The author, Richard Li, is a Singapore-based partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. This article was produced for the NTU-SBF Centre for African Studies, a trilateral platform for government, business and academia to promote knowledge and expertise on Africa, established by Nanyang Technological University and the Singapore Business Federation.
In its World Economic Outlook released in early October 2017, the International Monetary Fund (IMF) seems to be more optimistic about the global economy, but there are still many risks that can stall the recovery. It estimates that global growth in 2017 will be 3.6%, and forecasts a 3.7% rate for 2018 and 2019. The emerging market and developing economies will be the main growth engine, with an estimated growth of 4.6% in 2017, accelerating to 4.9% and 5% in 2018 and 2019 respectively.
As for sub-Saharan Africa, for the first time since 2000, its growth underperformed the global growth in 2016, growing barely at 1.4%, while the world economy grew at 3.2%. In fact, the IMF forecasts that growth in the region will continue underperforming until 2022. The main reason is that the biggest African economies – Nigeria and South Africa – have been struggling over the last few years and are estimated to grow by less than a percentage point in 2017. While many other African countries are growing by leaps and bounds, the overall outlook of the African continent will depend significantly on what is happening in Nigeria and South Africa.
Nigeria badly affected by oil prices
According to IMF data about gross domestic product (GDP) at constant prices, from 2000 until 2014, Nigeria has been growing steadily by at least 4% to a high of 11.3% in 2010. Even when the advanced economies went into recession during the global financial crisis, contracting by 3.4% in 2009, it grew by 8.4%. Unfortunately, Nigeria’s growth fell off the cliff, dropping to 2.7% in 2015 and contracting by 1.6% in 2016. After five quarters of contraction, Nigeria finally managed to get out of recession in the second quarter of 2017.
One of the main reasons for this decline is that Nigeria is highly dependent on oil, representing more than 90% of its overall exports. While oil prices were above US$100 a few years ago, it averaged about $50 in 2015 and $40 in 2016. Currently, oil prices are hovering above $50, but with increasing shale oil and gas from the US, prices are not expected to reach $100 in the short and medium term. Consequently, this is greatly impacting Nigeria’s foreign exchange revenues from oil, and the negative effect on its economy will continue to be felt in the coming years.
Moreover, the management of the state oil revenues has drawn some red flags and have sapped business confidence. In 2013, former Nigerian Central Bank Governor Lamido Sanusi informed former President Goodluck Jonathan that $50bn from the state-owned Nigerian National Petroleum Corporation (NNPC) had not been received by the government. And again, in early 2014, Governor Sanusi claimed that $20bn from the NNPC was unaccounted for. This allegation eventually led to his dismissal.
The drastic drop in oil prices has led to the massive decline in Nigeria’s current account balance, so much so that it incurred a major deficit of $15.8bn in 2015, from a positive $19bn in 2013. This has led to a dire lack of US dollars in Nigeria for business activities and trade, thus impacting the overall economy.
In addition, compared with the US dollar, the local Nigerian currency, the naira, depreciated by about 140%, from around 160 naira in 2013 to around 380 naira at the moment. Since 2014, all the major credit rating agencies – S&P Global Ratings, Moody’s and Fitch Ratings – have all downgraded Nigeria’s rating by a notch. In addition, while maintaining its current credit rating, Fitch Ratings has even put Nigeria on a negative outlook at the beginning of 2017.
In 2016, Nigeria went into recession, pushing its unemployment rate to 13.4%, while inflation climbed to 15.7%. At the beginning of 2017, President Mohammadu Buhari and his government launched their economic reform and growth plan for 2020. However, in its latest economic review, the IMF estimates that Nigeria will barely grow by 0.8% in 2017, improving slightly to 1.9% in 2018. But the long-term economic growth and outlook for Nigeria will not go back to its glory days over the decade since 2000.
Credit ratings downgraded in South Africa
Unlike Nigeria with the decline of oil prices, the difficult situation in South Africa is more structural and related to the political environment with President Jacob Zuma and his government. These issues have affected the overall economic environment within the country. From 2000 until 2008, South Africa grew at around 3% to a high of 5.6% in 2006. During that time, it averaged about 4.2% growth. However, from 2009 until 2016, growth has been steadily declining, reaching 1.7%, 1.3% and 0.3% in 2014, 2015 and 2016 respectively. Over these last eight years, South Africa averaged about 1.6% growth. For 2017, the IMF estimates that the South African economy will barely grow at 0.7%.
