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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.

Banking on opposite sides of the continent: Q2 summary

  • As a global trade war rages, Africa fears contagion from lower commodity prices
  • Diversified economies will be best placed to weather the storm
  • A well-regulated, mainly private banking sector is key to financing the economy

Focus: Africa

As 2019 nears the halfway mark, global economic news is dominated by fears over the trade war between the US and China, and the effects it might have on the rest of the world. In Africa, the fear is that a slowdown in China will result in softer demand for commodities, and accordingly lower commodity prices. As happened the last time, commodity prices fell dramatically, the undiversified economies will come under pressure as current account balances deteriorate, currencies come under strain, prices go up and central banks push up interest rates. This dynamic is already clear from comparison of different regions’ growth rates (see below). 

Sensible government policy, methodically implemented, is key to managing diversification drives. Deficient implementation (often due to corruption) has hampered diversification efforts as bureaucrats fail to follow through on putting plans in action, or else drag their feet under pressure from economic operators who benefit from the status quo. Even when policy is implemented well, however, an insufficiently developed banking sector will tend to retard diversification and economic development. 

A particular problem is the dominance of publicly-owned banks in some countries: state-owned banks tend to provide capital to safe investments by other state-owned enterprises (safe, because these firms’ debts are government-guaranteed), which makes access to financing tricky for private firms. Corruption is another frequent problem in state banks, where the staff may be under political control, and connected individuals are able to put pressure on bank officers to extend loans to companies that are unable, or unwilling, to repay the loans. The resulting high levels of non-performing loans then put pressure on the entire banking system.

Government support to the banking sector is best provided through a central bank, which should be independent, have a clear mandate to protect purchasing power by keeping prices stable, and have the tools to ensure that the commercial banking sector remains liquid. Central banks in many African countries could do with even greater independence and more resources on the research side. 
In the dedicated country sections below, this edition of Economic Insight: Africa will take a closer look at the banking sectors of Mauritius and Ghana.

The macroeconomic benefits of diversification are evident from a comparison of real GDP growth rates between the regions of Africa. As it has been since the sharp fall in oil and commodity prices that started in 2014, East Africa is the region in Africa that is estimated to have experienced the most rapid real GDP growth in 2018, and it is forecast to continue doing so over the next two years. The region’s growth is mainly driven by strong performances in the two major economies: Kenya, a $90bn economy forecast to expand by 5.5% in 2019, and Ethiopia, an $80bn economy forecast to grow by 7.9%. Kenya, in particular, has a dynamic banking sector and its most successful banks are regional leaders. Rwanda is often mentioned as a growth success story, and its projected real GDP growth rate of 7.4% in 2019 is certainly an impressive number, but the economy is only expected to grow beyond the $10bn level this year and it makes a minor contribution to the region’s output.

Regional GDP growth in Africa, 2014-20

The franc zone is the second-fastest growing region in Africa: there, GDP growth is forecast at 4.9% for 2019. Most of the growth will take place in Ivory Coast, which is forecast to show real GDP growth of 7.0% this year, thanks in large part to services growth (although cocoa exports still matter).

North Africa presents a somewhat mixed bag: Egypt, Morocco and Tunisia have diversified economies, whereas Algeria and Libya are extremely dependent on oil and gas. The latter two are forecast to have a very disappointing year in 2019: Libya’s economy will contract by 4.1%, and Algeria’s will grow by only 2.0%. This contrasts with a growth rate of 5.5% in Egypt, where the government has been exemplary in implementing constructive economic policy. However, to sustain this kind of growth into the future the government will have to encourage private-sector growth and improve the corporate sector’s access to finance.

Southern Africa is the slowest-growing region on the continent, with GDP growth forecast at barely 1.8% this year: less than a third of East Africa’s growth rate. Growth in the south is dragged down by South Africa, the region’s dominant economy (it accounts for more than two-thirds of regional output), where growth is forecast to remain at a dismal 0.8% in 2019 – the same level as in 2018. Slow growth in Angola (+1.1% in 2019, after a 2.5% contraction in 2018), the region’s second-biggest economy, acts as a further brake on the region’s growth.

Focus: Ghana

The economy expanded by a robust 6.3% in 2018, and growth looks set to accelerate this year, driven by a rebound in consumer demand and robust industrial output growth, particularly in relation to rising oil production. News that the Obuasi mine will start producing gold again towards the end of 2019, and oil exploration being ramped up by the likes of Tullow Oil and Aker Energy bode well for the medium-term outlook.

