.

According to Zemedeneh Negatu, chairman of the US-based Fairfax Africa Fund, the rapprochement between Ethiopia and Eritrea will boost growth and investment in both countries. Textile companies in Ethiopia will send their exports via Massawa port in Eritrea instead of Djibouti, which takes another four days in transit. This has already encouraged a couple of Italian companies to expand operations in Ethiopia, he adds.

The World Bank predicts that Ethiopia could exceed 8% growth this year, and that three economies should exceed 7% this year: Rwanda, Côte d'Ivoire and Ghana. And it forecasts that Tanzania, Senegal, Niger, Benin, Burkina Faso and Uganda will grow at least at 6% this year.

Continuing slow growth in Nigeria will drag down average growth in West Africa just behind that of North Africa, boosted by Egypt's strategic relations with Gulf states, Algeria's state-led investment plans and Morocco's manufacturing and processing expansion.

This means East Africa, led by Ethiopia and Kenya, is the fastest-growing region on the continent, with its strong ties to China, India and Japan. Political ructions in Congo-Kinshasa in the wake of the disputed election as well as several unresolved questions over mining projects and revenues will hold back Central Africa's growth.

Slow growth in Angola and South Africa  as well as the rumbling economic crises in Zambia and Zimbabwe are holding back the Southern region. A post-election economic revamp could lift South Africa's economy with beneficial effects for neighbouring states.

With Angola and South Africa set on policy reforms, the crisis in Zimbabwe's political economy will be the region's most pressing issue. Despite South Africa's good offices, it will offer little financial support to Harare, but it will encourage regional institutions such as the AfDB and the Cairo-based Afreximbank to step up backing for President Emmerson Mnangagwa's government.


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