This article is an excerpt of the recently released EY Attractiveness Report Africa.
Africa is poised for a multi-speed recovery path, with significant country and regional cluster variances.
Africa, along with the rest of the world, was significantly impacted by the Covid-19 pandemic in 2020 and witnessed one of its worst economic recessions in 50 years, heightened by weak healthcare systems and infrastructure. Overall GDP contracted by 2.4% in 2020, less than the 3.6% contraction in global GDP, 6.7% in the Eurozone and 4.3% in the Americas. Few countries were able to avoid the pandemic’s impact. Across Africa, East Africa was most robust, with Tanzania and Ethiopia growing fastest in 2020. Southern Africa was greatly affected, with South Africa registering the highest number of Covid-19 cases in 2020, pushing the economy into deep recession.
The outlook for 2021 looks mixed, with government recovery measures varying by country. We believe that private sector involvement, slowly recovering trade, rising commodity and crude prices, rebounding tourism and strong agricultural output will determine Africa’s recovery prospects. Africa is projected to grow by 4.6% in 2021, then averaging 4% up to 2025. Côte d’Ivoire, Morocco and Kenya are expected to rebound more strongly in 2021. But mounting debt, high unemployment, slow vaccination rollouts, political unrest in certain regions, lack of basic infrastructure and rising poverty levels pose risks to this outlook.
East Africa avoided significant pandemic impact
East Africa remained resilient, continuing its trajectory as the fastest-growing region in Africa in 2020, capitalising on its success of the last two decades. With most countries having experienced GDP contraction in 2020, owing to Covid-19, the East region’s major economies grew by 2.3% on average, with Kenya seeing a slight GDP contraction for the first time in two decades. Although GDP growth in Ethiopia and Tanzania slowed in 2020, it remained in positive territory.
East Africa’s GDP should pick up in 2021. Kenya’s growth is expected to rebound to 5%, supported by the Economic Recovery Strategy that has been implemented and a strong recovery in the service sector. Kenya may also benefit from an unprecedented free trade deal with the US, which is currently under negotiation. A new stable government and rebound in manufacturing will drive Tanzania’s growth in 2021 to 4.5%, while Ethiopia’s growth is projected to decline to 2.2% in 2021 as it struggles with high unemployment and political unrest in Tigray. Both Ethiopia and Kenya recorded some of the highest Covid-19 numbers across Africa. The current low vaccination rates, (only 1.2% of the population is fully vaccinated in Kenya) pose further risk to the outlook. In addition, rising public debt, with high debt distress risk in both Kenya and Ethiopia, could slow the growth rebound. Kenya’s debt rose to an estimated 69% of GDP at the end of 2020, which is considered high by emerging market standards.
Although North Africa was hurt by Covid-19, its vaccination rollout should support recovery
North Africa was one of the worst hit by the pandemic, with Morocco registering the second highest Covid-19 cases in Africa. Egypt’s economy proved somewhat resilient, recording a growth of 1.5% in 2020. But Covid-19 disrupted governments’ fiscal consolidation plans as external debt rose a sharp 15% in 2020, to $129 billion, and will rise further in 2021. Gross government debt reached 95% of GDP. By contrast, Morocco saw a sharp contraction of 7.1% in 2020 – its first recession in over two decades – impacted by the dual shock of the pandemic and severe drought.
GDP growth in Egypt is expected to rebound to 4.1% in 2021 on account of strong capital expenditure and reviving exports. Government measures to vaccinate employees in the hospitality sector will boost tourism revenues and offset the slowdown in the non-oil private sector. Morocco’s GDP is projected to record a strong 5.8% recovery in 2021, supported by a rebound in agricultural output, a successful vaccination rollout, and higher automotive parts and phosphate exports. Morocco is at the forefront of Africa in getting the Covid-19 vaccination administered, with more than 27% of its population now fully vaccinated.
West Africa’s recovery will benefit from a rebound in global trade
Growth across West Africa was affected by sharp declines in global trade, lower commodity prices and muted capital flows. The region’s largest economies – Ghana and Nigeria – both slowed significantly in 2020. Nigeria’s GDP contracted by 1.8%, while Ghana was slightly more resilient, with growth of 0.3%, driven by the agricultural sector. Nigeria was impacted by falling crude prices and oil exports, which constitute 80% of its exports (this is not the first time that the country has been hurt by global oil markets). The pandemic took a toll on poverty as unemployment rose (projected to reach 32% in 2021). Nigeria continued to suffer from acute shortages of foreign exchange due to its exchange rate pegging policy, impeding investment as sourcing foreign inputs prove difficult. Ghana’s gross government debt also spiked by 15 percentage points in 2020 to 76.3% of GDP – deemed high for emerging markets.
However, Ghana’s growth outlook remains positive, supported by a recovery in the construction and manufacturing sectors, improved business confidence and favourable cocoa prices. The country’s Covid-19 Alleviation and Revitalisation of Enterprise Support programme will boost GDP growth, projected at 4.8% in 2021. To overcome the fiscal deficit of 11.1% of GDP in 2020, Ghana will borrow $5 billion from the capital markets in 2021, which will further increase its debt to over 80% of GDP. Nigeria should also recover in 2021 with expected growth of 3.2%, with new orders surging in May 2021 and a recovery in oil demand. Robust growth in oil sector activity in the medium term will also support the country’s growth.
