Africa’s economic headwinds are subsiding

Luanda, Angola

This article is an excerpt from Quantum Global’s Q2 2017: Africa Investment Review.

Economic activity in sub-Saharan Africa is regaining momentum. Growth is anticipated to rebound to about 2.9% in 2017, following a sluggish 1.5% in 2016, lifted up by a modest recovery in commodity prices, an improving global economy supporting external demand, and appropriate policy interventions.

The headwinds experienced last year are subsiding, while policy reforms are beginning to bear fruits, as heralded by improving leading economic indicators. Oil prices are expected to average US$55 per barrel in 2017, while other commodity prices are likely to firm modestly. Growth rates will be variegated across countries in the region. Excluding Nigeria and South Africa, sub-Saharan Africa growth will average above 4% in 2017, led by oil-importing countries with 4.2% growth, while oil-exporting countries are projected to grow at 0.9%. The region’s growth rate is anticipated to strengthen further to 3.6% in 2018.

Large economies

The region’s largest economies (Angola, Nigeria and South Africa), which dragged down sub-Saharan African growth in 2016, seem to have bottomed out and are on a tentative recovery path. The Nigerian economy, which contracted by 1.5% in 2016, is anticipated to exit recession and expand at 1% in 2017, buoyed by improving oil prices, an increase in oil production, large infrastructure spending (about $30bn), and a gradual rebalancing of the foreign exchange market. The official and parallel exchange rates are showing signs of convergence, while inflation is decelerating (17.8% in February). Market confidence is holding up, with a recent $1bn Eurobond issue oversubscribed by a factor of eight and at a favourable coupon rate of 8%.

South Africa’s prospects are gradually strengthening, with growth expected at 0.8% in 2017, after an anaemic 0.3% in 2016, helped by firming commodity prices. However, political and institutional uncertainties, a lacklustre labour market and a recent credit rating downgrade will weaken investor confidence and weigh on the outlook. Prospects for Angola are improving, with growth expected at 1.3% in 2017, supported by improving oil prices, increasing oil production (6% to 1.7mb/d in Q1, 2017), and expanded public investment. The improving foreign exchange market and the narrowing of the gap between the official and parallel exchange rates has helped to reduce inflation to 37% in March 2017, from a peak of 42% in December. However, heavier debt service obligations and uncertainties surrounding the forthcoming elections could hold back the recovery momentum.

Frontier market and low-income economies

Some frontier market economies (Côte d’Ivoire, Ghana, Kenya and Senegal) and low-income countries (Ethiopia, Rwanda and Tanzania) will continue to grow at robust paces well above 5% in 2017, sustained by strong infrastructure investments, improved business environments, buoyant private consumption and stable currencies.

Côte d’Ivoire’s economy will expand at rates above 7%, buoyed by a strong infrastructure programme, a dynamic private sector and extensive international financial support. Kenya is projected to grow at 5.8% in 2017, supported by increased public investment and strong consumption. However, the decline in credit growth (to 6% in 2016 from 20% in 2015) following the capping of interest rates and political uncertainties surrounding elections in August could hamper the growth impetus. The outlook for Ghana is upbeat, with growth of 5.8% anticipated in 2017, stimulated by increased oil production from the new oil fields, and by policy reforms and monetary policy easing. Improving foreign exchange markets are helping to stabilise exchange rates and to reduce inflationary pressures.

The region’s inflation rate is expected to edge down below 10% in 2017. This will help to boost consumption and allow central banks to loosen monetary policies. Fiscal deficits and current accounts are expected to narrow to 4.5% and 3.8%, respectively, in 2017, as external conditions improve.

However, public debt ratios are likely to remain elevated, with more than 70% of sub-Saharan African countries expected to have debt levels above the region’s average of 40% of GDP in 2017, raising concerns about debt sustainability. Firming commodity prices and easing conditions are helping to boost FDI, which is set to rise to 2.1% of GDP in 2017 from 1.5% in 2016. On balance, macroeconomic conditions are improving in the sub-Saharan Africa region.

Risks to monitor

The positive outlook for sub-Saharan Africa is subject to some downside risks. Uncertainty about the Brexit process and its impacts is likely to dampen trade, investment and development assistance in 2017. The rise of protectionism in the US raises questions about trade policies and development assistance in the region. For example, there are concerns about the Africa Growth and Opportunity Act (AGOA) trade agreement, the Power Africa initiative and the President’s Emergency Plan for AIDS Relief (PEPFAR). The indication that the Trump administration might cut global aid to developing countries by 30% could considerably hurt sub-Saharan Africa’s smaller and more fragile economies, which have been relying heavily on foreign aid. The prospects and pace of further interest rate hikes in the US following a 0.25% hike in March, could also reignite risk aversion and tighten global financial conditions, further raising the cost of financing in the region.

Risks on French elections have turned to the upside. Macron’s victory has brought some relief to African countries, as French policies on Africa are likely to continue. Macron has pledged to increase development assistance to 0.7% of French GDP, and continue to foster political stability and fight Islamist militancy in the region. France will likely continue to maintain foreign exchange reserves of 14 francophone African economies, and maximise on trade and business opportunities in Africa, while allowing normal migration flows. However, Macron will need to garner legislative majority in the forthcoming parliamentary elections in June to succeed in implementing reforms under his economic programme.

China’s housing market is showing signs of cooling off, which could raise fears of a hard landing. The disorderly unwinding of the housing market could ignite volatility in financial markets and scuttle the recovery in commodity prices, hampering Africa’s growth momentum.

Several elections in the region (Angola, DRC, Kenya, Liberia, Rwanda, Senegal and Sierra Leone) in 2017 need to be monitored closely. In the DRC, tensions remain as infighting within different political parties is slowing the implementation of the agreement to form a transitional government. Elections in Kenya, Liberia and Sierra Leone could possibly delay plans to consolidate fiscal positions that would facilitate the needed economic adjustments. Rising political tension and calls for President Zuma to resign in South Africa following the controversial replacements of the respected former Finance Minister Pravin Gordhan, has prompted a credit downgrade. This has further weakened the rand and dampened investor confidence.

In summary, the region’s growth is rebounding, but remains variegated. Good policies – especially those that foster economic diversification – remain critical for sustaining higher growth rates.

Dr Seedwell Hove is a senior economist at Quantum Global Research Lab.