Growth, debt and Trump as issues for Nigeria, others in 2017
In 2016, real GDP growth in sub-Saharan Africa is estimated to have been the weakest since the 2008-09 global financial crisis. This was largely because of the weak performance in its two largest economies, South Africa and Nigeria, which together make up about half of sub-Saharan Africa’s GDP.
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 rates of growth of above six per cent. The slowdown in Africa was not uniform.
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/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 per cent 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 liberalised 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.
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.
To counter this, African economies will have to redouble efforts to boost intra-regional trade. While unlikely to compensate for a global trade slowdown, it 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.
In the years following the 2008-09 global financial crisis, African economies took advantage of cheaper financing to issue record amounts of traded external debt. Many of these countries are now only five or six years away from a large amount of this Eurobond debt maturing.
Ordinarily, borrowing countries would be looking to refinance their existing debt, issuing more long-term debt some time before their existing debt is due to mature. But rising U.S. interest rates and higher bond yields may complicate this process as global investors will likely demand even high returns for investing in sub-Saharan African debt, which is perceived to be more risky.
For African governments, borrowing internationally to invest in infrastructure is likely to become more expensive. They will have to do more to reassure lenders that they can repay existing debt. Those countries that are able to boost confidence by signing up for IMF and World Bank reforms will likely be rewarded with access to cheaper financing. Those that fail to adopt reforms could find their access to international capital markets more constrained.
Weak growth in recent years has impacted the health of the banking sector in different sub-Saharan African economies. Weaker commodity prices and sluggish fiscal revenue resulted in many governments falling behind on payments to suppliers and contractors.
The prevalence of fiscal arrears (late payment by government) has often been closely linked to the problem of non-performing loans in different banking systems.
Often the problems are country-specific. Prior to the collapse in the oil price in late-2014, Nigerian banks were used to lending in foreign exchange. But currency depreciation since then has made foreign exchange loan repayment more difficult. It has also called into question capital adequacy, the buffer (measured in local currency) through which banks are able to absorb losses. Until these issues are resolved comprehensively, it is difficult to see the return of new lending appetite on a sustained basis.
Populist policies have also played a role in weakening the performance of the financial sector. In Kenya, the full impact of the adoption of loan rate caps and regulated loan-deposit spreads, introduced in 2016, will only be seen in 2017 or beyond. Banks now face a maximum rate at which they are able to lend to clients.
If banks cannot price adequately for risk, they withdraw lending, choosing to lend only to the safest and most established borrowers. Small and medium enterprises as well as new start-ups with no established credit histories will likely face the brunt of this, meaning several growth and employment opportunities will be forgone somewhat needlessly.
While Africa’s economies face more difficult external conditions in 2017, many of the policies that have contributed to weaker economic growth are home-grown. The good news is that average regional growth should recover in 2017. But greater reform and deeper debate on the domestic policy choices that have constrained growth are required for more meaningful transformation.
• Khan is the Chief Economist for Africa, Standard Chartered Bank