The Sub-Saharan Africa (SSA) region took a turn for worse in the first quarter of this year. Most commodities-exporting economies continued to be dragged down by low international prices for many of their exports and domestic headwinds added to external pressures. This prompted the region’s GDP to expand only 1.7% in annual terms, the slowest pace since Q4 2009. Contractions in Sub-Saharan Africa’s largest economies, Nigeria and South Africa, were mainly behind Q1’s disappointing reading. Several other African economies, such as the Democratic Republic of the Congo, Mozambique and Uganda, also struggled in Q1. Bright spots in Q1 were Kenya’s well-diversified economy and Tanzania, where GDP growth is sustained by large-scale infrastructure development. Ghana and Botswana also expanded healthily.
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While GDP for Q2 is still outstanding for most countries in the region, there are signs that growth remained in the doldrums in the April to June period. Growing macroeconomic imbalances within a number of commodities-export-driven economies, including Angola, Nigeria and South Africa, look likely to have weighed on the region’s growth in the second quarter. The fall in commodities-related revenue is adding pressure on these countries’ external accounts and fiscal balances, which translates into a drop in foreign reserves, currency depreciations and soaring debt. On the upside, economies more reliant on domestic demand, such as Kenya, Tanzania and Uganda, are likely to have performed solidly in Q2.
2016 growth prospects weaken for the third consecutive month
SSA’s economy is expected to lose steam this year. Growth prospects continue to weaken as low prices for raw materials keep dragging on economic activity in commodities-exporting countries, reducing the value of their exports, putting their fiscal accounts under pressure and depleting their foreign currency reserves. Yet, the weaknesses are not only attributable to the international environment, as multiple domestic challenges are adding to the region’s economic woes. For the third month in a row, our panel of analysts slashed SSA’s outlook, this time by 0.3 percentage points. Our panelists now expect the region’s GDP to expand 2.2% in 2016. For 2017, our panel expects the SSA region to regain momentum and expand 3.8%.
This month’s cut to the region’s 2016 economic outlook reflects a downward revision for 6 of the region’s 13 economies. Nigeria’s projections experienced a drastic downward revision due to low oil prices, a significant drop in oil production caused by militant attacks on energy infrastructure, the persistent currency shortage and the depreciation of the naira. Our panel left its forecasts unchanged for 6 countries, including South Africa and Tanzania, while growth prospects improved only for Botswana.
Cote d’Ivoire, Tanzania and Ethiopia are projected to grow the fastest in the region this year at rates of 6.0% or more. By contrast, the region’s two largest economies, Nigeria and South Africa, are forecast to expand only a meagre 0.4% and 0.3%, respectively. Angola, another big player in the region, is expected to grow 1.8%.
NIGERIA | Growth looks lackluster in Q2 as militant attacks hamper oil production
Nigeria’s economy contracted in Q1 and its weak performance is likely to have carried over into Q2 as manifold headwinds persist. Militant attacks on oil production infrastructure have led to a drastic fall in output since February, increasing pressure on Nigeria’s key oil sector. Nigeria produced only 1.51 million barrels per day (mbpd) in July, down from 1.55 mbpd in June, according to the Organization of the Petroleum Exporting Countries (OPEC). The government’s decision to resume amnesty payments to former militants from August will not be able to put an end to all the attacks as the Niger Delta Avengers (NDA)—the most active militant group—are not included in the deal. June’s abandonment of the currency peg and the subsequent drastic depreciation of the naira were a step in the right direction to reduce elevated macroeconomic imbalances, but the economy will continue to suffer from a foreign currency shortage and low power generation.
Nigeria’s outlook is clouded by still-low oil prices, instability in the main oil-producing regions, a lack of foreign currency and monetary tightening. Our panelists expect the economy to expand 0.4% in 2016, which is down 0.6 percentage points from last month's projection. In 2017, the panel sees the economy growing 3.1%.
