Can Africa still rise?

Jan 29 2016 06:45

Economic conditions for many countries in sub-Saharan Africa will remain tough in 2016, primarily because of their heavy reliance on oil and other commodities, ratings agency Standard & Poor’s (S&P) warned in a new research report.

Low oil and other commodity prices, along with relatively slow growth in China, pose challenges, while interest rate increases in the US make emerging-market financing less attractive to international investors, S&P said.

The difficult climate has caused many to question the “Africa rising” narrative that has dominated discussions of the continent’s prospects in recent years.

Speaking at the recent Africa Outlook 2016 conference in Johannesburg, Sim Tshabalala, joint chief executive of Standard Bank, said while many commentators have already consigned the “Africa rising” narrative to history, the picture is a lot more nuanced than the news headlines would suggest.

“The continent continues to offer excellent investment opportunities – if you know where to look for them, and if you have a good understanding of likely risks and trends, not just in the next year or two, but over the next 10 to 15 years,” he said.

Tshabalala highlighted six points to build his case for “moderate and reasoned optimism” about Africa’s prospects. Here is a shortened extract from his speech:

1. Troubled finances

With Chinese growth at a 25-year low, oil falling to below $30 a barrel and concerns over global growth, Africa is fast running out of “policy space” for further monetary or fiscal expansion.

According to the IMF and the World Bank, 34 of the 45 countries in sub-Saharan Africa are in a worse fiscal position now than they were in 2008.

Several of the larger economies, including SA’s, now have gross external financing needs in excess of 10% of GDP.

Governments have three choices in this kind of situation: in the best case, they can take vigorous, and often politically difficult, steps to make their economies more competitive.

In the worst case, they can carry on spending regardless and thereby generate hyperinflation and a sovereign default. In the middle case, they can drift and tinker.

On current evidence, SA is a middle-category country. We’ll be looking to finance minister Pravin Gordhan’s February Budget Speech for firm evidence of fiscal discipline and a commitment to rebuild the country’s competitiveness.

However, Treasury can only do so much to encourage structural change. To get SA out of the doldrums, we would need better prices, better rains – and to see government as a whole pulling in the same direction, which is something that isn’t happening just yet.

Nigeria has the potential to become a rising star if President Muhammadu Buhari’s reforms take hold. In the context of depressed oil revenues, Buhari has unveiled plans to increase government spending by about one quarter over last year’s budget – but, crucially, this is to be funded by improving tax collection, cutting government costs and clamping down on corruption. None of this will be easy, or uncontested – but the intention is sound.

2. The need for inclusive growth

As corporate citizens of middle-group countries, we have both a duty – and a direct commercial interest – to do what we can to promote and support faster and more inclusive growth.

 In SA, this means doing everything we can to speed up transformation and to increase competitiveness, to improve labour relations and to strengthen institutions, and to stand up for honest and efficient management in our firms, in state-owned enterprises and in government.

It’s worth looking at what Kenya has achieved. There has been major investment in infrastructure in recent years, including refurbishing the port at Mombasa, opening new industrial parks and building a new railway that has cut cargo transit times by 90% and reduced the cost of energy by over 30%.

The country has also introduced an impressive set of regulatory reforms to improve the business environment.

As a result, Kenya jumped 28 places in the World Bank Doing Business Indicators last year.

Smart investors are piling in, and Nairobi is looking like an increasingly serious rival to Johannesburg as an African headquarters for multinationals and as a financial centre.

3. The impact of a slowing China

While the slowdown in China is having a negative impact on short-term trade, there are benefits too.

Some African countries could, for example, benefit from a weaker yuan that would cut the cost of the Chinese goods and services they import. A weaker yuan will mean more heavy equipment and more infrastructure at lower cost.

China’s switch from an investment-led to a consumption-led growth model is good news for Africa in the longer term.

According to the World Bank, the net effect of the evolution of the Chinese economy towards consumption will be to add 4.7% ($181bn) to Africa’s GDP by 2030 compared to China’s current growth path, with Kenya, Botswana and Nigeria the biggest winners, and only Zambia experiencing a small net loss. 

4. Currency depreciation

The evidence suggests currency depreciation has its advantages. If appropriately managed, depreciation supports national competitiveness and makes structural reform easier.

In most African economies, depreciation has rather small effects on local inflation. On average, a 10% depreciation will cause domestic prices to rise by only 1.3% − not percentage points.

In SA, the pass-through to inflation may be a bit higher − at about 1.6% a year for every 10% depreciation, or 6.4% as a result of the rand’s 40% depreciation last year.

Even this dramatic fall is unlikely to create a lot of inflation – it’s likely to push up CPI by only about 30 basis points.

Therefore, if SA can avoid another period of frequent load-shedding or major strikes, depreciation has relatively low costs to the economy as a whole, gives exporters a boost, and may create opportunities to undertake long-lasting reforms to our labour and product markets.   

5. Africa’s digital revolution

Africa already leads the world in mobile payments, and we can expect that Africa’s digital revolution will continue.

By 2021, we can expect the continent to have over 1bn feature- and smartphones in use. The economic, social and political effects of a fully digital Africa will be enormous, and I think, almost all positive.

Looking just at the financial sector, Africa’s lead in electronic payment is being rapidly supplemented by mobile-based insurance, savings and micro-credit services.     

6. Internally-driven growth

As African populations become steadily healthier, better educated and more urbanised, African economies are increasingly able to generate their own internal growth.

Three factors have driven overall economic growth in sub-Saharan Africa in recent years, according to World Bank research published in 2014:

  • Capital accumulation, driven by the flow of foreign direct investment, particularly to resource-rich countries;
  • The rising proportion of the working age population; and
  • Total factor productivity growth, which the World Bank attributes to reduced political instability, and economic diversification from agriculture to other sectors over the past two decades.

The steps that Africa has taken to get its own house in order – improved governance, major regulatory reforms in the rising star countries, better education and healthcare – are reaping rewards for the continent that are substantially independent from international commodity prices.

It is for these reasons that Africa will continue to grow at between 4% and 5% a year for the next five years – not quite as fast as we would like, not quite as fast as emerging Asia – but still far better than the world average, whatever the price of oil.

Click here for the full speech. 

This article originally appeared in the 4 February edition of finweek. Buy and download the magazine here

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