ICAEW.com works better with JavaScript enabled.

Economic Insight: Africa

The ICAEW Economic Insight: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.

African global trade takes a positive turn: Q2 summary

•  Commodity prices will have the biggest influence on Africa’s trade by value.

•  Intra-African trade will keep growing on deepening integration and developing infrastructure.

•  The hit of a lower cocoa price in West Africa will be tempered by a higher oil price and gold production.

•  Kenya is well positioned to take advantage of growth in its region and in Africa more broadly.

•  Mauritius’s efforts to diversify economic activity and export partners have borne fruit.

Nigeria’s external balances should improve over the medium term in line with a rebound in oil prices and production, but forex liquidity is still tight, which constrains importers. New oil projects, a rebound in crude prices, higher global gold prices and increased domestic output will tend to improve Ghana’s trade balance in the medium term, despite the impact of lower international cocoa prices.

The world’s largest cocoa producer, Ivory Coast, will suffer a dent to its trade surplus owing to this slump in cocoa prices. We forecast that its trade balance, as a percentage of GDP, will decrease from 8.6% in 2016 to 6.4% this year. Senegal, on the other hand, runs a large trade deficit: its imports have been on an upward trend in recent years, on the back of an ambitious development plan.

As in the case of Africa as a whole, the recent uptick in global trade will have a subdued effect on southern Africa as trade is mostly dominated by the extractive sector. South Africa and Angola were hit particularly hard by the recent slump in commodity prices. South African exports are expected to increase this year, supported by an uptick in mining production, while import demand will continue to be soft owing to weak consumer demand. Angola’s exports are expected to increase this year on the assumption that the average price of crude increases by 18% (oil which accounts for almost 95% of exports). 

Zimbabwe and Malawi expect a rise in exports on the back of an increase in production and better prices, while countries that sell diamonds (Botswana, Namibia, Lesotho and South Africa), could also see an increase in exports of the stones if, as analysts think, stronger consumer demand in the US will be apparent in the diamond trade. 

East Africa as a whole continues to struggle with a dependence on international commodity prices and vulnerability to bad harvests. This suggests that the region does not necessarily stand to directly benefit from the rise in international trade, as export receipts will primarily be driven by domestic agricultural production and global commodity prices. 

Kenya outlook

Kenya has been relatively successful in diversifying its exports and building up a strong manufacturing base. As the most sophisticated economy in East Africa, it stands to gain considerably from deeper regional economic integration, benefiting from strong economic growth in regional peers, exporting both goods and services to these economies. East African Community (EAC) members accounted for around a fifth of total Kenyan exports during 2016. Uganda was Kenya’s largest single export destination, accounting for around 11% of total exports during the year. Overall, the African continent accounted for around 41% of Kenya’s exports during the period, and Kenya’s trade with partners on the continent will continue to grow as demand increases and trade links improve. Europe and Asia each accounted for around a quarter of total exports during 2016.

The majority of Kenyan exports are raw agricultural products, particularly tea and flowers, and the country’s comparative advantage in value addition remains largely limited to regional African peers. Receipts from these commodities are largely determined by factors such as global commodity prices and domestic weather conditions (affecting production), and not necessarily the state of world trade. That said, Kenya does stand to benefit from stronger growth in the East Africa region, as it is positioned to take advantage of rising demand for manufactured goods, while the country’s location and relatively developed transport infrastructure will allow Kenya to act as the gateway into the East Africa region. The EAC’s infrastructure development strategy still largely depends on improving the efficiency of imports to the region through Mombasa, from which Kenya can be expected to gain.

The United Nations Economic Commission for Africa (UNECA) recently cautioned against the signing of the Economic Partnership Agreement (EPA) between the EAC and the European Union (EU) in its current form, which does not bode well for the EPA’s implementation. Kenya stands to lose the most without the agreement due to it being the only country in the EAC that would not receive duty- and quota-free access under the EU’s Everything-But-Arms initiative – due to Kenya not being classified a least-developed country. There is still much uncertainty regarding the way forward, which will weigh on exporters’ and potential exporters’ investment sentiment. 