SOUTH AFRICA | ANC loses popularity in municipal elections
Discontent over South Africa’s poor economic performance has materialized at the polls. As predicted by early polling, local elections held on 3 August dealt a substantial blow to the ruling African National Congress (ANC) party as it was voted out in several municipal areas and lost its long-held two-thirds majority in the National Assembly. The ANC has fallen out of favor with voters who have turned to the center-right Democratic Alliance (DA) party and the left-wing Economic Freedom Fighters (EFF) as alternatives. In market developments, the ZAR strengthened against the USD in the days after the election. Although South Africa’s economy has recently shown signs of improvement—manufacturing growth hit a 12-month high and business conditions stabilized in July—the government must still contend with weak external demand for the country’s resources, which will keep unemployment high and limit consumption going forward.
The political landscape has been shaken by the recent elections, which will force the governing ANC party to be less complacent when it comes to enacting pro-growth reforms. However, the mining-based economy is still faced with weak global demand for resources, which will limit potential growth. The FocusEconomics panel expects the economy to expand a meagre 0.3% this year, which is unchanged over last month’s estimate. For 2017, the panel projects growth of 1.2%.
ANGOLA | Weakness in oil sector erodes fiscal and external accounts
The slump in commodity prices has severely impacted Angola’s oil-dependent economy. The country’s public and external accounts have deteriorated and government debt has soared. Lower oil earnings have also translated into an acute shortage of foreign currency, which is causing liquidity problems in the banking system and hampering economic activity in import-dependent industries such as retail and construction. The rally in Cabinda Oil prices came to an end in July following a report from the state-owned oil enterprise informing that earnings in 2015 had dropped by 35% and warning of a difficult 2016. Similarly, in August the National Assembly approved a revised 2016 budget which factors in lower-than-expected oil prices. The government revised down the Cabinda oil price average for this year and confirmed that the economy in 2015 grew at the slowest pace since 2009.
Angola’s growth outlook is bleak as low oil prices pose significant challenges to government finances—oil constitutes approximately 95% of exports and over 66% of fiscal revenues. Ongoing low prices will keep oil earnings depressed, hampering public spending and staving off investment. FocusEconomics panelists expect GDP to grow 1.8% in 2016, which is down 0.2 percentage points from last month’s forecast. In 2017, the panel sees the economy growing 2.9%.
KENYA | Economic performance was solid at the beginning of the year
East Africa’s biggest economy started the year on a solid footing, with annual GDP growth ticking up in Q1 on the back of broad-based improvements. Particularly positive were the expansions in the key sector of tourism, which showed strong signs of recovery after a long struggle, and in electricity, which benefitted from improvements in power supply. More recent indicators point to a robust performance thereafter: the PMI was somewhat volatile but remained in expansionary territory throughout Q2 and into early Q3, and the shilling was fairly stable in this period. On the fiscal front, the government’s plan to cut back spending in FY 2017/2018 was welcome news as Kenya’s widening fiscal deficit and high borrowing costs raised concerns about debt sustainability. In the political arena, President Uhuru Kenyatta said that he will seek reelection next year and consolidate the ruling coalition of small parties into the new Jubilee party in order to extend his power base.
Kenya’s growth prospects are bright on expectations of infrastructure development, solid household consumption and easing monetary policy. Nevertheless, the country’s large twin deficits and political instability ahead of next year’s election bear risks for the economy. FocusEconomics panelists forecast that the economy will grow 5.9% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 6.0%.
INFLATION | Inflation ticks up in July to near eight-year high
Inflation in the SSA economy inched up to 12.7% in July, according to a preliminary estimate. The reading represents the highest inflation rate in nearly eight years and follows June’s slightly softer 12.6%. Inflation accelerated in some of SSA’s largest economies, such as Angola and Kenya. The currency weakness as well as energy and water shortages are the main drivers of mounting inflationary pressures in the region.
Panelists participating in this month’s FocusEconomics Consensus Forecast expect regional inflation to average 12.2% in 2016, which is up 0.3 percentage points from last month’s estimate. The upward revision reflects adjustments to the inflation forecasts of 5 of the 13 economies surveyed, including Angola, DR Congo and Mozambique. Panelists see inflation receding to an average of 9.6% in 2017.
Written by: Dirina Mançellari, Senior Economist