Growth in the SSA region disappoints in 2015 due to numerous problems
March 23, 2016
The economy of the Sub-Saharan Africa (SSA) region grew at the slowest rate in over five years in the third quarter last year and more recent data show that the economy didn’t gain momentum in Q4. According to an advance estimate, GDP expanded 3.1% in the final quarter, which was down from Q3’s increase and was the slowest expansion since Q4 2009. This also marked the fifth consecutive quarter in which the economy decelerated. As a result, the region expanded 3.5% in the whole year 2015 (2014: +5.1%). Q4’s deceleration came mainly on the back of slowdowns in South Africa and Nigeria, the region’s two biggest economies. Last year, SSA experienced a myriad of problems. Growth was dragged on by subdued commodity prices, security threats, a slowdown in the region’s main trading partners and adverse weather conditions, in particular in the southern part of the continent.
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Looking at individual countries, in Q4, Nigeria’s economy decelerated to 1.8% growth on an annual basis. The slowdown was mainly due to low oil prices, which led to low government revenues and severe dollar scarcity. Moreover, an exacerbation of the military conflict with Boko Haram weighed on growth. In South Africa—the region’s second-biggest economy—growth also decelerated in the final quarter of last year, broadly owning to unfavorable developments in the agriculture sector. Last month, the government of South Africa unveiled the budget for 2016, which focuses on stricter fiscal measures and aims at avoiding another credit rating downgrade to below sub-investment grade or “junk” status. Low commodity prices are taking a toll on the majority of the region’s currencies and also highlighting the need for the economies to diversify and reduce their dependence on imports. Kenya, however, is one exception to the current trends in the region due to its low exposure to commodity price fluctuations. The shilling has gained 0.8% in value against the U.S. dollar since the beginning of the year.
2016 outlook revised down for the fourth consecutive month
Looking forward, the SSA region is expected to grow faster this year even though the acceleration will likely be mild; the main challenges that the economy faced last year are expected to carry into this year. Until there is a significant recovery in commodity prices—which seems improbable in the short term due to subdued global demand—growth in the SSA region will likely remain under pressure. On the domestic front, political uncertainty in South Africa, security threats in Kenya and Nigeria, and an electricity shortage will keep growth under potential.
This month, our panel of analysts downgraded the outlook for Sub-Saharan Africa for the fourth consecutive period. Panelists expect the region to expand 3.7% this year, which is down 0.1 percentage points from last month’s estimate. This month’s downward revision reflects cuts to the outlook for 5 of the 13 economies surveyed, including Angola, Nigeria and South Africa. Conversely, panelists kept their projections unchanged for five other countries including Ethiopia, Ghana and Kenya. The outlooks for Cote d’Ivoire, Mozambique and Tanzania were revised up this month. For 2017, the panel foresees the SSA economy expanding 4.5%.
Cote d’Ivoire, Ethiopia and Mozambique, in that order, are expected to be the best performers this year, with GDP growth rates at or above 7.0%. Conversely, South Africa is likely to be the worst performer, followed by Angola and Botswana. Among the other major economies in the region, Kenya and Nigeria will expand 5.8% and 3.4%, respectively.
NIGERIA | Growth prospects remain dim amid low oil prices and security concerns
The low-oil-price environment and authorities’ willingness to maintain an artificially-strong naira drove GDP to decelerate in Q4 to levels last seen in 1999. This situation was exacerbated by the ongoing conflict against Boko Haram and an uncertain global economic outlook. GDP at market prices expanded 1.8% annually in Q4, which was down from Q3’s 2.8% increase and the economic situation is worsening. Power shortages, import restrictions and scarcity of U.S. dollars drove the PMI into negative territory in February. Moreover, the value of the naira in the parallel markets fell below 400 NGN per USD in March. In an attempt to prop up oil prices, Nigeria joined the initiative launched by Russia and Saudi Arabia to freeze oil production at January levels.
The fall in oil prices is hurting growth potential in Nigeria as crude represents 60% of government revenues and 95% of foreign-exchange income. This situation, coupled with an artificially-strong naira, is adding more pressure to the government’s coffers and reducing supply of U.S. dollars. That said, authorities’ intention to bolster investment projects could support growth. FocusEconomics panelists expect that GDP will grow 3.4% this year, which is down 0.1 percentage points from last month's forecast. Next year, the panel sees GDP growth accelerating to 4.5%.
