Sub-par Sub-Sahara

Oct 30, 2015|Kitan Williams

Sub-Saharan Africa, roughly the part of the the continent below the Sahara desert, is rarely appreciated for its sheer diversity and complexity. Today though, there is one worrying example of homogeneity across sub-Saharan African countries – their economic performance. Like other emerging markets, sub-Saharan Africa has struggled. The International Monetary Fund (IMF) estimates that economic growth in sub-Saharan Africa will slow to its weakest pace since 1999. Plunging commodity prices, the Chinese slowdown, demographic shifts, security threats, and deteriorating governance have all contributed towards this.

Previous leading lights within the region have particularly struggled. Nigeria, now the region’s economic powerhouse, is facing the prospect of weaker GDP growth amidst the challenges of underemployment, inflation and deteriorating fiscal balances at the state level. In South Africa, the country it deposed last year, the situation is even more dire as the Finance Minister estimates GDP growth of just 1.5% in 2015. Incredibly, the rainbow nation could soon find itself overtaken by Egypt.

Where Nigeria and South Africa have led, others have followed. Angola, Zambia and Ghana are some of the other countries whose economic woes have drawn scrutiny. And the homogeneity extends from performance to symptoms and outlook. The existence of common threads suggests an endemic regional problem caused by policy and monetary failings.

Commodities & Currencies

Many of these sub-Saharan countries were extremely exposed to a downturn in the commodity supercycle. For Nigeria and Angola, oil dependency has proven foolish; Zambia’s exports were heavily concentrated on copper demand from abroad; Ghana’s reliance on gold and cocoa has continually strangled its economy; the collapse in steel and mining have threatened to cripple South Africa’s economy. This commodity crisis has precipitated currency concerns in all the aforementioned countries.

Of the 155 currencies tracked by Bloomberg, the Zambian Kwacha has been 2015’s worst performer and has prompted national calls for divine intervention. The Ghanaian cedi is down 14% to the dollar this year while the rand has lost about 16% of its value. South Africa is also at risk of a credit rating downgrade which would leave its rating at the brink of junk status. The strong dollar has in turn, squeezed borrowing costs and living standards in these countries.

Nigeria is the intriguing exception. The highly unpopular Central Bank of Nigeria (CBN) policies have so far sustained the naira as one of the better performing emerging market currencies. However, the recent marginal tweaking of the CBN pegsfinancial market volatility and the negative international response cast doubt over how long this will continue.

Unsurprisingly, inflation is on the rise. In Nigeria, September year-on-year inflation hit 9.4%, outside the CBN’s current 6-9% band. Similarly, bad weather is forcing up food prices in Zambia and analysts expect South Africa’s inflation, currently at 4.6%, to exceed the government’s 6% upper bound next year. Yet perhaps the most chastening thought is the claim that imported inflation from Zambia and South Africa is causing deflation in Zimbabwe. Yes, that’s right. Deflation in Zimbabwe.

Policy Failure

Another common ailment plaguing these countries is inadequate power supply. Akinwumi Adesina, President of the African Development Bank, has highlighted the energy deficit as the primary drag on development in the continent. Unfortunately, things have gotten bleaker. Nigeria seems to have reverted to it’s previous state of darkness while relentless power cuts have also become the norm in Ghana.

Meanwhile, the Zambian power shortage is perhaps the finest example of sub-Saharan policy failure. The country is experiencing its worst electricity shortage on record due to drought reducing water levels at the hydroplants that supply nearly half of the nation’s energy. Yet the problem was exacerbated by constant over-utilisation, prompting former Vice-President Guy Scott to accuse Zambia and Zimbabwe of draining the reservoir like “two puppies drinking milk from the same saucer”.

Away from energy, indecisive governments have failed to inspire confidence. Nigeria still suffers from a fiscal vacuum as a result of the delay in appointing a federal cabinet. And the new administration has been criticised for attempting to influence monetary policy. At the same time, political tensions distract the ruling parties in South Africa and Ghana, with elections coming up next year in the latter’s case.

These countries have a lot to learn from Kenya, now the lone flag-bearer of sub-Saharan economic progress. The East African country grew at an annualized rate of 5.5% in the second quarter of 2015. Crucially, Kenya is a net importer of oil and commodities, liberating it from the commodity export dependence. Furthermore, it has continued to invest in power and infrastructure, with electricity and construction growing by 10.2% and 9.9% respectively.

Medium-term Outlook

True to form, the same forces threaten these sub-Saharan countries. The prospect of rising US interest rates, increasing populations, persistent security challenges and stagflation paint a gloomy image. Zambia’s pressing concern would be addressing its rising external debt as it now has $3 billion worth of Eurobonds and is facing the double whammy of higher bond yields and a rising deficit. Quickly addressing the power situation could be the Hail Mary pass the country desperately needs.

For the two giants of Africa, social challenges weigh heavier on the mind. A quarter of the South African workforce is now unemployed and along with the recent student protests, this is contributing to growing social tensions already fuelled by strained race relations. For Nigeria, security issues in the North East region are slowly abating but still pose a challenge to the inclusive growth agenda being pushed by the new administration. Overcoming these social challenges could be vital to rejuvenating the two largest economies in Africa.


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