SSA economy decelerates in 2015 amid low oil prices and domestic headwinds
February 24, 2016
Growth in the Sub-Saharan Africa (SSA) region decelerated throughout the first three quarters of last year and preliminary estimates show that 2015 economic growth likely recorded a slowdown over the previous year amid external and domestic headwinds. The economy likely expanded 3.6%, thus coming in substantially below the 5.1% increase tallied in 2014 and marking the slowest increase in six years. Low commodity prices, coupled with a slowdown in China, caused growth to be under potential last year. Moreover, on the domestic front, political instability, adverse weather conditions as well as water and electricity shortages undermined growth.
Looking at the individual countries in the region, last year, Nigeria’s economy expanded 3.0% according to an advance estimate, which was less than half of the previous year’s expansion and marked the slowest growth in over a decade. The disappointing performance was compounded by a range of factors that weighed on growth such as low oil prices, security threats and uncertainty in the lead up to the 2015 presidential elections. Against a backdrop of falling oil prices and a reduced supply of U.S. dollars, the naira traded in the parallel markets dipped to new record-lows at the outset of 2016. Similar developments were recorded in Angola where the black market has become the place to go for citizens who want to exchange Angolan kwanza for a more stable currency. Both countries have recently sought international loans to help the governments fund their budgets.
Head on over to our Sub-Saharan Africa page for more recent economic news on the region.
In the political arena, earlier this month, Ugandans held general elections and preliminary results show that incumbent President Yoweri Museveni of the ruling National Resistance Movement triumphed. Museveni has held power for 30 years and is credited with stabilizing the country after the civil war. Elsewhere in the region, the outcomes of the general elections in Zambia and Ghana later this year will be crucial given the need both countries have to move forward with much needed economic reforms.
Growth in the SSA region is expected to accelerate in 2016, even though the rebound will likely be moderate as the main threats to growth are not projected to wane soon. Oil prices have plummeted to the lowest level in over a decade and are expected to remain subdued in the medium term. Expectations of a further tightening in the U.S. Federal Reserve’s monetary policy are likely to add further pressure to the SSA region’s currencies. Moreover, the slowdown of the Chinese economy and domestic vulnerabilities within the region, such as political turmoil in South Africa and security threats in Kenya and Nigeria, will keep growth under pressure.
2016 outlook revised down on cuts to forecasts for South Africa and Nigeria
This month, our panel of economic analysts cut the outlook for Sub-Saharan Africa for the third consecutive period amid low commodity prices and weak growth among the region’s main trading partners. Panelists expect the region to expand 3.8% this year, which is down 0.2 percentage points from last month’s forecast. This month’s Consensus reflects downward revisions to the outlook for 6 of the 13 economies surveyed, including Ghana, Kenya, Nigeria and South Africa. Conversely, panelists kept their projections unchanged for six other countries including the Democratic Republic of Congo (DRC), Mozambique and Uganda. Cote d’Ivoire’s GDP outlook was the only one revised up this month. For 2017, the panel foresees the SSA economy expanding 4.6%.
Ethiopia, Cote d’Ivoire and the DRC, in that order, are expected to be the best performers this year, with GDP growth rates at or above 7.0%. At the other end of the spectrum, South Africa is likely to be the worst performer, followed by Angola and Botswana. Among the other major economies in the SSA region, Kenya and Nigeria will expand 5.8% and 3.5%, respectively.
NIGERIA | Low oil prices primarily behind deceleration in 2015
The economy decelerated notably in 2015, mainly due to low oil prices, turmoil in financial markets and severe imbalances in the foreign-exchange market after authorities decided to maintain an artificially-strong naira. GDP expanded 3.0% in 2015, which was below 2014’s 6.2% expansion and marked the weakest growth in over 15 years. Although growth is expected to pick up this year, weaknesses observed throughout 2015 carried into Q1. Against a backdrop of falling oil prices and rising scarcity of hard currency, the naira traded in the parallel markets dipped to new record-lows. The official exchange rate is 199 NGN per USD, while one dollar is currently buying 345 naira in the black markets. Adding to an already-sticky economic situation, President Muhammadu Buhari removed the head of the country’s budget office as the 2016 budget presented in December contained errors. The new budget is expected to be approved by the Parliament in March.