SOUTH AFRICA | Government’s 2016 budget aims at faster fiscal consolidation
The economy barely grew in Q4 of last year and growth for the whole year came in at 1.3%, which was a deceleration over 2014’s expansion. Last year’s slowdown reflected contractions in nearly all sectors of the economy, with agriculture recording a doubled-digit decrease. The latest economic data show that the economy failed to gain momentum in Q1. This is evident in the depreciation of the exchange rate and the weakness in the manufacturing sector. Moreover, continuing droughts point to unfavorable developments in the agricultural sector. The 2016 budget that was presented last month aims to follow a fiscal consolidation path where the fiscal deficit shrinks faster than what was projected in October last year. This is expected to be achieved by cutting public expenditures and increasing tax revenues.
The county’s outlook is dim. The electricity and water supply constraints will hamper growth by both interrupting production and discouraging investment. Moreover, a moderation in Chinese demand and low commodity prices will weigh on growth. FocusEconomics’ panel cut its GDP forecast for the eighth consecutive month and now expects the economy to expand 0.8% in 2016, which is down 0.3 percentage points from last month’s estimate. For 2017, the panel projects growth of 1.5%.
ANGOLA | President Dos Santos announces retirement amid a subdued economic outlook
Angolan President Eduardo Dos Santos stunned the country when he announced plans to retire from active politics in 2018 following 37 years of uninterrupted rule. This has raised numerous questions regarding his successor, future governance and if Dos Santos will comply with his pledge as he had backtracked from a previous pledge to give up power. The news comes amid a somber panorama for the oil-exporting nation: the latest economic climate indicator plunged to a new record low in Q4 and annual GDP growth in 2015 expanded at the slowest rate since 2012. Against this backdrop, Moody’s credit ratings agency placed Angola’s rating under review for downgrade arguing that low oil prices have considerably weakened the oil-exporting country’s fiscal position.
Growth expectations are grim as low oil prices pose significant challenges to government finances—oil constitutes over 95% of exports and 75% of fiscal revenues. FocusEconomics panelists expect that the economy will grow 2.6% this year, which is down 0.2 percentage points from last month's forecast. Next year, the panel sees GDP growth accelerating to 3.7%.
KENYA | Government secures credit line as a precaution against economic downfall
Kenya’s economy likely expanded at a healthy pace last year on the back of public infrastructure projects and robust gains in most sectors, which more than compensated for weak tourism. However, large fiscal and current account deficits still constitute a risk to Kenya’s macro-stability. In March, the government announced that it envisages increasing this fiscal year’s spending slightly, reversing earlier plans to scale back expenditures. On a positive note, Kenya’s recently-secured USD 1.5 billion precautionary deal with the IMF provides the balance of payment with a buffer against potential external shocks. Meanwhile, in a recent report, the World Bank highlighted several challenges to be addressed in order to ensure long-term growth, including the subdued productivity in the agricultural and manufacturing sectors, corruption and infrastructure bottlenecks.
Kenya’s outlook is fairly stable. Infrastructure projects, particularly the Standard Gauge Highway project, still-low oil prices and a growing services sector will sustain GDP growth in spite of persistent structural weaknesses. FocusEconomics Consensus Forecast panelists expect that the economy will grow 5.8% this year, which is unchanged from last month's forecast. Next year, the panel sees GDP growth accelerating to 6.1%.
INFLATION | Inflation soars in February
Slumping commodity prices have brought the currencies of SSA down with them, thus driving up inflation in the region. According to a preliminary estimate, inflation jumped from January’s 9.3% to 11.5% in February, which represented the highest reading in seven years. February’s increase was broadly driven by a jump in Nigeria’s inflation due to the weak currency. Elsewhere in the region, Angola’s inflation also increased in February and reached the highest level in nearly ten years. Shortage of food supply due to droughts in the southern parts of the continent, electricity and water scarcity, as well as depreciating currencies are fueling inflationary pressures in the region.
Prompted by soaring inflation, the Reserve Bank of South Africa increased its policy rate this month by 25 basis points from 6.75% to 7.00%. Conversely, the Central Bank of Angola decided to keep the Basic Interest Rate unchanged at 12.00% following two consecutive hikes due to concerns regarding the weaknesses in the domestic economy. Similarly, the Central Bank of Kenya kept the Central Bank Rate unchanged at 11.50% for its fifth consecutive session. FocusEconomics Consensus Forecast panelists expect regional inflation to average 8.9% in 2016, which is up 0.2 percentage points from last month’s estimate. In 2017, inflation is seen moderating to 7.9%.
Written by: Dirina Mançellari, Senior Economist
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