Inflation, meanwhile, has trended broadly higher to 9.5% year-on-year in April, and risks to the outlook have mounted. These risks, including the weak performance of the cedi, higher global oil prices and possible utility tariff adjustments, prompted the central bank to tone down its dovish rhetoric after a surprise 100 bps cut in the policy rate at the start of the year. 

Consumer price inflation (%, y-o-y)

Debt sustainability concerns have also resurfaced following the completion of the IMF programme coupled with a steady increase in public debt levels – while the government stuck to the official 3.8% of GDP fiscal deficit target, off-budget spending related to financial sector reforms actually pushed this figure up to 7.2% of GDP in 2018. 

As part of a reform programme to bolster the stability of the banking sector, the central bank embarked on a recapitalisation exercise which saw the licences of seven insolvent banks being revoked. After the recapitalisation exercise ended on 31 December, a review of the outcome in early January 2019 showed that a total of 23 banks met the GH¢400m minimum capital requirement – 16 banks injected additional capital, three mergers were approved while private pension funds injected capital into five indigenous banks through a special purpose holding company named Ghana Amalgamated Trust Limited. The industry has shown signs of recovery after the reform drive. The Capital Adequacy Ratio (CAR) rose to 21.7% in February 2019 from 19.2% a year earlier. Asset quality also improved, with the non-performing loan ratio falling from 21.6% in February 2018 to 18.2% in February 2019.

Non-performing loan ratio (%)

In general, the banking industry’s performance is expected to improve this year following the completion of the restructuring drive. However, this process has contributed to a steady increase in public debt, fuelling sustainability concerns. Continued fiscal consolidation efforts are thus imperative, but this will not be an easy task in light of persistent revenue underperformance. The weak finances at certain state-owned enterprises also still represent a key concern. 

Focus: Mauritius

The island economy has expanded at a firm pace of around 3.8% between 2016−18, buoyed by robust performances in the dominant financial services and tourism industries. Meanwhile, the export-orientated agricultural and manufacturing sectors have struggled. We forecast that real GDP will moderate slightly to 3.7% in 2019.
Agriculture and manufacturing are expected to continue to disappoint, while tourism also looks set to be weaker this year. This will mostly be offset by steady growth in the services sector as well as Port Louis’s economic diversification and infrastructure investment efforts. However, risks are skewed to the downside. Mauritius’s major trade and tourism partners are facing some economic challenges, and changes to the local tax regime could weigh on the banking industry’s profits.

Finance industry growth vs GDP growth

In the 2018/19 budget the government announced major changes to the regulations for companies with global business licences (GBC), due to international pressure on tax havens. The amendments harmonised these regulations and aligned them with global standards. Last year ‘finance & insurance activities’ contributed around 12% to GDP. The financial industry is dominated by banks (which account for roughly 80% of total financial sector assets) and GBC deposits account for 30% of total bank deposits.

Last year was a bitter year for sugar cane (-9.1%) and sugar (-19.0%) production due to dry local conditions and low sugar prices (owing to a global supply glut). Sugar prices have remained under pressure in H1 2019 and the outlook for sugar stockpiles depends heavily on the uncertain outcomes of India’s monsoon season and Brazil’s ethanol production. The textile industry (which accounts for roughly a third of merchandise exports) is facing increased competition from other African textile exporters such as Madagascar. The industry’s cost competitiveness may have been reduced by a significant increase in minimum wages since 2017.

The tourism industry saw a quieter start to the year in 2019. The number of tourists arriving in the island nation declined by 1.2% year-on-year in Q1 2019. The decrease probably reflects the impact of the global growth slowdown and tighter budgets for Chinese travellers. Furthermore, France, a major trade partner and source of tourism, is battling with suppressed consumer and business confidence in the wake of the gilets jaunes protests. Other major trade and tourism partners, the UK and South Africa, are forecast to post modest economic recoveries this year. However, these countries are beset by unique political problems that could affect growth and investment.

Total Arrivals (% chg, y-o-y)

On the bright side, the construction industry is expected to record strong growth in 2019. This is thanks to several large rail, road and port infrastructure projects which form part of the Public Sector Investment Programme. Consumer spending and growth in the services sector is also expected to remain robust this year. This will be supported by the negative income tax and national minimum wage policies which were implemented in 2018.

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.