While low oil prices are hurting government revenues and reducing supply of U.S. dollars, authorities are keeping an artificially-strong naira, thereby exacerbating the shortage of hard currency. Nevertheless, there is still hope that government spending and emergency policies will support growth. FocusEconomics panelists expect the country to grow 3.5% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel expects the economy to accelerate and expand 4.6%.
SOUTH AFRICA | Growth prospects remain dim amid severe droughts and low commodity prices
South African’s economy recovered slightly in the third quarter last year, although GDP recorded weak growth on a sequential basis. Latest indicators point to another dismal expansion in the final quarter of 2015 and the outset of the new year. Manufacturing barely grew in December and the business confidence index recorded the second-lowest reading in nearly a decade in January. Low commodity prices are weighing heavily on mining companies and industry officials estimate that there will be over 50,000 job cuts in the sector. Against the backdrop of a high unemployment rate, further cuts have the potential to trigger social unrest. Moreover, the country is experiencing the worst drought in years, which could depress the economy further as a supply shortage translates into higher agricultural imports and rising inflation.
The county’s outlook is dim. The current 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 of analysts expects the economy to expand 1.1% in 2016, which is down 0.2 percentage points from last month’s estimate. For 2017, the panel projects growth of 1.7%.
ANGOLA | Economy remains under strain from falling oil prices; country seeks international loan
The Angolan economy shows no sign of improvement amid subdued commodities prices. The government held talks with the World Bank in January to secure a USD 450 million loan, which could be available by June. In response to dwindling supply of U.S. dollars, the Central Bank has limited its supply only to strategic sectors of the economy, such as oil and health. However, limited USD supply has led to a booming parallel market for foreign currencies in which the kwanza trades with a premium of more than 130% the official rate. Against this backdrop, credit rating agency Standard & Poor’s (S&P) downgraded Angola’s credit rating from B+ to B. S&P pointed out that Angolan public debt is projected to increase following multiple currency devaluations and accruing foreign and domestic loans. The agency also noted that it expects that external financing needs will reach USD 31 billion for this year and next.
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. Our panelists expect GDP to grow 2.8% in 2016, which is down 0.3 percentage points from last month’s forecast. In 2017, the panel expects GDP to expand by 3.5%.
KENYA | Economy performed solidly in Q4 2015
Economic growth ticked up in Q3 2015 on the back of solid expansion across most sectors of economic activity, suggesting that Kenya’s growth dynamics are fairly diversified and robust. In fact, dragged down by ongoing security risks from terrorism, tourism was the only sector that declined. High-frequency data suggest that the economy performed solidly in Q4 and at the outset of this year: the PMI picked up in January and the exchange rate has been broadly stable since October. Overall, the economy is on track to have accelerated slightly to a 5.5% expansion last year. A lower import-bill due to the oil price slump partly contributed to this solid performance, along with strong public infrastructure spending. However, Kenya’s fiscal deficit likely continued to widen last year. Against this backdrop, the administration’s plan to reduce the budget gap in the next fiscal year is seen as a step in the right direction to improve fiscal sustainability and reduce reliance on external financing.
GDP growth is expected to receive a boost this year from ongoing infrastructure development, especially the Standard Gauge Highway project, still-low oil prices, an expanding services sector and regional integration. However, Kenya’s persistent twin deficits expose the country to external risks. Analysts project GDP growth of 5.8% for 2016, which is down 0.2 percentage points from last month’s forecast, and see growth picking up to 6.1% in 2017.
INFLATION | Inflation jumps to highest level in over four years in January
Inflation in Sub-Saharan Africa jumped from December’s 8.7% to 9.3% in January, which represented the highest reading in over four years. Power supply shortages, food scarcity amid severe droughts and weaker currencies across the region are keeping inflationary pressures high.
Africa’s biggest economies are taking different approaches to their monetary policies. Rising inflation prompted the Reserve Bank of South Africa to increase its policy rate by 50 basis points from 6.25% to 6.75%. Similarly, the Central Bank of Angola raised the Basic Interest Rate to 12.00%—the highest level since records began—in order to combat soaring inflation and support the weakening Angolan kwanza. Conversely, the Central Bank of Nigeria maintained the monetary policy at 11.00% due to concerns regarding the weaknesses in the domestic economy. FocusEconomics Consensus Forecast panelists expect regional inflation to average 8.7% in 2016, which is unchanged from last month’s estimate. In 2017, inflation is seen moderating to 7.8%.
Written by: Dirina Mançellari, Senior Economist
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