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Tags: africa | cape town | economics | china

5 Stormy Economic Headwinds Facing Africa

Daniel Silke By Saturday, 05 September 2015 07:05 PM EDT Current | Bio | Archive

With GDP increases of at least fivefold since 2000, Africa’s growth story has been the "good news" narrative of recent years. However, recent international and domestic events are precipitating the rise of some stormy headwinds that threaten to setback or even retard the advance of the continent.

Here’s a list of the top 5 concerns for the continent:

1. The China Syndrome (and others too): Africa’s recent rise has coincided with the advance of the Chinese economy and a quest for the supply of commodities that attracted Beijing to the continent initially.

Over the last decade, China has become Africa’s single largest trading country (the EU collectively is still a larger partner) and has forged close economic and political bonds with just about every African state.

Clearly, those countries most exposed to China’s current economic woes may feel the aftershocks. China’s voracious demand for commodities has already contracted. Beijing’s imports from Africa in July were down about 40 percent from the same month a year ago.

And, its not just China, On-going EU uncertainty; a slowly normalizing U.S. interest-rate environment and a sharp decline in other developing markets like Brazil and Russia all add to Africa’s uncertainty.

2. Commodities Collapse: Across the board, commodity prices have fallen – and hard. From iron-ore to copper to coal, African countries reliant on these exports have begun to feel a contraction. But the real kicker is the price of oil that is still a core export earner for Nigeria, Angola, the DRC to name but a few.

Only a year ago, Nigeria and Angola needed oil at over $120 per barrel to balance their respective budgets. With prices now well below half that, national treasuries are slashing their budgets. Cost cutting is now the order of the day. And, unfortunately, big CAPEX items like infrastructure may well bear the brunt of financial pruning.

State business interests are also likely to be severely curtailed for a period that could last some time as countries adjust — painfully — to lower state revenues. Already Nigeria’s GDP has almost halved, falling to just 2.3 percent in the second quarter compared to 3.9 percent a year ago.

3. Currencies Crash: With commodities and oil under severe pressure, it comes as no surprise that African currencies have tumbled. The Nigerian Naira has slumped 15 percent over the last year and, unless oil prices rise, may tumble another 10 percent by beginning 2016. The same crisis has befallen South Africa, Kenya, Ghana and Angola whose unit is now 19 percent weaker against the dollar.

As a result, higher rates of borrowing can result in growing budget deficits and possible repayment crises. Inflationary pressures on imported goods naturally add strain to a shifting sentiment that may retard global foreign direct investment (FDI).

Sentiment can also be a big driver on equity markets: The Nairobi stock exchange (NSE) has lost almost $1.5 billion in value since January confirming a more negative trend.

4. Middle-Class can become a Floating Class: Much has been said about the 330 million  Africans who have moved up the income ladder over the last decade. However, a large proportion of this "middle-class" — some 200 million live on only $2-$4 per day. Any broad-based economic decline can push many back into lower categories upsetting the recent boom in consumer demand.

There is a newfound vulnerability to domestic consumption as a result of falling GDP rates. These also have the potential to raise political temperatures as austerity-induced budget cuts fuel rising discontent.

5. Inability to Diversify Sufficiently:
A common human failing is to enjoy the good times but fail to plan for the bad. Africa’s decade of tremendous growth largely failed to transform a continent still reliant on extraction into a continent of manufacturing.

Africa has 12 percent of global oil reserves, 40 percent of Gold & 80 percent of chromium and platinum but still just 1 percent of global manufacturing and 2 percent of world exports. Clearly, this is an unsustainable model given the volatility in the current era.

The foundations for job creation for the massive population increases coming have not nearly adequately been laid. Africa’s cities need substantial infrastructure CAPEX to be competitive and now face serious lags as budgets shrink. Not to mention enhancing land (agricultural) policy that needs to be a priority like never before.

Despite this vulnerability, Africa is equally more equipped to deal with change like never before.

Regional integration has improved. There are green shoots in new manufacturing industries and ICT start-ups. Not forgetting the great fundamentals of the world's largest working-age population and rapid urbanization combined with connectivity.

It’s a testing time for the continent — perhaps the most arduous since the “Arise Africa” theme gained global traction. The coming few years will be the real test. It’s now not just about ever-increasing GDP or FDI statistics but how resilient the management of economies can become in times of strain.

Daniel Silke is recognized as one of South Africa’s leading political economy analysts. He is currently director of the Political Futures Consultancy based in Cape Town. He is the author of  “Tracking the Future: Top Trends that will Shape South Africa and the World.” He regularly appears on CNBC Africa, ENCA, SABC, ANN7, and Bloomberg. For more of his reports, Go Here Now.

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With GDP increases of late, Africa’s growth story has been the narrative. However, recent international and domestic events are precipitating the rise of some stormy headwinds that threaten to setback or even retard the advance of the continent.
africa, cape town, economics, china
Saturday, 05 September 2015 07:05 PM
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