If 2010 was a good year for the economies of sub-Saharan Africa, their continued recovery so far this year has cemented a growing view that the region’s economic gains are here to stay.
Foreign trade and investment are once again soaring; domestic and intra-regional trade are beginning to gather some momentum; and most governments are pressing ahead with structural economic reforms.
International lenders including the World Bank, the IMF and the African Development Bank all predict 5%-plus growth for the region this year, and similar rates in 2012 – a marked contrast to past decades of poor performance.
AfDB president Donald Kaberuka is convinced that this time it’s different: “I don’t think that this is another false dawn, and I don’t think it’s naive to acknowledge the economic momentum built over the last decade,” he tells Emerging Markets. “We have reason to be optimistic about the momentum.”
But this positive outlook masks mounting external and domestic risks that could threaten the region’s bounce back.
Rising food and fuel prices this year have already exacted a heavy toll, while persistent poverty and income inequality are reminders that the fruits of strong, headline growth have been unevenly distributed across the region. Moreover, Africa’s economic fate remains heavily dependent on external commodity demand, and the global economic outlook appears increasingly uncertain.
INFLATION
Rising food and fuel prices are the most pressing risk to the regional outlook. As AfDB chief economist Mthuli Ncube puts it: “Food prices are volatile and heading upwards. This is a major risk to vulnerable groups, and it can quickly become a problem for net importers of food who don’t produce enough locally.”
Inflation has hit double digits in many countries, driven disproportionately by food and fuel prices, prompting authorities to tighten policy, or introduce subsidies to cushion the impact.
“The biggest challenge in the near term is how policymakers deal with the threat of rising inflation, and whether they can stop food and fuel increases from becoming more generalized,” says Razia Khan, chief Africa analyst at Standard Chartered.
Some argue that regional policymakers have been too slow to react and may be forced to tighten policy aggressively as the year progresses. “There is a risk that some policymakers in the region may be a bit behind the curve, and that they may engineer a hard landing,” says Stuart Culverhouse, chief economist at Exotix, an investment banking boutique.
Kenya – where inflation is at 13% – is a concern, says Culverhouse. Although the central bank has begun to hike rates, there are risks of inflation pass-through and pressure on the currency, he warns.
While the policy risk is significant, arguably more pressing is the possible impact on social stability – high food prices were one of the principal drivers behind recent unrest in North Africa. Food price protests have already erupted in a number of sub-Saharan African countries, including Burkina Faso and Uganda.
Says Ncube: “It will be very difficult for policymakers to prevent political or social upheaval due to sharp increases in prices.”
But Shanta Devarajan, chief Africa economist at the World Bank, says that low urbanization rates and the predominance of millet and rice in sub-Saharan African diets should mitigate the impact of rising global food prices. Prices of these staples have remained more stable than wheat or corn over the past 18 months.
Devarajan says price controls and social programmes in many countries had helped cushion the impact on the urban and rural poor. Ethiopia, for instance, doubled the wages paid to labourers on public works programmes in response to rising prices.
BALANCING ACT
But rising prices could also delay moves by African governments to withdraw from fiscally expansionary policies deployed in the aftermath of the financial crisis. This risks eroding the region’s fiscal cushion, undermining policy flexibility and leaving it vulnerable in the event of another global economic downturn.
“Broad-based subsidies can quickly become expensive and are fiscally not sustainable,” says Roger Nord, a senior Africa adviser at the IMF. “The challenge for sub-Saharan Africa is to start rebalancing their economies away from stimulus... but that’s a challenge exacerbated by the spikes in food and fuel.”
Nigeria, Ghana and Kenya are examples of countries that have made little progress in reducing their fiscal deficits, despite strong economic growth over the past 18 months.
Nevertheless, current African debt levels must be seen in perspective: a combination of debt forgiveness and more prudent macro and fiscal policies over the past decade has meant that debt levels are historically low.
“We have to remember that Africa was able to reduce debt levels from on average 100% of GDP in 2000 to less than 40% today,” says the IMF’s Nord. “They’ve gone up slightly during this past crisis, but not dramatically. You still have debt levels that compare favourably with what you might see in some advanced economies and in other emerging economies, and that has given a lot of sub-Saharan countries fiscal room for manoeuvre.”
While rising food prices are putting a strain on balance of payments, the hope is that countries have stockpiled enough foreign exchange reserves to cope with rising prices. “The recovery cycle from last year assisted these countries in accumulating foreign reserves, so while debts could come through due to higher import prices on food, they can run down those accumulated reserves,” says Ncube. “I’m confident that there is enough of a cushion on the capital account side of things.”
EXTERNAL RISKS
Notwithstanding such prudent policies, the worry remains that the region may be ill-equipped to deal with external shocks – not least given the region’s heavy reliance on external trade, in particular primary commodities.
