Economic Update: Africa
The ICAEW Economic Update: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.
Privatisation in Africa: Q4 summary
- Privatisation has progressed more slowly in sub-Saharan Africa than in other regions
- Many state-owned enterprises are seen as vehicles to pursue economic policy objectives
- Privatisation will accelerate as the fiscal opportunity costs become more apparent
Focus: Privatisation and Africa
The global economy is stumbling towards the end of 2019. A broad-based economic slowdown in the developed world has weighed on international business and investor sentiment with safe-haven assets the largest beneficiaries. Germany, the economic powerhouse of Europe, is on the brink of recession and the European Central Bank (ECB) has stated it will provide monetary stimulus for ‘as long as it takes’. In the US the Federal Reserve is implementing ‘insurance’ interest rate cuts due to growth concerns. While still strong, GDP growth in China is easing and authorities have signalled that they see this as a natural result of a maturing economy. Against this rather gloomy international backdrop Africa remains a relative bright spot with many positive economic stories. Although the continent’s two largest economies, Nigeria and South Africa, continue to struggle, Africa will be home to half of the 10 fastest-growing economies on the planet over the next five years.
East Africa’s economic growth is expected to remain robust, easing slightly from 6.3% this year to 6.1% in 2020. Most of the region’s economies continue to benefit from lower international commodity prices while the consumption-driven growth structure prevalent in the region insulates these economies from the global trade slowdown. Economic growth in the Franc zone is also expected to remain strong, increasing from 4.7% in 2019 to 4.9% next year. Côte d’Ivoire’s effective exploitation of its mineral and agricultural resources has been accompanied by an ambitious government development plan, while Senegal’s relatively diversified economy has been supported by the Plan Senegal Emergent development strategy. North Africa’s economic performance remains volatile due to instability in Libya, with regional growth picking up from 2.8% this year to 4.5% in 2020. In Egypt, the region’s economic anchor, favourable policy adjustments are translating into improved macroeconomic fundamentals and a positive growth outlook.
Although it will pick up next year, GDP in the continent’s other regions will remain relatively subdued, largely due to lackluster performances in regional heavyweights Nigeria, Angola and South Africa. Growth in West & Central Africa is expected to increase from 3.4% in 2019 to 3.7% next year, largely held back by a subdued economic performance by Nigeria due to some erratic and ineffective policy decisions. In Southern Africa growth is expected to come in at 2.2% in 2020 compared with a 1.3% expansion in 2019. The South African economy will keep stagnating this year, also due to policy uncertainty, while electricity constraints have had a negative impact on industry and have deterred investment in general.
Regional growth rates in Africa
Africa’s commendable growth performance in the context of dismal returns in the developed world continues to attract investor interest. Some of this interest has taken the form of calls to privatise some of the continent’s numerous state-owned enterprises (SOEs), not just to benefit private investors but also to improve the performance of these institutions to the benefit of the nations they are meant to serve. But Africa has a fraught history when it comes to privatisation. At the time of independence an ideological predisposition towards a central role for government in poverty alleviation, and an affinity with the Soviet Union shared by many independence movements, pressed many governments in newly free countries to nationalise large private enterprises.
However, in the decades since privatisation has proliferated across the continent. Côte d’Ivoire was an early proponent of privatisation in the 1960s and in the 1990s many SOEs across the continent were privatised due to pressure from the IMF and World Bank. The process initially started with small- and medium-sized enterprises in competitive sectors but extended to larger utilities in the latter half of the 1990s. That being said, the privatisation process in sub-Saharan Africa has proceeded at a much slower pace than that observed in other regions of the world and remains incomplete. Even South Africa, the continent’s most industrialised nation, remains burdened with a hodgepodge of underperforming SOEs in numerous sectors, the most infamous being energy utility Eskom.
Resistance to privatisation largely stems from the idea that SOEs’ performance should not just be assessed in terms of commercial efficiency but also in terms of social welfare. From this perspective SOEs can play a central role in pursuing progressive policies such as subsidising the poor and creating jobs while also supporting the development of local capacity over the longer term. It should also be noted that, according to a 2018 World Bank research paper, the literature now reflects a more cautious and nuanced evaluation of privatisation, with pre-conditions (especially the regulatory infrastructure and institutional framework) and an appropriate process of privatisation critical in ensuring a positive result.
Government transparency & accountability
As regulatory infrastructure develops, institutional frameworks mature and citizens’ expectations grow more sophisticated, we expect calls for privatisation to become louder across the continent.
The African continent’s airlines are struggling compared to international rivals. The International Air Transport Association (IATA) estimates that airlines on the continent will record a combined loss of $100m this year, while the rest of the world’s carriers are projected to post a profit of $28bn. In an effort to turn the tide, the Kenyan Government announced in September that it plans to re-nationalise the loss-making Kenya Airways by the end of this year, in an effort to boost competitiveness.
