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Vol 60 No 9

Published 3rd May 2019

Slowing down but borrowing more

International financial institutions are downgrading their growth prospects for the continent

As the International Monetary Fund and World Bank held their spring meetings in Washington DC last month, economists with both institutions presented an Africa growth picture which has worsened since the meetings in Bali, Indonesia, just six months ago. The IMF also downgraded its estimates of global growth, which are now expected to fall (compared with last year), particularly during the first half of 2019 (AC Vol 59 No 21, Struggling to keep pace).

Copyright © Africa Confidential 2019

The IMF had, in January, already reduced its October 2018 projection for real GDP growth in sub-Saharan Africa (SSA) in 2019 from 3.8% to 3.5%, which remains unchanged (AC Vol 60 No 3, Glitches in the growth). Yet the latest IMF figures confirm that since Bali, it has reduced 2019 growth predictions for over 20 economies in SSA and North Africa including: Algeria, Angola, Cameroon, Ethiopia, Kenya, Nigeria, South Africa, Tanzania, Tunisia, Zambia and Zimbabwe.

The World Bank slashed its projections of 2019 SSA growth from 3.3% in October and 3.4% in January to 2.8% now and, unlike the IMF, now says overall SSA growth decelerated between 2017 and 2018. The Bank, like the IMF and most economists, believes that, overall, the SSA economy will expand more quickly this year than last.

Like the IMF, the Bank has since October reduced its growth projections for SSA's three largest economies, South Africa, Angola and Nigeria. They remain a drag on the region's growth and are predicted, as a group, to register negative per-capita growth this year, in 2020, and in 2021.

Slipping giants
Taking a historical perspective, the Bank now ranks these three among several 'slipping' economies whose average economic performance from 2015-18 is clearly worse than during 1995-2008. It also lauds the performance of a number of 'improved' and 'established' SSA economies, exclusively from East and West Africa, both exceeding 5.4% average growth from 2015-18 and improved compared with 1995-2008.

The growth outlook for SSA and Africa, including North Africa, remains differentiated according to region. The African Development Bank (AfDB), ahead of its June-scheduled annual meeting in Malabo, Equatorial Guinea, maintains that East Africa will, as in 2018, outpace, in declining order of growth, North Africa, West Africa, Central Africa and Southern Africa this year and next.

Yet the AfDB's prediction for Africa's fastest growing region, at less than 6%, falls short of the IMF's predicted economic expansion in Emerging and Developing Asia even if faster, on average, than the group of 'ASEAN-5' economies (Indonesia, Malaysia, Philippines, Thailand, Vietnam). Convergence of average SSA living standards with more economically-developed regions appears improbable for now.

Differentiation also persists between non-resource and resource-intensive economies, with the former set to outpace the latter in both the short and medium term. IMF economists predict that 21 mostly diversified/non-resource intensive SSA economies should reach or exceed 5% growth this year, and that nine (including Côte d'Ivoire, Ethiopia, Ghana, Senegal and Uganda) could reach or exceed 6%.

Among resource-intensive economies, the Fund now predicts Africa's oil exporters will, during 2019 at least, narrow the growth gap with other resource-intensive countries. Commodity prices remain a key factor in these countries' growth, and for their government finances.

From an oil producer perspective, the significant fall in oil prices from around US$80/barrel back in October has fortunately been followed by a modest price recovery this year, backed for now by hopes of global demand growth and continued commitment by OPEC and (some) key non-OPEC producers to cap supply. The current outlook for non-oil commodity prices remains mostly weak, partly due to lower-than-hoped Chinese demand.

On the fiscal front, both Washington DC institutions predict an overall reduction in median SSA fiscal deficits this year, with most oil exporters –though not Nigeria – achieving fiscal surplus.

Current account deficits are expected to worsen this year on average, reducing foreign exchange reserves in turn. So, too, will price inflation, particularly in Africa's non-resource intensive economies.

Jobs deficit
Critics continue, with some justification, to bemoan the failure of Africa's policymakers to achieve, or set the stage for, sufficient per-capita growth to reduce inequality, and significantly boost job creation. IMF economists repeat their assertion that 20 million new jobs need to be created annually to accommodate SSA's rapidly expanding labour force, an unrealistic target should SSA's medium-term growth 'plateau' as the IMF expects given the economic policy status quo – at 3.75% in the medium term.

Despite debt reductions in some oil exporters, debt service and debt sustainability remains a concern in a number of economies. Sixteen SSA economies are still at high risk of debt distress, or currently in debt distress, according to the IMF. Current IMF hopes that average debt/GDP levels will decline in oil exporter and non-resource intensive countries depends on these countries following IMF recommendations, or at least matching 'baseline' Fund scenarios.

Moreover, both the Fund and Bank highlight the shift this decade in SSA countries' debt away from concessional and Paris Club bilateral debt, and the additional risks (including currency, rollover, and increased complexity of future debt restructurings) faced by several countries.

Fund warning
The Fund, along with other sceptics, warns of the risk of reversal of the improved – compared with much of 2018 – financing environment, currently reflected in the reduced borrowing 'spreads' for frontier and emerging market borrowers that has encouraged SSA Eurobond borrowings during the first quarter of 2019, including an oversubscribed US$3 billion Ghana Eurobond, shortly before the country exited its IMF 'extended credit facility' programme.

Another Eurobond borrower, Nigeria, still continues to spend the clear majority of its federal government revenues on interest payments.  The IMF again warns that, in the event of shocks, including to interest rates, revenues, growth and exchange rates, interest payments could significantly exceed 100% of these revenues.

Nigeria's economic policies are unlikely to change significantly in the short term following the re-election of President Muhammadu Buhari in February, even with likely ministerial changes and the anticipated exit of Central Bank of Nigeria governor Godwin Emefiele. Hopes persist that, in South Africa, the continent's second-largest economy, economic reforms could accelerate following the scheduled May elections if, as expected, President Cyril Ramaphosa secures his first full term.

Some market analysts are more sanguine on the risks attached to sovereign debt, and associated rollover risk, than the Washington DC institutions (AC Vol 59 No 10, Sounding the alarms on debt). Even so, they still warn that Zambia's debt woes could worsen significantly in the near term, as its government struggles to present a coherent fiscal plan and if it fails to agree an IMF deal to boost its finances (See Feature, Treasury in the red).

Other analysts warn specifically of the growing level of bank financing to some governments and corporates – on which there is often less transparency and understanding. Fast-growing Kenya is one country which has recently been negotiating with bank lenders over its expensive syndicated loans.

Aside from potential debt struggles, Africa's economies remain vulnerable, like the world economy, to a number of risks. The IMF estimates, for example, that the combined impact of a deterioration in financing conditions, commodity prices, increased US trade policy-related uncertainty and trade tensions, and slower China growth could conceivably reduce SSA growth by 2% this year – with commodity exporters the most affected. Other risks to African growth remain: banking sector fragility, the economic impact of insecurity and conflicts, and adverse climate conditions.

As climate change protests attract international attention, climate shocks have already impacted Africa's economy this year, including Cyclone Idai, which has already Zimbabwe's short-term economic prospects, and caused a humanitarian crisis in Mozambique.

Despite reduction in African growth projections, and persistent downside risks, other developments are seized upon by Africa optimists. In particular, hopes have been raised of an economic boost from the African Continental Free Trade Area, now ratified by over 20 African economies albeit not, for example, Angola and Nigeria.


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