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Africa should be prepared for headwinds from euro crisis

The World Bank, in its Global Economic Prospects January 2012 edition, has warned developing countries to be prepared for the tangible risk that an escalation in the euro area debt crisis could see the world slide into a slump on a par with that seen in in 2008/09.

Capital flows to developing countries declined by almost half in 2011 as compared with 2010, with Europe appearing to have already entered into a recession, and growth in several major developing countries (Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening.

As a result, and despite relatively strong activity in the United States and Japan, global growth and world trade have slowed sharply.

Despite the multiple shocks experienced by the global economy in 2011, the report notes that growth in sub-Saharan Africa continued relatively briskly in 2011, with GDP estimated to have expanded by 4.9%, slightly ahead of the 4.8% World Bank growth number for 2010.

This fell just shy of the pre-crisis average of 5% recorded between 2000 and 2008.

Overall, over a third of countries in the region attained growth rates of at least 6%, with another 40% of countries in the region growing at between 4% to 6%. Growth was driven mainly by domestic demand, with external demand also providing impetus, supported by the higher commodity prices.

In its medium term outlook for sub-Saharan Africa, the World Bank expects the underlying factors supporting growth dynamics to continue over the next several years.

However, considerable headwinds from slower growth in the global economy, lower commodity prices, heightened uncertainty in global financial markets, and monetary policy tightening in some countries, could dampen prospects.

Assuming a muddling through in the high income world, GDP in sub-Saharan Africa is estimated to expand by around 5.3% in 2012 and 5.6% in 2013. Stripping out regional giant South Africa, growth could be as high as 6.6% and 6.4% in 2012 and 2013 respectively.

The anticipated acceleration in 2012 reflects new oil and mineral capacity coming on stream and increased investments in these sectors in several countries.

Under the baseline scenario, in 2012, a third of countries in the region will grow by at least 6% (similar to 2011), another third will grow between 4.7% and 6% and the remaining third will grow by less than 4.7%.

In the event of a deterioration of conditions in Europe, however, growth in sub-Saharan Africa could decline by 1.6% compared with the current forecasts for 2012, with oil and metal prices falling by as much as 18%, and food prices by 4.5%. The fiscal impact of commodity price declines could be as high as 1.7% of regional GDP.

The outlook for sub-Saharan Africa remains relatively bullish then, on a macro level, and we expect companies to reflect this growth. However, risk appetite, or lack thereof if the eurozone remains in turmoil, may see this not reflected in the continent’s frontier equity markets, the larger ones of which have to a large extent become driven by foreign investor capital.

Imara is an investment banking and asset management group renowned for its knowledge of African markets.

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