Since its inception, the EAC has set itself ambitious goals. Objectives such as a monetary union and political federation will take some time to be realised owing to the complexities involved, but the EAC has made notable progress on other fronts. It is the most progressive trade bloc in Africa, and collaboration on regional infrastructure has also reached a level rarely seen on the continent. On May 31, Kenya’s President Uhruru Kenyatta celebrated the completion of the first section of the Standard-Gauge Railway (SGR) by taking a train trip from the port city of Mombasa to the capital Nairobi. That leg is intended to eventually be the spine of the ambitious $26bn Lamu Port Southern Sudan-Ethiopia Transport (Lapsset) Corridor, planned as the main trade artery in East Africa, with Kenya at the heart of regional economic integration. 

A Single Customs Territory (SCT) system will take effect across the EAC from July 31. The aim of the SCT is to facilitates trade between member states by harmonising and electronically connecting countries’ custom clearance systems. A pilot programme involving certain goods and certain entry points has generated positive results, and if implemented successfully, the SCT could significantly stimulate trade in the region by reducing the cost of doing business.

At the time of writing, non-tariff barriers are the major remaining concern for EAC member states, and in May this year authorities collectively directed partner states’ ministries in charge of EAC affairs to resolve long-standing non-tariff barriers. A monitoring tool identified 19 non-tariff barriers that remain unresolved, ranging from restrictions on Kenyan beef exports to Uganda, to the requirement that companies exporting to Tanzania should register, re-label and retest goods already certified by other partner states.

Mauritius outlook 

Mauritian authorities have been successful in diversifying the economy over the last couple of decades, to expand economic activity beyond the sugar, textile and tourism industries but also the customer base beyond the geographical borders of Europe. Exports to Europe fell from 80% of total exports in 1990 to 47.3% in 2016. The economic turmoil in the region has directly affected Mauritius, as reflected by weaker economic growth figures in recent years. 

However, the recent uptick in world trade driven by stronger growth prospects, especially Eurozone growth, will benefit Mauritius greatly. Oxford Economics (OE) recently raised its Eurozone GDP growth forecast for 2017 from 1.7% to 1.9%, and even noted that a stronger result should not be ruled out. Stronger growth in the Eurozone correlates strongly with Mauritius’s exports. The economic recovery in that region can be expected to boost Mauritian exports, given the fact that Europe remains Mauritius’s most important export market.

The two main markets within the Eurozone for Mauritius are the UK and France, each sharing roughly 12% of total exports last year. The strong link to the UK also brings with it significant downside risk for the next couple of years, due to the UK’s recent vote to leave the European Union – it remains to be seen exactly how the actual exit will affect Mauritius, but lower economic growth in Britain (OE recently adjusted the UK’s GDP growth forecast for 2017 slightly downward to 1.8% from 1.9%), will play a role.

Further positive signs for the Mauritian economy stem from Emerging Market (EM) growth which is forecast to accelerate from 3.5% last year to 4.1% this year. Successful diversification efforts have seen Mauritius increase its export market in Africa, from 4.2% of total exports in 1990 to 22.9% of total exports last year. The island nation increased its footprint in the Asian markets from 1.6% to 16.7% during the same period. The US remains a strong trading partner as its share of total exports remained at an average of 12.3% per year from 1990 to 2016. Relatively strong growth in the US this year coupled with a slight upward revision in the 2018 forecast will be a welcoming sign for Mauritian exporters. Finally, the recent positive sentiment in world trade could have a positive outcome for the Mauritian economy. 

If it is sustained, we expect the current pickup in world trade to further benefit Mauritius, an island nation that has been dependent on trade throughout its settled history. The textiles sector remains the most salient source of exports: it made up more than 30% of goods exports in 2016. The current mini-boom in the Eurozone is expected to give the sector a better year in 2017. Fish exports trended up in 2016, as did exports of the historic cash crop, sugar. 

Looking at trade flows in the other direction, Asia remains the largest source of Mauritian imports: it accounted for 53.1% of imports in 2016. The largest sources for imports from Asia were China and India. Imports from Africa accounted for 13.5% of the total, of which the majority (and 7.8% of the total) came from South Africa. Mauritius’s largest import category remains refined petroleum products. 

The downside risk that an increase in crude oil prices poses to the Mauritian import bill was once again evident in the first quarter of this year. Refined petroleum products increased by more than 80%, as average crude oil prices traded almost 55% higher in Q1 2017 when compared to the same period last year.  We do not expect oil prices to increase from current levels for the rest of the year. 

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.