The economic slowdown in Africa was not uniform in 2016. Although oil and mining economies were hurt by the commodity slowdown, much of East Africa as well as oil-importing Francophone economies such as Côte d’Ivoire and Senegal managed robust growth rates above 6 percent.
Hopes for faster growth rest on prospects in the region’s two largest economies.
Uncertainty surrounds the economic impact of a Donald Trump presidency. Africa is unlikely to be the direct target of Trump-induced trade protectionism, but trade tensions could weaken confidence in emerging market prospects. Sub-Saharan African economies are likely to be affected.
From African Arguments. Story by Razia Khan, regional head of economics for Africa at Standard Chartered Bank.
In South Africa, recovery after a severe drought in 2016 and improved electricity generation should provide a modest lift. But private sector confidence remains weak, and rising debt levels mean that South Africa remains at risk of losing its investment grade credit rating. With little room to scale up public investment, a tepid recovery is likely, at best. Faster growth will be needed to contain rising public debt. South Africa faces its next round of rating reviews in June, but it will be difficult to achieve anything meaningful by then.
In Nigeria, following a probable contraction of GDP in 2016, it will not take much to drive growth to positive levels in 2017. But higher oil prices alone – we forecast an average of $66 per barrel in 2017 – are no panacea. Oil output and Nigeria’s ability to curb militancy in the Niger Delta will also matter.
Even more important are prospects in the non-oil economy, which makes up 92 percent of Nigeria’s GDP. Activity in the non-oil sector has been sluggish, hampered by poor policy choices, in particular a poorly functioning foreign exchange market. Despite several flawed attempts at currency flexibility, Nigeria has never fully embraced a liberalized foreign exchange regime. The authorities are uncomfortable with allowing demand and supply to determine the value of the Nigerian naira. Because Nigeria has low levels of accumulated oil savings and its foreign exchange reserves have come under pressure, it has had to resort to curbing import demand in order to maintain a steady foreign exchange rate. However, squeezing import demand has meant maintaining a severe squeeze on the real economy. Growth prospects will depend on how quickly unsustainable foreign exchange bottlenecks are resolved.
2017 is likely to bring a cyclical recovery to sub-Saharan African economies. But this will not mean a restoration of previously robust growth rates.
Much uncertainty surrounds the likely economic impact of a Donald Trump presidency in the U.S. In recent weeks, global equity and commodity markets have rallied in anticipation of more expansionary fiscal policy and the possibility of faster U.S. economic growth. The U.S. dollar has strengthened against other currencies, especially those of emerging markets which are seen as especially vulnerable to a potential trade war.
Many worry about how the U.S. will afford more infrastructure spending; bond markets have sold off (with prices falling and bond yields rising), reflecting the concern that larger fiscal deficits may be needed to enable any spending stimulus. Each of these factors will have implications for sub-Saharan African economies in 2017. Africa is unlikely to be the direct target of any Trump-induced trade protectionism. But if trade tensions escalate, potentially weakening confidence in emerging market prospects, sub-Saharan African economies are likely to be affected. Over the last two decades, Africa’s trade with emerging markets has grown rapidly, at the expense of its trade with more developed partners. A slowdown in global trade would be a negative for trade-dependent emerging markets and could hurt their demand for Africa’s export commodities.
To counter this, African economies will have to redouble efforts to boost intraregional trade. While unlikely to compensate for a global trade slowdown, this might mitigate some of its more negative effects. Plans for an African Tripartite Free-Trade Area (TFTA) – encompassing 26 economies from the Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC) and Southern African Development Community (SADC) – should get underway in 2017. The challenge will be how to make the new trade partnership meaningful. Poor infrastructure links and weak trade complementarities hampered earlier trade initiatives. However, faced with the threat of new disruptions to existing trade patterns and supply-chain integration, it is even more important that African economies start trading more among themselves.