“I am cautiously positive that African governments are moving in the right direction, but I’m not confident that the global economy will cooperate,” says Devarajan. A darkening global economic picture is the main reason the bank recently downgraded its sub-Saharan African growth forecast for 2011 to 5.1%, from 5.3% at the start of the year.
Chief among these risks is a potential slowdown in global commodity demand. More than 80% of Africa’s export earnings over the past decade came from primary commodities. China is now the largest trading partner for many of the region’s biggest economies, including South Africa and Angola.
“If Europe goes into a crisis, the US doesn’t really come out of recession, and China slows down dramatically, we would see a decline in commodity prices, and that’s the main vulnerability for Africa,” Devarajan says.
While all of these scenarios could have a negative impact on sub-Saharan Africa, a slowdown in emerging Asia appears the most serious potential risk.
The region’s relative resilience to the global economic crisis in 2008 was largely due to the rapid rebound in growth, particularly from China, from early 2009. This strong demand has continued to be a major driver of growth even as the recovery in advanced economies begins to falter. “A China slowdown is a major risk to the growth prospects for Africa,” says Ncube. “If demand from China falters, that will cause significant problems for commodity-producing countries.”
DIVERSIFICATION
Most economists argue that a sharp slowdown in Chinese commodity demand is unlikely in the short term and that economies are well placed to absorb a tempering of commodity prices.
“I cannot say that Africa can disconnect from the rest of the world. That is not true. But Africa has gained some degree of internal stamina, which is helpful in resisting external shocks,” says AfDB president Kaberuka.
Nevertheless, the possible consequences of a more severe commodity reversal underscore the importance of greater economic diversification. “I’m confident Chinese demand will stay strong for years to come, but in the interim there will be ups and downs that will impact on African countries. The need to diversify away from commodities is an imperative,” Ncube says.
Key to this process will be the development of strong domestic markets through local investment and entrepreneurship, and the growth of intra-African trade networks. But progress to date has been slow: domestic demand remains a marginal driver of economic growth, while intra-African trade accounts for just 10% of the continent’s exports.
“Structural transformation has been slow and will be needed to get Africa to the next growth level, and that’s the big challenge,” says the IMF’s Nord. “What you have in Africa is a lot of fragmentation of markets, and that is not necessarily conducive to economies of scale and investment.”
But there is still scope for local consumption to play a more important role. “Domestic demand has been growing substantially,” says Khan. “Africa has small domestic economies, but demand relative to where it has been in the past is enormously strong.”
She points to Kenya as a good example of a diversified and dynamic African economy with developed capital markets, a conspicuous middle class and growing trade links with the region.
Ncube points out that there are more than 120 million Africans spending between $4 and $20 a day and that this group would be the main drivers of continued domestic demand growth. “This middle class is real, they are professionals, they are growing and they are consuming, otherwise how do you explain the growth in mobile telephone services, in cars and in banking services across Africa,” he says.
But this will do little to alter the economic balance in the short to medium term. “The region is so heavily concentrated in commodity exports that even if we get 10% or 20% growth in manufacturing or non-tradable exports, it’s still from such a tiny base,” says Devarajan.
INCLUSIVE GROWTH
One pressing priority for policymakers is a move towards more inclusive, socially equitable growth. “There are huge similarities between sub-Saharan Africa and North Africa; if anything, the phenomenon of a large number of young people entering the labour market and not getting jobs is even more acute in sub-Saharan Africa than in North Africa,” says Devarajan. “The prospect that unrest could spread is a real one and one that keeps me awake at night.”
But some say the political systems in many sub-Saharan African states are very different from the ossified dictatorships in Egypt, Tunisia and Libya. “There’s much more pluralism, much more of an embrace of multi-party democracy in sub-Saharan Africa, so I don’t think that the thesis that ‘it happened in Tunisia and Egypt so we are likely to see the same in sub-Saharan Africa’ is accurate,” says Khan.
Similar unrest in sub-Saharan Africa is unlikely, says Ncube. But he suggests the events of the Arab spring may incentivize sub-Saharan African leaders to speed up reforms aimed at promoting employment, productivity and wage growth. “The positive thing about the North Africa story for the rest of the continent is that it will compel governments to do more about inclusive development and to promote policies that promote inclusion,” he says.
But it may be unrealistic, some argue, to expect more inclusive growth until a stable macroeconomic and political environment has been established – something that has only recently happened in many sub-Saharan African states.
If governments now fail to leverage relatively strong growth foundations to enact reform, they risk storing up major problems for themselves further down the line. “You have to have stability first so that activity and entrepreneurship can flourish, and then hopefully you get the trickledown,” says Exotix’s Culverhouse.
“But if you don’t get the trickledown, then in five or 10 years, that growth looks a bit of a mirage, and then you get the sort of protests we are seeing in North Africa,” he says.