End of commodities super cycle causes poor economic performance in 2016
After averaging about 5.0% from 2010 to 2014 and declining to 3.2% in 2015, Sub-Saharan Africa’s (SSA) GDP growth descended abruptly to a mere 1.3% last year, its lowest level in over two decades. Our panelists had long anticipated the worsening of the economic situation, cutting their regional economic growth estimates almost uninterruptedly from early 2015. It came as no surprise that the end of the commodities super cycle in mid-2014, and the consequent crash in commodities prices, substantially affected many of the largest Sub-Saharan African economies which depend heavily on commodity exports, such as Angola, Nigeria and South Africa. Also, many countries in Eastern and Southern Africa experienced a severe drought caused by the El Niño weather phenomenon, which prompted a decline in agricultural production and cutbacks in hydroelectric generation, particularly in Ethiopia, Mozambique and Uganda.
Despite the overall deterioration last year, the extent of weakness varied across different countries in the region. The continent’s three largest economies, Angola, Nigeria and South Africa, were the worst-hit. These economies account for over 60% of SSA’s GDP and they were mainly responsible for the overall picture of sluggish economic performance at the aggregate level. The economies of Angola and Nigeria contracted last year, as the region’s largest oil producers faced severe financial constraints due to the decline in global oil prices. Consequently, these countries experienced a sharp reduction in crude oil output, which was exacerbated by a notable decline in investment in Angola and unplanned disruptions in Nigeria as a result of militant attacks on oil pipelines.
In South Africa, GDP grew in 2016 at the weakest pace in seven years, reflecting the impact of lower commodity prices and a decline in agricultural output as a result of the drought. South Africa has been consistently falling behind the government’s growth targets, which is having serious implications for business and consumer confidence. On top of the economy’s disappointing performance, the continued deterioration in the domestic political environment and governance is inhibiting investment. South Africa’s economic outlook remains challenging after two major credit ratings agencies downgraded the country’s sovereign rating to junk at the end of March and beginning of April this year, respectively. The downgrades reflected the agencies’ concerns that the recent cabinet reshuffle made by the President on 31 March, in which he sacked the finance minister, signals a further weakening of governance standards and a potential change in economic policy that could cause the country’s public finances to deteriorate even further.
Other commodity exporters, particularly exporters of metals, struggled to adjust to the decline in prices. Growth slowed notably in the Democratic Republic of Congo and Mozambique. Meanwhile, agricultural exporters such as Ethiopia and Tanzania decelerated in 2016, but continued to grow at a pace of above 6.0%. Solid growth in these countries was again the result of strong public infrastructure investment and healthy private consumption, as they benefited from low oil prices.
Will the economy come out of the woods this year?
Economic growth in Sub-Saharan Africa registered an improvement in the final quarter of 2016 and continued to gain momentum in the first three months of this year, in line with the perception of a coordinated global growth pickup. An aggregate estimate produced by FocusEconomics showed that SSA’s GDP increased 2.3% in Q1, which came in above the 1.5% expansion seen in Q4. The reading reaffirms analysts’ view that the regional economy is over the worst. The economists we surveyed this month expect SSA’s GDP to expand 2.8% this year, which was left unchanged from last month’s projection. Going forward, GDP should accelerate next year, with the Consensus Forecast of analysts projecting the region’s economy to accelerate to a 3.7% expansion in 2018.
Growth rates will continue to vary across the region, and foreign investors and trade partners will need to assess the potential and stability of each country against the regional growth rate, which is set to be moderate and somewhat discouraging overall. Although growth in South Africa and other major oil exporters is seen rebounding this year, it will be weaker than in exporters of agricultural and mineral commodities. More stable currencies, lower inflation, improved agricultural production and large infrastructure programs should support economic activity in agricultural exporters, such as Cote d’Ivoire, Ethiopia, Kenya, and Tanzania, and mineral exporters such as Ghana.
NIGERIA | Economic activity starts to revive after last year’s slump
The decline in commodity prices laid bare structural weaknesses plaguing the economy and the country’s dependence on oil earnings. Inflation spiked, monetary liquidity deteriorated and economic activity came to a grinding halt, causing the economy to contract in 2016 for the first time in over 20 years. While leading indicators suggest that growth is slowly picking up and recovering oil prices have provided some respite to public finances, much needs to be done. In a scathing assessment of the economy as part of its Article IV Consultation, the IMF warned that growth will remain constrained by policy inaction. If the currency’s overvaluation is not tackled in the near-term, the spread between the official and parallel exchange rate will continue widening. In that scenario, the country would face the grave prospect of a disorderly currency depreciation to prevent a sharp decline in international reserves.
