The African economy: What we learnt in 2014, and the still sexy outlook for 2015

South Africa is the proverbial millstone around sub-Saharan Africa's neck, and why Nigeria is growing fat from a non-oil diet.


THE year that was: 2014


Regional growth is expected to come in at 4.5% (5.6% if you exclude South Africa) when all the numbers are in, despite the threat of Ebola, conflicts, falling prices of commodity, and an unpredictable global environment. What we learnt from the World Bank’s new growth review and forecasts:

—Only China grew faster than Africa of all developing regions, demonstrating the continent’s much-appreciated resilience. This was despite demand from the Asian giant for sub-Saharan Africa’s commodities slowing down. However, there is a Catch-22: the regional economy is strongly resilient to external shocks, but highly vulnerable to domestic shocks, such as drought and conflict.

—The benefits of diversification were evident for Nigeria, which looks set to weather plunging oil prices. Angola could probably learn the lessons, as reduced production output added to the prices headache, forcing cuts in growth forecasts.

—South Africa is the proverbial millstone around sub-Saharan Africa’s neck: The region actually expanded a full percentage point faster if you exclude South Africa’s anaemic growth, fuelled by labour fallouts and energy shortfalls. Larger-than-expected current account deficits there also spooked almost everyone, leaving the rand hanging on for dear life against the dollar.

—Agriculture is still sexy: Record maize harvests in Zambia offset steep copper declines, and steadied Cote d’Ivoire from the knock-on effects of Ebola in the region, and helped even Nigeria and Kenya hold their heads high.

—African governments go to great lengths to court foreign investors. But Foreign Direct Investment was unreliable—indeed it declined, as did the more passive portfolio investment flows, and generally, all other flows. You just can’t rely on outsiders.

—Many countries turned to external financing to fund infrastructure, successfully raising money from bond markets, including Kenya and Senegal. Increased spending on this may hit fiscal positions, and can push up servicing costs as they are largely non concessional, but the benefits will soon become apparent. 

—Fiscal imbalances do not have to be redressed by cuts, cuts, cuts everywhere. In Burkina Faso this was achieved by better revenue collection, and reforming its tax policy (it came too late to save president Blaise Compaore’s job). There are options for those who run into angry civil servants who want more pay.

—The “bad” boys: While regional debt ratio remained moderate, some countries just did not get the memo: Ghana’s debt ratio rose to worrying 65% of its GDP, Niger’s leaped to 42%, and Mozambique and Senegal both breached the 50% mark.

—We can’t say it loudly enough—add value to exports and improve competitiveness, and you have a fighting chance: While the region’s current account deficits stabilised at 2.9% of GDP in 2014, falling prices for commodities threaten to bloat this further in 2015. Restricting imports is currently not an option when most are for infrastructure or private consumption.

—But it’s not all bad—declining commodity prices helped most countries in the region contain inflation, which remained in single digits despite an upward push in the first half of 2014. But not all—in Ghana and South Africa inflation rose above upper central bank limits, leading to a tightening of monetary policy, essentially slowing down economic activity. The results were there to see, including currency hits. The lesson? Balance and order is crucial.

—What happens out there matters around here: the low-interest international environment and subdued volatility helped sub-Saharan Africa’s capacity to issue bonds, as sovereign spreads—a measure of country risk— fell across the region. But you can’t win all the time: spreads in oil exporters rose sharply, reflecting concerns about low oil prices. Yes, we are looking at you, Nigeria, Gabon, Guinea and Angola.  

—For Ghana, the only way is up, because it’s been flat on its back: the West African country had a turbulent 2014, seeing its cedi currency depreciate nearly 40% against the dollar, as concerns swirled about loose fiscal stance and low external reserves. 


The year that is: 2015


Regional GDP growth is projected to be 4.6% in 2015, just off last year’s mark, and the third year it has improved. This would be a result of investment in infrastructure, more production in agriculture, and a booming services industry. What is expected to happen:

—Sometimes your best friends let you down: commodity prices and capital inflows are expected to provide less support, while economic activity will remain subdued, and FDI inflows flat. But don’t think it’s all gloom—the region will remain one of the fastest growing in the world, supported by infrastructure investment and agriculture expansion. Our growth solutions really lie within.

—Even sclerotic South Africa will pick up slowly, as labour relations improve, helping to right its current account deficit, while energy reforms are expected to take shape, helping boost industry and consign the ubiquitous “load shedding” phrase to the back burner, even as president Jacob Zuma continues to blame 21 years back - on apartheid.

—Even Angola and Nigeria will pick up on the act, as oil production rebounds in the former, and non-oil sectors expand in the latter. You will probably be surprised to learn that services account for 50% of Nigeria’s GDP. But weakening terms of trade will remain a bugbear for commodity exporters.

—Kenya almost wrote off its tourism industry as Al-Shabaab terror group attacks hit numbers, but visitors are seen rebounding, while agriculture will also pick some of the slack. Higher public investment will also boost growth in East Africa’s largest economy. In a reminder that one man’s meat is another man’s poison, the country will together with a horde of other net oil importers be happily counting their gains.

—Ebola need not conjure the nightmare economic scenario that saw forecasts of up to $32 billion in losses for the region. Effective containment would cause a moderate economic loss to the region—one estimate suggested no more than $3 billion. Success stories are not too far off, in Nigeria and Senegal. Risks also remain: creaking health infrastructure and disruption to cross-border trade links. 

—Remittances are seen rising 5% annually during 2015-2017, supporting private consumption and reducing imported inflation. This will also strengthen domestic economic demand. But it will not be all rosy, with current spending by governments expected to also increase.

—Conflict also remains a concern—South Sudan, where a $158 billion tag has been put by some—and Central African Republic. Add Nigeria’s north-east and we have a situation where budgets are redirected towards security as opposed to infrastructure, with a long-term negative outlook. 

—What matters out there affects us, even as we profess our love for domestic solutions: volatility in global markets which would raise risk premiums could hurt the region, especially South Africa which is intimately wired to outside markets. Also at risk would be those countries that have developed an appetite for external financing—Zambia, Ghana and Nigeria.

—We can’t escape from China: expectations are already low, but a worse-than-expected slowdown would further reduce demand for sub-Saharan Africa commodities, leaving countries such as Zambia, Mauritania, Tanzania and Mozambique waving a white flag and furiously winking in the direction of the Bretton Woods institutions.   

—Finally, the role of policy remains supreme. Widening deficits in the region have been linked to increased spending on current expenditures, rather than the “good” type—on infrastructure and other capital spending. Wage increases should be carefully managed in the public sector. On the plus side, many countries appear to have the space for “creative” monetary policy.


Related Content

Comments

blog comments powered by Disqus