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Economic Update: Africa

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

Election-related uncertainty in African economies: Q4 summary

  • Elections and accompanying political instability affect some countries over the short term – including South Africa and Nigeria
  • Oil importers beginning to see higher international fuel prices hit growth
  • East Africa remains strongest-growing region, Southern Africa’s growth lags

Focus: Africa

East Africa continues see the highest GDP growth on the continent, even though the region’s economic growth is expected to ease slightly, from 6.8% in 2017 to 6.3% this year. Within the region, Ethiopia (7.8%), Rwanda (7.1%), and Tanzania (6.7%) all perform above average, while the drags on growth are Burundi (0.1%) and especially war-torn South Sudan (-3.8%). Those at the bottom of the growth rankings illustrate how large an effect political instability can have on economic prospects. Kenya, emerging from political uncertainty after elections last year, should see growth rebound to 5.4% this year after GDP growth dropped to 4.9% in 2017 (between 2012 and 2016 growth averaged 5.5%). 

Political instability tends to peak around election time for Africa’s fragile democracies. Among these, is Nigeria which is heading to the polls in February next year. However, Africa’s largest economy cannot lay all the blame for its rather weak growth (forecast at 1.8% this year) on election uncertainty – compared to the average of 2.5% for West and Central Africa. There is little uncertainty about who will win elections in the Democratic Republic of Congo (DRC) in December, but political tensions are set to rise nonetheless, and are the main downside risk to our GDP growth forecast of 4.1% there this year. In far more stable territory, Ghana’s economy should expand by a respectable 5.2% this year (note GDP figures were rebased over the past quarter). This is on the back of the boost the industrial sector has received from higher oil prices.

In Southern Africa, again the continent’s slowest-growing region with GDP forecast to expand only 1.2% this year, the story of elections is clearly shown by regional powerhouse South Africa and neighboring Zimbabwe. Election rhetoric regarding land and property rights in South Africa ahead of polls in 2019 has spooked investors, and President Cyril Ramaphosa is finding it difficult to convince them it will be business as usual. The country is expected to post GDP growth of just 0.7% this year. Zimbabwe’s government, meanwhile, is suffering from post-election credibility difficulties, with international lenders and investors unconvinced things have changed in Harare after violence and fraud allegations marred July’s election (see our special focus on the country in this report).

Africa GDP growth by region, 2013-19

In North Africa, Libya and Algeria are scheduled to head to the polls in the near future, in December 2018 and April 2019, respectively, although Libya’s election will almost certainly not go ahead as the legal framework for it is not yet in place. They are also, incidentally, the region’s fastest and slowest growing economies this year at 14.7% and 2.3%, respectively. Egypt, which held elections in March to overwhelmingly return President Abdel Fattah Al-Sisi to power (97% of the vote), is expected to grow by 5.3% this year. The certainty of Mr Sisi’s grip on power appears to be helping the country’s economic rebound.

Finally, in the Franc Zone, which should see GDP growth of around 4.6% this year, Cameroon just returned Paul Biya (85) to the presidency. He is Africa’s second-longest serving president after 36 years in power. Despite his unpopularity and the violence that accompanied his re-election, the country is expected to post a GDP growth rate of 4.0% this year – up from 3.2% in 2017. Elections and accompanying political instability evidently have a complex relationship with economic growth.

Focus: Nigeria

The economy disappointed over the first half of the year, with GDP expanding by only 1.7% y/y during H1. Contributing factors were weak private sector credit extension, fuel shortages and delays in passing the fiscal budget. However, we expect the performance during the second semester to be stronger. Oil production has rebounded slightly faster than anticipated in recent months – according to OPEC figures, oil output rose from 1.64 million b/d in July to 1.75 million b/d in September.

The non-oil economy still faces headwinds, evidenced by leading indicators declining slightly from recent highs. That said, a ramp-up in fiscal spending will provide a boost in H2. Demand-side activity should also gain traction thanks to lower inflation and a gradual increase in liquidity – the consumer confidence index also moved back into positive territory in Q3. We maintain our forecast for real GDP growth to reach 1.8% this year.

The manufacturing PMI declined to 56.2 in September. The non-manufacturing PMI also trended lower from 58.0 in August to 56.5, ascribed to weaker performances in the agriculture, healthcare and telecommunications sectors. That said, Nigeria’s PMI readings remain well within expansion territory. This supports our view of a recovery in non-oil activity, albeit at a more gradual pace than we had expected before.

Inflation edged higher for the second consecutive month in September, reaching 11.3% y/y, mainly ascribed to rising food costs due to flooding and security challenges. There is still limited evidence of a fiscally-induced liquidity injection placing upward pressure on prices, but this could become more of a risk as elections approach. Inflation is still forecast to average 12.2% this year.   

Another variable likely to be affected by approaching elections is Nigeria’s foreign currency buffer. Foreign reserves rose sharply from US$30.3bn in June 2017 to US$47.2bn a year later, due to a surge in portfolio inflows following the liberalization of the exchange rate framework in addition to aggressive external debt accumulation.  

