South of the Sahara, economies have flourished over the past decade, earning the continent the moniker ‘Africa Rising’. But growing pains are emerging, clouding the short-term outlook for a region that has become a magnet for foreign investors.
On the surface, all looks well. Regional growth is expected to accelerate to 6 per cent this year from 5 per cent in 2013, the International Monetary Fund estimates, making it second only to developing Asia in terms of the pace of expansion. Inflation remains well under control, having stabilised last year at 5.5 per cent, compared with 47.4 per cent 20 years ago.
But it does not take much digging to find that a number of Africa’s hitherto rising stars, including Ghana, Nigeria, Uganda and Zambia, are experiencing either economic, social or political troubles – or a combination of all three.
Add to this the turbulence in emerging markets as the US Federal Reserve tapers its monetary stimulus, and a Chinese slowdown that has triggered a decline in commodity prices – an essential revenue source for sub-Saharan governments – and the investment community has to be asking itself if it got carried away in these frontier markets.
“With global monetary conditions set to tighten over the coming years, investors are now paying closer attention to the region’s vulnerabilities,” says Shilan Shah, Africa economist at Capital Economics consultants. “Some countries may now be required to tighten policy in line with rising global interest rates, leading to a period of softer growth.”
Sub-Saharan Africa was one of the biggest beneficiaries of investors’ search for yield outside the rock-bottom rates offered in developed economies. This enabled the continent as a whole to issue a record $10bn in US dollar-denominated sovereign bonds in 2013, up from $1bn a decade earlier, industry estimates show.
While investors have held on to this dollar-denominated debt, capital inflows to local currency debt markets have slowed significantly.
Since the beginning of the year, as US tapering started, the Nigerian naira, the Ghanaian cedi and Zambian kwacha have hit all-time lows. The central bank of South Africa hiked interest rates in an effort to bolster the falling rand. Zambia and Ghana have also tightened their monetary policy to counter rising inflation and depreciating currencies. As capital flows slowed, the region’s economic policy flaws emerged.
Sub-Saharan Africa is particularly vulnerable to the slowing Chinese economy, which is translating into weaker commodities prices. For example, the price of copper, a key export for several African nations, has fallen to less than $6,500 a tonne, down more than a third from a 2011 peak of $10,190.
Sid’AhmedRaiss, governor of the central bank of Mauritania, whose economy depends on oil and iron ore exports, said: “China is a huge client of sub-Saharan Africa. Its [economic] growth rate is very important for the region.”
Willard Manungo, secretary of finance in Zimbabwe, which produces platinum and diamonds, warned: “If commodities prices come down [further], then we will have a problem.”
The slowing portfolio flows and commodities’ revenues threaten to exacerbate current account deficits across the region. As KanguyaMayondi, an official at the Bank of Zambia, pointed out, capital inflows have “played an important role in financing” current accounts in Zambia and across sub-Sahara.
Indeed, the aggregated current account deficit of the region is expected to hit 4.1 per cent of gross domestic product this year – up from 1.6 per cent a decade ago. The number masks bigger individual deficits, such as in Ghana and Uganda, which are forecast to reach 10.7 per cent and 13.9 per cent respectively.
Meanwhile, the normalisation of interest rates across the globe will force governments and companies to pay higher rates to attract foreign investment. Kenya will test the appetite of the market for African debt when it launches its first dollar-denominated sovereign bond, expected in the next few weeks.
The complex trends are challenging policy makers to tackle a number of lingering problems if they want to move forward from being designated risky frontier markets.
Nigeria is a good example: its economic growth remains robust, and the IMF has forecast that it will accelerate to 7.3 per cent this year, up from 6.4 per cent in 2013. But the recent suspension of LamidoSanusi, the central bank governor, after he exposed an alleged multibillion-dollar hole in the oil account, has unsettled investors.
Ghana is another example: despite repeated promises to bring down the fiscal deficit, the government has announced a double-digit hole for 2013 on the back of spiralling public sector salaries.
But PravinGordhan, South African finance minister, remains optimistic about the outlook for the continent, thanks to its billion-strong pool of potential consumers – almost as many as in China. He concedes, however: “You are going to have dips in the curve every now and again.”
While short-term flows into debt markets might be slowing, equity investors are still pouring money into regional exchanges, though many are worried about sky-high valuations for the most popular banking and consumer goods companies.
Perhaps more telling is that long-term investment by companies – more important than the less-stable short-term capital flows – continues apace. The UN estimates that the region attracted a record of $42bn in foreign direct investment last year – up 10 per cent from 2012, and well above the previous record of $39bn in 2011.
“There is still momentum in the African boom, but in a number of key countries the short-term outlook is for a downturn,” said Chris Becker, a strategist at ETM Analytics in Johannesburg.
Razia Khan, Africa economist at Standard Chartered bank in London, pointed out that it would be “wrong to dismiss the Africa story on the basis of a few countries” that are showing signs of strain.
The immediate future is brighter for some. Investors are particularly bullish about Kenya, Ethiopia, Ivory Coast, Tanzania, Mozambique, Botswana and Angola, boosted by new discoveries of hydrocarbons and booming foreign direct investment.
Differing outlooks for each of the sub-Saharan economies demonstrate that there is no single-speed rapid growth trajectory for the “Africa Rising” phenomenon. As David Cowan, Africa economist at Citi bank, said: “From time to time we are going to have a bump in the road.”
Javier Blas
