Despite global economic headwinds, characterised by a commodity price collapse, the ‘Africa rising’ narrative is still very much alive. However, instead of the continent being championed as a collective, investors are seeking opportunities within regional pockets of sustainable growth. Thursday’s Africa Outlook 2016 event, hosted by Frontier Advisory Deloitte in Woodmead, revealed that the continent’s growth story is not as romantic as when it was told three or four years ago.
A downturn in China’s economy marked the end of the commodity price super cycle, having the most significant impact on oil, copper and iron ore prices and driving the slowdown of Africa’s predominantly resource rich economies. Coupled with a sensitive financial system and depressed global demand, many African economies will struggle to navigate 2016 and beyond.
Dr Martyn Davies, MD of emerging markets and Africa at Frontier Advisory Deloitte, said while the continent will still grow by 4% to 5% this year, the old narrative of a bright and glossy future for Africa is over. The commodity super-cycle, which was driven by China’s infrastructure spend to insulate itself from the impacts of the global financial crisis, is over, and current commodity prices, he said, are not so much low as they are normalised. Meaning, they are here to stay.
Barring India and China, the story of emerging markets is one of decelerating growth. Previous estimates that emerging market economies would catch up with the developed world within the next 30 years are now a pipe dream, Davies said. In the current market, and excluding China, the International Monetary Fund (IMF) reports now forecast that it will take 300 years for emerging markets to ‘converge’ with the developed world.
“According to the IMF and the World Bank, 34 out of 45 countries in SSA (Sub-Saharan Africa) are worse off than than they were in 2008,” said Sim Tshabalala, joint chief executive of Standard Bank Group. “Most worrying, several of the larger economies – including South Africa – now have gross external financing needs in excess of 10% of their GDP.”
But, as with any crisis, there is opportunity. The overarching theme of the Africa Outlook 2016 event was that countries on the continent need to take the difficult period ahead as a driver of structural reform.
“On average, a 10% currency depreciation has 1.3% impact on domestic prices,” he said, adding that South Africa is one of the few exceptions, which is more sensitive to inflation. This means there is more opportunity to grow exports, and encourage multinational companies to set up operations in those countries.
Good governance equals economic growth
Tshabalala said African countries have little room to drive growth through fiscal and monetary expansion and thus have to foster a business-friendly regulatory and political environment in order to attract investment.
“The fastest-growing countries on the continent are not those that are resource rich but those that have improved their governance.”
Konrad Reuss, MD of credit rating agency Standard & Poor’s sub-Saharan office, said this means getting the right people for the right jobs, and forgetting about petty politics. Because, even though investors are still looking for opportunities on the continent, “there is much more scrutiny on African countries and markets will be unforgiving.”
There needs to be more policy action and reaction with regard to addressing the structural deficiencies, particularly in South Africa, which, he said, face another ratings downgrade in the coming year if growth continues to fall below expectations, and political events don’t inspire confidence in the economy.
But even the shining stars are facing difficulties. Kenya, spoken of at the event as a beacon of light for the continent for leading Africa’s innovation drive, still has a negative outlook from S&P, due to having a debt-to-GDP ratio of 50%.
Letsebe Sejoe, CEO of Botswana Investment & Trade Centre, said that while his country is well-recognised for its good governance, its over-reliance on diamonds means that its fiscus has been put under pressure by a drop in prices. Now there is pressure for the government to develop privately-run social and infrastructure projects.
In terms of oil reliance, Reuss said Nigeria will only survive the current headwinds if it floats its currency, while Angola is at far greater risk of a further ratings downgrade and, possibly, recession.
“This is going to be a dramatic year for change. Not all of it positive,” said Davies. “Ten years ago, if you said Lybia would be the next Somalia, or the next Afghanistan, nobody would have believed you, (but that’s what could happen).”