However, in the next few months reserves declined to US$44.6bn (the figure at end August) and the central bank’s 30-day moving average estimate stood at US$42.4bn on October 24. The pressure on reserves most likely stems from portfolio reversals in light of rising returns in advanced economies, but uncertainty related to February’s election may also be weighing on the minds of investors. That said, reserves may well receive a boost from additional external debt accumulation. On October 17, the Nigerian Senate approved a request for Abuja to issue a further US$2.8bn in Euro-bonds. Oxford Economics forecasts reserves will end the year at US$42.2bn.

President Buhari’s approval rating by geopolitical region, Sep 2018

With regard to campaigning ahead of February’s elections, both main parties – the ruling All Progressives Congress (APC) and People’s Democratic Party (PDP) – held their primaries to select candidates in early October. The APC’s choice of President Muhammadu Buhari was a foregone conclusion, but a number of strong candidates were in the running for the PDP’s presidential ticket. In the end, the opposition party went for former Deputy President Atiku Abubakar.

Mr Abubakar was a solid choice for the PDP; if he had not been picked, he would most likely have broken away and split the opposition vote. Besides that, he is wealthy, has good name recognition and, perhaps most importantly, he is not Mr Buhari. We expect this final trait to be Mr Abubakar’s main campaign message after Mr Buhari’s first term was riddled with multiple crises (economic and security related). 

Mr Abubukar has also managed to secure the backing of his former foe Olusegun Obasanjo (president when Mr Abubakar was deputy). That should help bring in some votes in the south-west where the PDP is weaker than the APC. 

While the race will be more competitive than expected, Mr Buhari remains the favourite to win. This assessment is based mostly on his popularity in the north-west which accounted for 30% of all votes cast in 2015’s presidential election. He also has the backing of powerful politicians in the southwest which could be the swing region that decides the winner. As polling from September on Mr Buhari’s approval rating indicates, however, it is likely to be a very close contest.

Focus: Zimbabwe

Following a contentious election in which the opposition Movement for Democratic Change (MDC-Alliance) challenged the ruling Zanu-PF, which resulted in post-election violence in the capital Harare that left six people dead and dozens injured, the Constitutional Court ruled that the MDC-Alliance’s case of poll fraud was unfounded. Zanu-PF’s candidate Emmerson Mnangagwa, who had taken over from independence leader Robert Mugabe on an interim basis after a coup in November 2017, was sworn in as president a second time on August 26 – signalling the start of a project to address the big economic challenges facing the country after decades of neglect and repression.

For Zimbabwe, the successful running of the elections was always going to be more important than who actually won. What’s more, it was somewhat a given that the eventual loser would not accept the outcome and proceed to question the fairness of the election, which turned out to be the case. Despite claims of despondency and despair in Zimbabwe over the outcome, there was little palpable evidence of either. The elections were deemed a relatively free, fair and credible poll, reflecting the will of the people. For the most part, Zimbabweans just want to get on with their daily lives in the hope that the new president will keep his promises of fixing the badly damaged economy.

Real GDP is expected to continue expanding in 2018, showing growth of 1.7% in the year, but this is mostly due to high levels of government expenditure, which along with government debt has become unsustainable in the last few years. Excessive government spending is one of the undercurrents fuelling inflation. Another is the continuous devaluation of the ‘bond notes’ (under the multi-currency monetary regime), which is precipitating dollar hoarding and panic buying. The fact that Zimbabwe does not have its own currency makes for a very uncertain financial environment, with quasi-currency instruments consistently losing value against the US dollar, which consumers and traders far prefer to hold.

It is still too soon to say whether the new dispensation will bring about meaningful change that could put Zimbabwe back on track towards economic recovery, but officials have been busy trying to keep the economy from going under. There has been an unceasing drive to push Mr Mnangagwa’s ‘open for business’ narrative, as the country attempts to re-engage with multilateral credit institutions and foreign investors. In a bid to unlock more donor involvement, Zimbabwe has emphasised the clearing of nearly $2bn in arrears as a main priority. After having settled $107.9m of debt with the IMF in 2016, the country still owes the World Bank, African Development Bank (AfDB) and European Investment Bank (EIB), while significant amounts are also owed to other creditors, both in the Paris Club and outside it. In October newly appointed Minister of Finance Mthuli Ncube said that the World Bank and IMF are to endorse Zimbabwe’s road map to clear foreign arrears by backing a two-year economic recovery programme.


Zimbabwe’s creditors by amount ($bn)

Although this sounds promising, Zimbabwe would probably have to do more than just settle its debts: foreign investors want more certainty in the form of meaningful policy reform, which would reassure them that change under the current administration is something of actual substance. As discussed in the Q1 2018 Economic Insight, Mr Mnangagwa’s team has indicated that his government will be friendlier to foreign investors and lenders than Mr Mugabe’s was, by announcing several positive policy amendments.

Unfortunately the economy is still constantly besieged by a myriad of problems, of which the currency issue is the most serious. The severe shortage of foreign exchange makes it nearly impossible for investors to repatriate profits, while businesses struggle to import key goods such as wheat, maize, fuel, essential medicines, and electricity. The liquidity shortages constrain economic activity more generally as consumers hoard US dollars and this leads to panic buying, thus creating an enormous imbalance in the economy. The IMF regards Zimbabwe as the second-largest informal economy in the world (when expressed as a proportion of GDP) with around 61% of all activity conducted outside the formal sector.

There is an increased sense of hopefulness among Zimbabweans that the new dispensation could produce something meaningful, but the road to recovery is a long one.

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.