Strong US dollar. Low oil and commodity prices. Slowing Chinese growth.
These are the global economic realities that will continue to shape African markets in 2016. How we made it in Africa speaks to a number of economists about their outlook this year for three of sub-Saharan Africa’s major economies.
Nigeria – currency troubles
Last year was tough for Nigeria, and not only because it felt the effects of a collapsed oil price. According to Edward George, Ecobank’s head of research, the uncertainty surrounding the Nigerian national election towards the end of March 2015 caused a slowdown in economic activity – both leading up to the election, as well as the months after as the country waited for the new president, Muhammadu Buhari, to appoint his cabinet.
“We do expect a bit of a pick-up this year, but Nigerians are grappling with very big problems.”
Nigeria’s 2016 budget, revealed in December, was calculated with Brent crude – which contributes the largest share of the country’s foreign exchange reserves – estimated at a price of US$38 per barrel, greatly reduced from last year’s benchmark of $53 per barrel. However, this week Brent crude fell to below $28.
“There are some really difficult decisions to make in terms of public spending and trying to control foreign exchange reserves. And the biggest challenge for them this year is really the currency,” continues George.
Last week the Central Bank of Nigeria announced it has halted US dollar sales to foreign exchange operators. The naira hit lows of close to 300 to the dollar on the black market, around a 50% difference to the official central bank rate of near 200 to the dollar. And economists suspect there will be a devaluation in the near future.
Despite these struggles, many remain optimistic about the country’s outlook, citing a relatively diversified economy, low level of debt to GDP, and stronger political leadership as reasons.
“Nigeria is not growing in per capita terms – it’s true, it did not in 2015. But the oil price has halved so you can understand why. The more positive way of looking at it is that this is an economy that’s still growing, that still provides opportunity to foreign investors, that is led by a president who is determined to reduce corruption in a country that unfortunately has a known reputation for it… and a president that seems more capable of reducing the ethnic tensions that have existed in Nigeria,” notes Renaissance Capital’s global chief economist, Charles Robertson.
“So you have an improving security situation, improving anti-corruption policies, and a country still growing [around] 3%, even when its primary export has just halved in price. It would be unwise to write-off Nigeria.”
Anna Rosenberg, head of Frontier Strategy Group’s sub-Saharan Africa Research practice, agrees. Her firm recently ranked all sub-Saharan African countries in terms of their resilience to external shocks – with Nigeria scoring quite high.
“So while its main economic trajectory in 2016 is going to be tough, I think that at the end Nigeria is going to get out of it fine, and relatively strengthened,” comments Rosenberg.
Kenya – growth remains robust
While the Kenyan shilling has also fallen to the dollar, economists have a relatively optimistic outlook for the country, especially in relation to many of its African peers.
“We estimate Kenya managed a real GDP growth of 6.5% last year and we think this will continue to pick up over the next two to three years. We are forecasting 6.8% this year,” highlights Edward.
One of the country’s major strengths is that it’s an oil importer. “So the government is in fact saving quite a lot of money from the low price of fuel, which it can invest in expanding infrastructure,” says Rosenberg.
However, she notes this lower oil price has not been fully passed down to the consumer, with the cost at the pumps staying relatively unchanged. On the other hand, Kenyans are already experiencing the effects of rising food prices – influenced by the global El Niño weather pattern that has resulted in drought across much of the region.
“So consumers are currently under pressure,” continues Rosenberg. “But when you look at Kenya I think it is important to see that government spending is going to go up and is going to facilitate infrastructure and public services – and that will benefit consumers once it trickles down a year or a few months along the line.”
According to Robertson, the country’s key economic risks stem from twin deficits. “The current account deficit may be around 7-8% of GDP in 2015 – that is big. And the budget deficit is also pretty significant. So those are the two risky areas.
“I think the government is about to unveil changes to the budget, in a supplementary budget for this current fiscal year, in the next few weeks – which will headline a reduction in the budget deficit and support that further improvement in the current account.”
South Africa – falling investor confidence a key concern
“I think South Africa is increasingly becoming a less attractive destination I’m afraid, and at the moment we don’t see any signs in the economy that this may change any time soon,” says Rosenberg.
South Africa seems one of the worst hit by global economic trends, partly because it is more integrated into the global economy. The rand hit record lows to the dollar this month, and has lost around 30% of value in the last six months. The fall in global prices of key exports, such as iron ore and coal, have also helped place the mining industry in deep trouble.
In addition, the country is suffering from internal troubles which are intensifying the situation. Slow growth, power shortages, labour unrest, drought, inflation, coupled with credit rating downgrades and political uncertainty – as seen with President Jacob Zuma’s unexpected finance minister reshuffle in December – are all affecting investor confidence.
“If global capital has no confidence in your country, you have got a problem,” notes Martyn Davies, managing director of emerging markets and Africa for Deloitte.
“I think in South Africa this year we need structural reform above all else, particularly being more capital-friendly environments created by government… and one that creates a more certain, clear and consistent message around creating an environment for investor confidence.”
In November the South African Reserve Bank (SARB) hiked its benchmark repo rate (for the second time in 2015) by 25 basis points to 6.25%. This was partly in anticipation of the expected US Fed rate hike in December, which was already placing pressure on the rand, and Davies says there will likely be further increases by SARB in 2016.
On the plus side, Robertson argues that the rand is “insanely cheap”, which could boost tourism and attract investors to buy “super cheap” assets in South Africa.
“What we have got now is a currency that is cheaper than it has been in 20 years and two standard deviations away from fair value, which is a geeky maths way of saying this is very rare, unlikely, and it’s oversold.
“So what is going to change because of this extremely weak currency? Everyone is going to go on holiday to South Africa because the currency is so cheap. I was in Kenya last week and people were worrying that the Kenyan safari is going to be suffering because the South African safari is cheaper.”