Financial difficulties are not the Kenyan carrier’s only problems; increased regional competition from countries like Uganda, Tanzania, Rwanda, Togo and Ethiopia of course compounds the problem. Ethiopian Airlines is the only profitable airline in sub-Saharan Africa and is increasingly acquiring shares in smaller carriers on the continent in an effort to become the powerhouse pan-African airline. Kenya Airways also fails in comparison to Ethiopian Airlines on activity levels, with the former only covering 56 cities while the latter flies to more than 120 destinations. The extent of the company’s troubles is reflected in top management rotation, with three changes of chief executive in the past five years. The airline is currently 48.9% government-owned while 7.8% of the company is held by Air France-KLM. Kenya Airways was once considered a model for successful privatisation after it became the first African carrier to be privatised in the mid-1990s. However, it started making losses in 2014 after making costly aircraft purchases, which coincided with a slump in tourist and business travel due to a spate of terrorist attacks. Despite debt restructuring, the company still made a pre-tax loss of KSh7.59bn ($74m) last year and has already posted a loss of KSh8.56bn ($83m) for the first six months of 2019.
The government now plans to emulate the likes of Ethiopian Airlines by forming an aviation holding company in which the carrier will be combined with a planned national aviation college and profit-making assets such as Jomo Kenyatta International Airport (JKIA, the country’s biggest airport) and the Kenya Airports Authority (KAA). The new holding company will thus operate all the nation’s airports. Earlier this year, Kenya Airways submitted a proposal to the KAA to manage JKIA for a concession period of 30 years. JKIA is the seventh busiest passenger airport in Africa, serving about 7m passengers annually.
In addition to shoring up the airline’s balance sheet, nationalisation will exempt Kenya Airways from taxes on engines, maintenance and fuel. The move will undoubtedly improve the company’s financial position over the short term, but there is a lot of uncertainty over whether increased government involvement will actually benefit Kenya Airways’ longer-term sustainability, especially when considering that most other airlines are moving away from nationalisation, towards privatisation.
Tremendous numbers of passengers are set to pass through Kenya in the coming years: IATA thinks total air passengers through Kenya will increase from 6.8m in 2018 to over 10m by 2026. It is clear that as it is currently managed, Kenya Airways cannot reap the benefits of this increased market.
Total air passengers (million)
Economic growth in Ethiopia remains strong, supported by an ambitious capital expenditure drive and a reform agenda that envisions Ethiopia’s transformation from a tightly-controlled system towards a more pragmatic, market-oriented framework. However, momentum in the period through 2020 will probably slow in the face of power rationing and political tensions. In recent months real, watershed successes in telecommunications and financial sector reform were countered by worsening shortages of food staples and hard currency, underperformance on tax collection and inflation at multi-year highs.
Political challenges in the form of regional and ethnic violence, as well as strained relations within the ruling coalition, will increasingly test Prime Minister Abiy Ahmed’s resolve as the May 2020 general election draws near. Mindful of these factors, Oxford Economics has revised its real GDP growth forecast lower by 0.2 ppts to a below-consensus 7.5% for 2019. Even at this lower growth rate Ethiopia will remain a top performer on the continent and in the world this year, with growth underpinned by ambitious capital expenditure and foreign interest in the government’s reform plans. Over the medium term, growth prospects hinge on the success of the reform programme, which will unlock a gradual rotation towards a consumption-based, market-oriented economy. We anticipate that growth will adjust to a more sustainable pace over the medium term, of 6% per annum.
Foreign Direct Investment (FDI) will be key to improving Ethiopia’s external situation, and the plan is to attract investors through the partial privatisation of parastatal Ethio Telecom, the awarding of two other mobile telecommunications licences (scheduled for March 2020), and plans to open a domestic bourse in 2020. Sufficient FDI will also help replenish foreign reserves. International companies MTN, Vodacom, Orange and the Vietnamese Viettel are reportedly in the running to enter the lucrative mobile market, and have applied for licences. Ethio Telecom boasted a 21% increase in revenues over the first quarter of its fiscal year as the subscription base rose by 10% – lifted by discounted tariffs for internet services and data – and the state-run company introduced new products. In August, the government announced that a 4G network will be installed in the capital, which is expected to become fully operational within three years. Ethiopia also passed a law in June 2019 to establish an industry regulator. Credible regulation and the entry of large international players will open the door for smaller players.
Years of fuelling growth through government capital spending has come at a cost. Even in the highly-indebted African creditor context, Ethiopia stands out: external debt surged by 885% over the 10-year period to 2018. External debt is forecast to breach 36% of GDP by 2021, and government debt is set to remain near 55% of GDP. So liquidity risks are exceedingly high as the amount of foreign exchange reserves to protect against an external crisis is relatively low (enough to pay for 2.1 months’ worth of imports). Media reports in August stoked fears that SOE debt exceeded $24.7bn. According to Bloomberg sources, Ethiopia is reportedly in negotiations with unspecified Chinese lenders to reschedule payments, specifically within the telecommunications sector.
Real GDP growth and GDP per capita in Ethiopia, 2012-19
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