Southern Africa will only gradually recover from recession
Growth in the region is expected to rebound over the medium term, after it was severely impacted by the Covid-19 pandemic in 2020. South Africa recorded the highest number of cases and fell into a deep recession that saw its GDP shrink by 7% – the steepest fall in over a century. Mozambique’s GDP contracted by 1.3% in 2020 due to supply chain disruptions. Mozambique was one of the six African countries in debt distress in 2020, with debt mounting to 120% of GDP.
Recovery across the region is conditional on an accelerated vaccine rollout and continued focus on fiscal consolidation. South Africa’s economy saw a stronger 1H 2021 with a pickup in the industrial sector, particularly in mining and manufacturing. Its GDP is projected to grow by 4.8% in 2021, supported by higher commodity prices and a stronger currency. However, the fourth Covid-19 wave, slow vaccination rates (only 23.1% of the population is currently fully vaccinated) and electricity outages pose significant risks to growth. The high unemployment rate (projected to reach 33% in 1Q 2022) and rising public debt (projected to jump to an unprecedented 94% of GDP by 2025 from 71% in 2020) are key risks to growth. Of greater concern, recent unrest ignited by the former President’s incarceration, resulting in widescale looting across two provinces, has led to a downward revision of growth estimates to –3.5%. Mozambique’s GDP is also projected to recover slowly to 1% in 2021, before rising to 3.6% in 2022 and up to 7% by 2025.
Central Africa struggles with falling crude oil production
Angola – the largest economy in Central Africa – has been in recession since 2016, due to its over-reliance on oil and exports. In 2020, the economy shrank further, by 5.2%, due to Covid-19-related restrictions, a slump in oil prices and falling oil output. These events have offset the macroeconomic reforms, such as the implementation of VAT, a fiscal responsibility law and liberalisation of exchange rates, introduced over the previous years. Falling oil prices have resulted in a weaker currency and lower export earnings, raising its debt servicing costs. Government debt increased rapidly to 123% of GDP in 2020 – the highest in Africa.
In 2021, Angola is expected to turn the corner and record growth of 1%. However, the recovery is expected to be slow, as crude oil production in the country declined further in 1H 2021 and failed to meet OPEC targets. Inflationary pressures are expected to peak in 2021 (with CPI rising to 23.5%) due to higher taxes and supply chain disruptions caused by the pandemic, impacting consumer real income and employment levels. Reviving crude oil prices will boost government expenditure over the medium term. The government has expedited its Social Protection Strengthening Program, Kwenda, during Covid-19 to support 1.6 million low-income households.
French-speaking sub-Saharan Africa should rebound strongly
The region – with Côte d’Ivoire and Senegal being the main investment destinations – saw a sharp slowdown in growth in 2020. Côte d’Ivoire avoided an economic contraction, with GDP up 1.2%, owing to strong agricultural output and fiscal stimulus during the pandemic. The country also received $1 billion from the IMF for economic growth and recovery. Senegal, on the other hand, contracted by 0.7% due to a slowdown in exports and tourist numbers. Although government debt spiked in 2020, debt levels remain moderate. Côte d’Ivoire financed its budget deficit (5.9% of GDP in 2020) via bond markets due to weaker fiscal revenues. The vaccination rollout in French-speaking sub-Saharan Africa, albeit slow, is ahead of other regions in Africa, with 5.5% of Senegal’s population currently fully vaccinated.
With the implementation of the National Development Plan 2021-25, strong agricultural output, and efforts to maintain a stable political regime, Côte d’Ivoire should rebound sharply, with GDP growing 5.9% in 2021 and 7.1% in 2022. Senegal has implemented a similar long-term recovery plan – Emerging Senegal Plan – which will gradually drive the country’s GDP growth to a projected 9.3% in 2023, as it is further stimulated by private consumption and investment.
The road to recovery will be difficult, but a few key catalysts can be harnessed to accelerate growth
1. A young and growing population
Africa has the youngest population in the world, with a median age of less than 20 years, and 70% of the population is under the age of 30. This sizable proportion of youth, coupled with the availability of vast natural resources can be a significant catalyst for innovation and economic growth. But to benefit from this young population, will require investment in tertiary education with a particular focus on growing digital skills.
2. The new free trade agreement: African Continental Free Trade Area (AfCFTA)
The AfCFTA – with the potential to be the largest free trade area in the world, with 53 participating members – came into effect on 1 January 2021 and presents a potential income gain for Africa of $450 billion by 2035. The deal aims to bring 30 million people out of poverty, raise the incomes of 68 million individuals, cut red tape, and simplify customs and tariffs.
But to achieve these goals, political will and buy-in across the continent is required. AfCFTA has been a long time in the making, but uptake and implementation remain patchy. To date, only a handful of countries have cut tariffs in line with the accord, and many are driving localisation strategies that aim to promote local priority industries. It remains to be seen how and whether these competing goals can be achieved simultaneously.
3. Debt sustainability
In the wake of the Covid-19 pandemic, most African countries announced fiscal stimulus investment ranging from 0.02% of GDP in Sudan to 10.4% of GDP in South Africa. The African Development Bank (AfDB) estimates that Africa needs additional financing of $154 billion in 2020-21 to rebound properly from the crisis. This financing gap has pushed six African countries into debt distress, and many more are at risk of following suit. The average debt-to-GDP ratio for countries in Africa is projected to rise above 70% in the next few years from 60% in 2019, increasing the risks of downgrades and defaults. In the short to medium term, it is important to contain rising debt-to-GDP levels to stabilise or, even better, reduce debt servicing costs, leaving more funds to drive poverty alleviation programmes.