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MANY TALK OF this being China’s century, yet over the past 15 years Sub-Saharan Africa has run the People’s Republic close. To some, this region, once impoverished and war-torn, now one of the most optimistic places around, can even claim to be the economic success story of the new millennium. Gross domestic product across the region has grown by an average of more than 5% a year since 2000, according to data from the World Bank, buoyed by better governance, the spread of democratic principles and economic reforms.
Democracy has gone hand in hand with deregulation and market liberalization, opening once-closed markets to unfettered enterprise. In 1989, just three regional economies were considered even partly democratic. By 2014, according to the US non-governmental organization Freedom House, that number had risen to 22. And the direction remains positive. In 2012, the reformist Augustin Ponyo was elected premier of the Democratic Republic of the Congo (DRC); on the final day of March 2015, Nigerian president Goodluck Jonathan made way for Muhammadu Buhari in the country’s first democratic transition of power.
Tricky year ahead
Yet the data suggest that this is likely to be a tricky year for Sub-Saharan Africa. Individual states from Kenya to Ethiopia, and DRC to Sierra Leone, are on track to grow by upward of 6% this year, with some making it into double digits. Yet the underperformance of a few powerhouse states, notably Nigeria and South Africa, tipped by the International Monetary Fund to grow by 4.8% and 2% respectively in 2015, will remain a drag, with the IMF tipping regional economic output to inch down to 4.5% in 2015, from 5.8% last year. South Africa’s ongoing electricity woes are another source of concern: a complete shutdown of the power grid has long threatened to cause an economic crisis in the region’s most advanced economy.
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Muhammadu Buhari, Nigeria’s new president |
Drags on the region also emanate from outside its borders – yet another sign of how far Sub-Saharan Africa has progressed. Before the millennium, a near-5% growth rate would have been considered a minor miracle. Two sources of pain and a further point of uncertainty stand out in particular in the near term. The first is oil prices; the second, China. In its latest Africa economics update, published on 15 April, London-based Capital Economics noted that economic growth in Nigeria would come in 2.5 percentage points lower than previously predicted due solely to the recent decline in oil prices.
Other commodity-rich nations, from Angola to Zambia, are being undermined by Beijing’s attempts to restructure and diversify the export-heavy Chinese state. Notes Allan Dwyer, professor of finance at the Bissett School of Business at Calgary-based Mount Royal University: “African economies are particularly exposed to China, and despite a range of stimulus measure having been attempted by Chinese economic authorities, little traction has been gained as of yet.”
Waiting on the Fed
Then there is the Federal Reserve’s decision about whether and when to hike US interest rates. Tighter monetary policy would increase market yields and exert downward pressure on currencies, as well as slowing Chinese demand for the region’s commodities, weakening its ability to earn foreign exchange. The Fed’s timing “will play on global investors’ minds”, notes Angus Downie, head of economic research at Togo-based pan-African lender Ecobank. This, he adds, “is in addition to long-standing negative perceptions of the region, such as disease, corruption, instability and poor infrastructure”.
China’s slower-growing economy also hurts the region in indirect ways. In April 2014, Zambia raised $1 billion through its second dollar bond, widely seen as a play on the still-robust copper market. A similar issue in the current, tougher market would be tricky – although not impossible, given the hefty yield the Zambian government would offer (similar if not higher than the coupon of 8.625% handed to investors a year ago).
For now, hopes rest on a Chinese recovery, stemming from a new bout of stimulus in Beijing. “Everyone is trying to time a China recovery,” notes Dwyer: “Energy sources and particularly resource demand from China played a major role in the African economic miracle of the past. When will that demand return? Much analysis is going into this question and the likely channels and endpoints for renewed Chinese expenditures in Africa.” Adds Razia Khan, chief economist for Africa at Standard Chartered: “Both a China slowdown and the Fed tightening pose some risks to African markets.”
Yet these are far from genuine setbacks. Slightly slower net growth is hardly cause for gloom. Capital Economics remains bullish about the region’s prospects and tips economic output to rebound in 2016. In its first quarter 2015 Africa Economic Outlook, the consultancy points to the “huge consumer potential” of Nigeria’s powerhouse economy, and the strides made in deregulating the power sector.
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African economies are particularly exposed to China, and despite a range of stimulus measure having been attempted by Chinese economic authorities, little traction has been gained as of yet
Allan Dwyer, Bissett School of Business, |
Lower oil prices (now running at around 60% of the previous high, recorded in June 2014) will benefit some nations, just as they hinder others. Energy-poor Kenya stands to benefit, allowing Nairobi to boost growth in 2015 and 2016 while narrowing its current account deficit. Côte d’Ivoire is another nation set to benefit from lower global energy prices, with GDP growth tipped by the IMF to remain north of 7% this year and next. Economic output is also set to rise sharply in Uganda and Tanzania.
Planning for the future
Others point to the region’s increasing ability to plan for the future. Few economies still depend on a single, dominant source of income, notes Irmgard Erasmus, an economist at independent South Africa-based consultancy NKC. “A number of African countries,” she says, “have embarked on strategies to diversify their respective economies away from the often dominant primary industries”. This means a stronger consumer-facing economy in Nigeria, a South African government increasingly invested in eastern and central Sub-Saharan Africa, and the increasing tendency of commodities to be both mined and processed inside the region’s borders.
Besides, growth isn’t going anywhere. Investors sharp enough to overlook a few lean quarters in a handful of economies can see what Sub-Saharan Africa offers. Strong economic data, better governance and infrastructure, and more investable corporates and assets. Capital Economics tips regional compound annual growth to average 7% between 2014-2019, while growth, notes Jacob Kholi, partner and chief investment officer, Sub Saharan Africa at The Abraaj Group, a leading private equity group with investments across the region, “has almost quadrupled over the past decade, boosted by better governance, fiscal management, a natural resources boom and the development of a resilient middle class”. How many other parts of the world can say that?
