Saturday 26 September 2015


With much of the world weighed down by anaemic growth, high debt and painful austerity programmes, Africa has been a rare bright spot, producing some of the world’s fastest growing economies. But after riding the wave of the commodities cycle, many African policymakers, particularly in resource-rich nations, face stern tests as the continent now endures the headwinds of global turbulence.

This year’s collapse in oil and metals prices has already had a significant impact on Africa’s largest economies, including Nigeria and Angola – the continent’s top two crude exports respectively – and South Africa, the continent’s top mining destination. Now dollar strength and concerns over the health of China’s economy have triggered a broader weakening of African currencies as they get swept up in the emerging market volatility.

Indeed, the state of China’s economy is likely to be a major factor in the fortunes of many African nations. China, which overtook the United States as Africa’s largest single trade partner in 2009, has been a key destination for Africa’s mineral exports, a major investor and constructor of infrastructure projects as well as a vital source of cheap government financing.

Martin Kingston, head of Rothschild for sub-Saharan Africa, said: “In the context of China, there is more than one dynamic at play. It’s the depression of commodity prices, but also in terms of trade and foreign direct investment, including infrastructure support. There’s also an additional question — to what extent is Africa going to be able to rely upon other flows of capital and other forms of support for infrastructure and other programmes?”

Evidence is already mounting of a slowdown. A recent note by Fathom Consulting highlighted a 40 per cent year-on-year dip in Chinese imports from Africa for July. Martyn Davies, chief executive of Frontier Advisory, a group that specialises in Africa-China investment, says there is anecdotal evidence of an easing in Chinese activity on the continent. “The hurdle rates of Chinese sovereign wealth investment, or part sovereign wealth fund invested projects in Africa have been raised so the capital is more discerning and seeks greater profitability,” he says.

The latest uncertainty is likely to put such investments under an even greater microscope, he adds. “Chinese flights to Africa have already been curtailed. You are not seeing anywhere near the number of state business delegations one used to see coming into this part of the world,” Mr Davies says. Still, Mr. Davies believes the level of Chinese private sector interest in Africa is likely to grow.

Indeed, Abebe Aemro Selassie, deputy director of the African Department at the IMF, says what is often overlooked is the impact China has had on the African growth story beyond commodities and state-sponsored projects.

The benefit to the region has been as much from China’s emergence on the global scene and the extent it has depressed prices for capital goods, consumer goods, and services throughout Africa,” Mr. Selassie says. “And that is about half, if not more, of the story. That should remain in place and is something that is underestimated.”

And while the latest global turbulence is likely to reduce African nations’ headline growth — the IMF forecasts growth for sub Saharan Africa to be 4.4 per cent this year, down 5 per cent in 2014 — “it masks a very diverse picture”, Mr Selassie says. China has been roiling global markets all summer as its leaders try to stop a huge stock bubble from bursting and its slowing economy from stalling

Among the most severely affected are the continent’s oil producers, with both Nigeria and Angola seeing their currencies plummet and their growth prospects sharply decline. The pair, Africa’s first and third largest economies respectively, are already suffering foreign currency shortages and both have put in measures to control the flow of forex.

Their fortunes have a significant impact on the continent’s growth story — sub-Saharan Africa’s eight oil exporters account for about 50 per cent of the region’s gross domestic product.

For Africa’s non-oil exporters, the collapse in crude prices has provided a cushion. But, with many African countries import-dependent, the depreciation of currencies affects inflation and the cost of imports. It will also put a strain on those nations that have taken advantage of investors’ search for yields to tap into international capital markets.

The likes of Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal, and Ivory Coast have all issued foreign currency dominated sovereign bonds in recent years. “In the past, foreign exchange weakness in Africa was largely shrugged off. Economies adapted and found a way to cope with it, but the recent surge in eurobond issuance has been a game-changer,” says Razia Khan, chief economist for Africa at Standard Chartered.  Now, when currencies depreciate, external risks are magnified, public debt ratios rise, and perceptions of sovereign creditworthiness alter quite dramatically.”

Ms. Khan says the question is whether governments have given enough consideration to the repayment risk and how they would raise the foreign exchange to service the debt. And the current market volatility will likely make it harder or more expensive for African nations to tap capital markets.
Even if China were to grow at a slightly slower rate, it would remain a hugely significant economy. China’s interest in Africa has always been long-term and strategic,” she says. “However, the financial market effects are real. The financial market volatility has highlighted some of the shortcomings in the defences put in place by regional policymakers.” (FT)

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