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China’s slowdown should not be Africa’s biggest concern

Sovereign debt and difficulty of doing business are bigger problems.

Much has been made of the impact that China’s economic slowdown has had on Africa and its resource-rich economies but, according to Razia Khan, the MD and head of Africa research at Standard Chartered, the continent has more pressing matters. Particularly, African countries had to reduce their risk profile so as to reduce the effects of global economic headwinds that drive risk-averse investors to take their capital away from emerging markets.

“There has been a decline in commodity prices, which has impacted the value of the China’s trade with Africa,” said Khan, “but if you look that trade growth in volume terms, it continues to grow strongly.

Speaking at a panel discussion during the EY Strategic Growth Forum, held this week in Sandton, she said some of the commodity price declines attributed to China’s slowdown are inconsistent with reality. For example, China’s import levels of oil and copper have recently been at record highs. And, despite experiencing a drop from double-digit growth to around 7%, the world’s second largest economy still contributes significantly to global economic growth and will continue to play a big role in terms of investment on the continent.

Said Khan: “China is much bigger than it was a decade ago. Therefore, for it to be growing at 7%, in value-added terms, probably represents more growth than that when China was growing at 14%, off a much lower base…. Our view is that China, in terms of how it manages its investment programmes, remains focused on Africa,” said Khan.

The bigger challenge facing African economies is how they will cope with the external pressures of economic headwinds affecting the global economy, which drive investors away from riskier markets. The resulting capital flights have depreciated currencies, increasing the value of existing debt-to-GDP ratios and reinforcing the risk profile of these economies.

Combined with the threat of the US Federal Reserve raising interest rates, economies on the continent are much more susceptible to the whims of investor sentiment.

“This was supposed to be the year when the Fed would tighten monetary policy and economic growth was said to be strong enough to sustain that tightening. But the uncertainty around this move has impacted emerging market economies,” said Khan.

And, unless countries can reduce their debt-levels, this will continue to be the case. This makes it increasingly difficult for governments to raise capital to spend on key priorities areas like infrastructure development, education and health.

“Risk-aversion has taken hold of markets and investors [have] been very careful in scrutinising debt metrics…. In South Africa, the net debt has gone from around 20% of GDP during the Global Financial Crisis and increased by a further 20 percentage points in a short space of time,” said Khan, who stated that at 60% of GDP, government debt is considered too high to be able to rein in.

More pressing matters

Khan said that African governments therefore had to cut wasteful expenditure as a matter of urgency, and prioritise the stimulation of economic activity. Countries like South Africa, would have to attract investment and could only reduce the risk profile (reducing debt) or improve the return profile, which meant improving the ease of doing business.

“Ease of doing business is something that must be copied from more developed countries,” said Ali Mohamed, the Qatar Financial Centre head of Africa. “In Dubai, if you want to open a shop its takes one week to a month.”

Former president of the African Development Bank Donald Kaberuka said countries would do well to try to replicate the case of Vietnam, whose government reduced the population (90 million) living below the poverty line from above 60% in 1994 to around 3%. It did so by improving its agriculture productivity fourfold, and spending on education, which is extremely important because, “you only see its impact, (or lack thereof) 30 years down the line.

“Number three is to acknowledge that you cannot address the infrastructure deficit across the country at same time. There are places that businesses want to set up manufacturing activity. You have to make a choice to focus on those areas and wait (for those projects to be completed before moving onto the next area).”



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