The economy is expected to rebound this year on higher oil earnings and fiscal spending. The recovery, however, is fragile and requires government reforms to unleash growth in the non-oil sector. Panelists participating in the FocusEconomics Consensus Forecast project that the economy will grow 1.3% in 2017, which is up 0.1 percentage points from last month’s forecast, and 2.9% in 2018.
SOUTH AFRICA | Cabinet reshuffle prompts credit rating downgrade to junk
Data continues to suggest that weakness in economic activity persisted in the first quarter, following a GDP contraction in Q4. The economic outlook has also taken a turn for the worse after Fitch Ratings downgraded South Africa’s sovereign rating from investment grade to junk on 6 April, following a similar move by S&P Global Ratings on 3 April. Both downgrades are the direct result of a cabinet reshuffle carried out by President Jacob Zuma on 31 March, when he ousted his respected Finance Minister Pravin Gorhan and four other ministers, replacing them with loyalists. The move suggests a potential retreat from fiscal prudence, a rise in spending and increased opportunities for patronage. The new Finance Minister, Malusi Gigaba, insists that the government will adhere to the fiscal targets presented in the 2017 budget, but—unlike Gorhan—he lacks the authority to defy presidential instructions.
GDP growth should pick up to 1.1% this year from 0.3% last year, supported by an improvement in the agricultural sector, at the same time when higher prices for several of the country’s key export commodities will help mining and oil production. However, analysts cut the growth forecasts by 0.1 percentage points from last month’s projection as heightened political risk and the credit rating downgrades will deter much-needed capital inflows, which will impact investment. Next year, economic growth is projected to pick up to 1.7%. 8.
ANGOLA | Weakness in activity persists due to volatile oil prices
The economy remains in a bad way. Business confidence hit rock-bottom last year and growth was choked off by low oil prices and a weak showing from the non-oil sector, which suffered from a lack of foreign exchange for imported inputs. In a bid to breathe more life into crude prices, since the start of 2017 Angola has cut oil production by more than stipulated in the OPEC agreement, and has been vocal in calling for an extension of the deal beyond June. However, the price of Angola’s Cabinda oil remains highly volatile, and lower oil prices than previously anticipated going forward could threaten growth. On a more positive note, a proposed new customs regime to replace the widely criticized current system was recently submitted to the Council of Ministers. If approved, the new regime would lead to a reduction in tariffs on imported goods such as food and raw materials, reducing inflationary pressures and boosting consumers’ purchasing power.
Angola’s economy should recover slightly this year thanks to improved terms of trade, although growth will remain hampered by low business confidence and oil prices far below those seen in 2013 and 2014. Analysts expect GDP to expand 1.6% in 2017, up 0.1 percentage points from last month’s forecast. In 2018, they see the economy growing 2.8%.
KENYA | External sector offsets poor domestic activity
Economic growth was relatively stable last year, according to a first estimate released in mid-April by the Kenya National Bureau of Statistics. The result underscored the country’s resilience in the face of both domestic and international challenges, not least the severe drought that affected the country in the final months of last year. The marginal improvement in the country’s economic performance was largely the result of a positive contribution from the external sector. Imports contracted due to low energy prices, while exports continued to grow, albeit at a slower pace. This offset weaker domestic demand, as both private and government consumption slowed and fixed investment swung to contraction, with the latter trend aggravated by the government’s decision to cap interest rates in September. However, pressure is mounting on the government to scrap its interest rate policy, as its negative impact on growth is starting to become apparent, with credit growth slowing rapidly. In April, the World Bank echoed the IMF’s earlier call to scrap the policy.
GDP growth is expected to slow this year, as the interest rate cap continues to choke business investment. In addition, political uncertainty around the August presidential election could dampen business sentiment. Panelists now expect GDP growth to slow down and average 5.4% in 2017, which is down 0.1 percentage points from last month’s forecast, before picking up slightly to 5.7% growth in 2018.
INFLATION | Inflation falls for third consecutive month in March
Although still high, inflation continued showing signs of moderating in March. Preliminary data showed that inflation edged down from 13.4% in February to 13.2% in March, which represented a seven-month low. The fall in inflation seen in the first three months of the year is mainly the result of a stabilization in regional exchange rates, which in turn reflects a gradual increase in commodity prices. Looking at individual countries, the drop in the aggregate estimate reflected lower inflation in Angola, Cote d’Ivoire, Ghana, Nigeria, South Africa, Uganda and Zambia.
As commodity prices are expected to continue rising gradually this year, exchange rates should stabilize or strengthen. The analysts we surveyed this month expect regional inflation to average 11.9% in 2017, which is up 0.1 percentage points from the previous month’s forecast. Next year, inflationary pressures should continue to recede and inflation is projected to average 9.5% in 2018.