Since Zuma took office in 2009, the finance minister has been changed five times, with Malusi Gigaba currently in charge. All these changes, coupled with the lack of continuity, when the previous finance ministers like Pravin Gordhan were fired and replaced, have greatly undermined the business confidence in South Africa. Hence, the credit rating agencies have steadily downgraded their ratings to indicate the increasing risks in South Africa.
S&P Global Ratings and Fitch Ratings downgraded South Africa from investment grade in 2009 to junk category with a BB+ rating, which is still currently the case. While Moody’s still maintains its Baa3 rating – a notch above junk status – with its negative outlook on South Africa, it is only a matter of time that Moody’s will eventually downgrade to junk status as well. As it is, Moody’s announced on Monday 30 October that the budget statement by Gigaba was credit negative, fueling speculation that it would also downgrade to junk status. There is also speculation that both Moody’s and Fitch would downgrade the rand to junk status.
The immediate consequence is that South Africa may be removed from the global bond indices, as well as the investment grade bond funds. This would lead to an increase in not only the cost of debt for South Africa, but would also lead to global institutional investors, looking for investment grade opportunities, reducing their exposure to South Africa, thereby reducing foreign investment in the country.
This was clearly demonstrated when Finance Minister Gigaba wanted to raise more debt from the financial markets and the bond yield accelerated upward. The South African 10-year bond yield rose by more than 100 basis points to more than 9.4% from around 8.4% in September 2017. The fall into the junk status, coupled with the need for more debt funding, will potentially push the bond yield higher in the future. As the credit default risks rise, investors will seek higher returns for their risk exposure.
Increasing risks in South Africa
The economic outlook has greatly affected the South African rand. From around R7.90 to the greenback at the beginning of Zuma’s mandate in 2009, it has depreciated about 78.5% to about R14.10 currently. From R15.90 against the US dollar at the beginning of 2016, it seems that the rand is appreciating. This is only because of the inflow from the global high-yield investors. However, should risks in South Africa rise further and other better investing opportunities arise elsewhere in the world, these investors may exit the market as fast as they came.
Compared to the US 10-year treasury note with a yield of around 2.4% and the German 10-year bond yield of about 0.38%, the South African debt looks very attractive. Nonetheless, with the Federal Reserve on a rate hike path and the European Central Bank doing tapering, the rand risks depreciating more in the future. All these will further increase the currency volatility and investment risks in South Africa.
Adding on to all these economic woes, the mismanagement of the state-owned enterprises, (SOEs) leading to their poor financial status, will require a huge financial bailout from the government. This will put pressure on the finance ministry to either raise more debt or do an asset sale.
Prior to the Zuma administration, the unemployment rate was at its lowest at 22.5% in 2008. With all the economic plans failing to create more jobs, the jobless rate has risen to a high of 26.7% in 2016. The IMF estimates that it will continue on rising to 27.6% in 2017 and 28.3% in 2018. As a matter of fact, it has already risen to 27.7% in 2017. Such high rates may lead to social unrest and dissatisfaction with the ruling African National Congress (ANC). This is shown by the steady decline of its popular vote in the past general elections, dropping from 69.7% in 2004 to 65.9% and 62.2% in 2009 and 2014 respectively. Overall, the political uncertainties are exacerbating the economic and social risks in South Africa. As a consequence, the economic outlook will remain cloudy.
Future outlook for Nigeria and South Africa
Unfortunately, the economic outlook by IMF for Nigeria and South Africa does not look flattering and there are no easy solutions to rectify the current situation. With the slight recovery in oil prices, Nigeria will benefit. However, Nigeria will still barely grow in the coming years. Similarly, for South Africa, having recovered from a short technical recession, economic growth will be minimal in the short term. Both countries face major challenges to restructure their respective economies.
Owing to the lacklustre performance of Nigeria and South Africa, the overall economic growth of sub-Saharan Africa will be dragged down in the coming years. Being the biggest economies, Nigeria and South Africa will definitely affect the overall perception of potential investors towards Africa. As a result, even those fast-growing African countries with great potential will be indirectly affected.
Hence, for the Africa Rising narrative to continue, the political leaders in both Nigeria and South Africa need to bite the bullet and rise up to the challenge. But by the looks of what is currently happening, it seems that politics will overwrite economic common sense. And the political leaders will only focus on the short-term and take the easiest way out.
Richard Li is a Singapore-based Partner with Steel Advisory Partners, a management consulting firm that serves clients across industries. Having spent his working career in strategy consulting, he worked with various global clients and covers themes such as Corporate Strategy, Transformation, Digital Innovation and Risk Management. He can be contacted via the Steel Advisory Partners site. This article was specifically written for the NTU-SBF Centre for African Studies.