The ICAEW Economic Insight: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.
The US is Sub-Saharan Africa’s (SSA) biggest benefactor in terms of bilateral official development aid (ODA) by some margin: it provided $9.0bn in 2015, well over twice as much as the second biggest donor, the UK. The fear is that nationalism and isolationism in a Trump presidency will result in a reduction in these flows, with consequences for Africa’s development.
Yet more risk to Africa results from President Trump’s hostility to the UN, to which he has threatened to cut funding. Such a move would affect the viability of UN missions in Africa, making war zones even more dangerous, and refuge lives more precarious than they currently are. While the Trump team would have to overcome substantial bureaucratic inertia to make these changes, the risk remains.
The dynamics on trade are similar: isolationism and mercantilism may lead the US administration to restrict free trade. In Africa’s case that could be affected by repealing or limiting changes to the African Growth and Opportunity Act (Agoa), which allows duty-free access to the American market for exports from 43 SSA countries.
There is more reason to be optimistic about trade than about aid: Africa’s exports to the US are inputs in domestic manufacturing – if they are cheap, US industry benefits. Imports under Agoa have declined from $82bn in 2008 to only $16bn in 2016, because of the drop in the value of African oil exports to the US, so the overall trade may prove too small.
Ghana’s recent peaceful change in government again showed why it is one of the most admired democracies on the continent. In December, Nana Akufo-Addo of the New Patriotic Party (NPP) won the country’s seventh presidential election since the return of multi-party democracy in 1992, beating then president John Dramani Mahama of the National Democratic Congress.
The new ruling party was soon confronted with many economic challenges, principal among which is the urgent need to consolidate Ghana’s fiscal balances to ensure debt sustainability moving forward. The cumulative fiscal deficit reached 5.9% of GDP by September 2016, already breaching the full-year target of 5% of GDP, and in February the NPP revealed substantial, previously undisclosed expenditure. The international Monetary Fund (IMF), which is assisting the government, estimates the fiscal deficit increased to 9% of GDP in 2016.
The economy performed poorly last year, with growth declining to 3.6%, mainly because of lower oil production. The economy however looks set to gain more traction this year: we project real GDP growth will increase to 6.3% in 2017. Besides higher oil output, improved government assistance and less severe weather bode well for agriculture. The demand side of the economy will also benefit from lower inflation and interest rates.
Unfortunately, there are concerns about the NPP’s commitment to fiscal consolidation. The 2017 budget aims to lower taxes to support growth, and to broaden the tax base to compensate for this. However, such measures have a lower probability of success. We see a high likelihood that the fiscal shortfall may be significantly wider than the 6.5% of GDP envisaged in the budget.
Concerns regarding debt sustainability have made investors increasingly anxious. This contributed to the currency’s poor performance so far this year, with the cedi trading almost 10% year-to-date weaker by early March. The weak cedi will slow the disinflation process, which means the central bank will be reluctant to cut interest rates aggressively. Domestic borrowing costs will remain elevated, forcing the government to pay higher interest on domestic debt. Ghana may also find it more difficult to raise debt on external credit markets because of investor worries about the new administration’s commitment to fiscal consolidation. If Fiscal stimulus works, strong growth in the US would make matters more difficult still.
Source: Ghana Statistical Service, NKC African Economics
Nigeria’s economy contracted by 1.5% in 2016. The country faced a number of issues last year, most of which stemmed from the adverse effects of lower crude oil prices and Delta security threats which curtailed oil production. Also, despite a devaluation in June, the Central Bank of Nigeria (CBN) maintained a tight grip on the naira, restricting the flow of foreign currency to the private sector.
While a rise in crude oil prices early in 2017 increased foreign exchange inflows, the CBN opted to boost its reserves rather than disbursing more dollars to the market. The lack of forex contributed to a wider gap between the official and parallel market exchange rates which stoked inflation, putting household spending under more severe pressure. Such signs prompted a downward revision in our growth forecast: we now predict GDP expanding by 1.5% in 2017.
Aside from base effects, one of the key growth drivers this year will be a ramp up in fiscal spending. In its current form, the budget is designed to increase fiscal expenditure significantly to jump-start the economy. We expect more capital projects to get off the ground, which will support industries such as construction and manufacturing.
Another key growth driver this year will be the expected increase in oil production. Delta security risks have eased since the government agreed to resume stipend payments to militants. Oil production looks set to trend gradually higher this year, which bodes well for downstream industries.
The management of the naira will also have implications for the economy this year. Forex liquidity has remained tight and hard currency is still difficult to get hold of through banking channels. As a consequence, the naira was changing hands at more than NGN500/$ on the black market early in February, against an official rate of NGN304/$ (it has since strengthened on the parallel market).
In response, the CBN stepped up efforts to clear forex backlogs. Recent developments have heightened the probability of a more liberal NGN stance being adopted this year, but a completely free float looks unlikely and tight forex liquidity conditions will remain a significant drag on economic growth.
President Muhammadu Buhari is thought to be seriously ill and can be expected to withdraw from the day-to-day running of the economy over time. This is positive overall, as Vice President Yemi Osinbajo has more liberal instincts and may interfere less with the CBN.
Source: Nigeria National Bureau of Statistics, NKC African Economics
A regional drought has weighed heavily on economic growth in East Africa. The adverse effects of the drought have been most notably felt in Uganda, resulting in a contraction in agriculture during the first three quarters of 2016. Poor crop production has also had a marked impact on food price inflation across the region.
Authorities have attempted to mitigate the effects of the drought by stimulating economic activity through other channels. Both Rwanda and Uganda have loosened monetary policy during the first quarter of the year, while Ethiopia has counterweighed the drought effects through substantial fiscal stimulus, and the construction sector has reportedly expanded by 25% during the 2015/16 fiscal year. Overall, economic growth in East Africa remains strong. Infrastructure development continues to stimulate industry across the region, while expanding services to the largely unserviced markets remains the key driver behind growth.
South Africa and Angola are still struggling to gain any traction as a result of the slump in commodity prices and the recent regional drought, which creates a drag on the rest of the region. Real GDP growth of 1.2% is forecast for both these countries in 2017. South Africa’s growth will be supported by widespread rains, an improved outlook for consumer demand and a recovery in commodity prices. Angola projects oil production to recover and the commencement of infrastructure projects.
Botswana is forecast to record growth of 4.1% as demand in the international diamond market picks up. Mauritius is still one of the top performers in Africa considering both the political and economic landscape. The island nation is still highly dependent on developments in Europe; successful efforts to diversify the economy away from the historically important sugar and tourism sectors could see growth of 3.8% this year.
The two West African countries with the strongest growth potential in 2017 are Senegal and Ivory Coast, with forecast GDP growth figures of 6.7% and 7.7% respectively. Notably, both countries use the CFA franc, which is pegged to the euro, removing much currency risk.
In Senegal strong growth in the primary (specifically extraction and fisheries) and secondary (especially the chemical industry) sectors have pushed overall GDP growth above 6%. Improvements in infrastructure, particularly in electricity supply, made as part of government’s development plan, have made a big difference to the operating environment. Downside risks are the weather and slack demand from the Eurozone.
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