Frontier markets lead sub-Saharan Africa – Commodity prices and policy moves help stability

Seedwell Hove, Senior Macroeconomist, Quantum Global Group

 

Sub-Saharan Africa’s economic recovery is on course, though there are some impending obstacles. The International Monetary Fund projects growth to accelerate to 2.6% this year from a sluggish 1.5% in 2016. Stabilising commodity prices, strengthening external demand and helpful
policy measures are all supporting recovery.

The modest rebound in Angola and Nigeria and strong growth in non-resource intensive economies, such as Côte d’Ivoire, Ghana, Ethiopia and Tanzania, will lift regional growth. However, political uncertainty in South Africa, Kenya and the Democratic Republic of the Congo could impede momentum. Longer than expected adjustments in some commodity exporters and drought in East Africa, too, should engender caution.

The region’s growth is projected to strengthen to 3.5% in 2018 as commodity prices continue to stabilise and the benefits of latest policy measures come to fruition. Inflation is moderating and expected to average 10% in 2017, boosting consumption and allowing central banks to ease monetary policies. The region’s fiscal deficit will stabilise at around 4.5% of GDP this year, as the larger fiscal deficits of oil exporters are offset by narrowing deficits of oil importers. Improving external conditions will help to narrow the region’s current account deficit to 3.8% of GDP. Nigeria and Côte d’Ivoire are the only countries in the region to issue eurobonds in 2017, though more issuances are expected as countries try to cover substantial fiscal gaps. Frontier successes Frontier markets lead sub-Saharan Africa
Commodity prices and policy moves help stability

Frontier successes
The Nigerian economy exited recession with 0.6% growth in the second quarter of 2017, following economic contraction since 2016. GDP growth is expected to average 0.8% in 2017, signifying a durable return to positive growth. Nigeria’s purchasing managers’ index, a leading economic indicator, rose to a twoyear high of 54.8 in July, indicating tangible expansion. This was thanks to higher oil production, robust growth in the agricultural sector and increased infrastructure spending. The foreign exchange window – introduced in April by the central bank to create a market for transactions which appeal to foreign actors – is succeeding in attracting portfolio investment. This is bolstering Nigeria’s international reserves and helping to rebalance the foreign exchange market.

The South African economy slipped into a technical recession in 2017, with a 0.7% GDP contraction in the first quarter after a 0.3% contraction in the final quarter of 2016, buffeted by heightened political squabbling. This prompted the country’s credit rating downgrade and contributed to rand volatility, weak business confidence and subdued private consumption. President Jacob Zuma narrowly survived a no-confidence vote in August amid multiple corruption scandals. The political wrangling is likely to continue until at least the electoral conference of the African National Congress, Zuma’s party, in December. Sentiment in some frontier economies – including Côte d’Ivoire, Ghana and Senegal – and low-income countries like Ethiopia, Rwanda and Tanzania remains optimistic, and growth rates there are expected to
exceed 5.7% in 2017. These economies are less resource-intensive, relatively more diversified, and are net oil importers. Côte d’Ivoire’s economy is anticipated to expand by 7% in 2017, boosted by strong
infrastructure spending, a dynamic private sector and extensive international financial support. However, the decline in cocoa prices, a key export, will damp fiscal revenues, with additional fiscal pressures arising from the payment of bonuses to members of the army and civil service following a protest in May.

Ghana’s outlook remains favourable, with growth of 5.8% anticipated in 2017, lifted by increased oil production, expansionist policies, and subsiding inflation risks. Kenya’s mostly positive outlook, however, is stymied by the decline in credit following the capping of interest rates in 2016, drought and political tensions after August’s presidential election. Ethiopia will continue to outperform its peers, with IMF data suggesting it could overtake Kenya as East Africa’s largest economy in 2017.

Uncertainty about US
Uncertainties about US trade and development policies under Donald Trump’s administration persist. Particular concerns have been raised about the future of the Africa Growth and Opportunity Act, the Power Africa Initiative and the President’s Emergency Plan for AIDS Relief. The 30% cut in development assistance by the US is likely to hurt some smaller and fragile African economies. Moreover, prospects of further interest rate rises in the US could tighten global financial conditions, cause capital outflows, and further raise financing costs. The cooling of China’s housing market, amid the rebalancing of its economy, is raising concerns in Beijing about risks of a ‘hard landing’. This could create volatility in global financial markets, upset commodity prices, and African recovery.

The political situation in many countries is shifting. In Angola, João Lourenço is replacing José Eduardo dos Santos as president, and elections proceeded well in Rwanda. However, in Kenya the Supreme Court on 1 September annulled the result of its presidential vote amid allegations of widespread gerrymandering; a new poll will be held before the end of October. The political environment remains tense in the DRC, with slow progress in registering voters likely to delay elections until next year.

In spite of uncertainty and structural challenges, African governments have no choice but to embrace economic diversification. This is the only way to improve economic stability and secure long-term sustainable growth.