Subdued commodity prices and domestic headwinds continue to weigh on SSA's economy
April 27, 2016
The Sub-Saharan Africa (SSA) region decelerated notably in the final quarter of last year and more recent data show that growth remained under pressure in the first quarter of this year. According to a more complete set of data, GDP expanded 3.0% annually in Q4, which was down from the 3.5% increase tallied in the previous quarter and marked the slowest expansion since Q1 2010. As a result, the SSA region grew 3.5% in the full year 2015, which came in below the previous year’s 5.1% increase. The deceleration in Q4 was broadly the result of slowdowns in Nigeria and South Africa—the region’s two biggest economies—which expanded 1.8% and 0.6%, respectively.
The region’s economies lost steam last year as the collapse in commodity prices and adverse domestic developments took a toll on growth. Nigeria and South Africa were the worst-hit economies in 2015. Nevertheless, two bright spots of the continent in 2015 were Cote d’Ivoire, which benefited from strong domestic demand, and Kenya, which, as a net importer of energy, was supported by low oil prices. Earlier this month, Angola’s government announced that it is currently in talks to secure a bailout from the International Monetary Fund (IMF) in order to sustain its economy. This comes weeks after Kenya agreed on a precautionary deal with the Fund. The scale up in the IMF’s activity highlights the higher borrowing costs that the SSA countries are facing in international capital markets.
In the political arena, South Africa’s President Jacob Zuma survived an impeachment vote in April after the African National Congress (ANC) party backed him. While this was in his favor, the recent wave of corruption scandals where Zuma has been involved threatens to jeopardize ANC’s support in the upcoming municipal elections. Elsewhere in the region, general elections in Zambia and Ghana later this year will be crucial given that it is imperative that both countries move forward with much-needed economic reforms.
2016 outlook revised down for the fifth consecutive month
Looking forward, the region’s economy will likely remain vulnerable even though growth is expected to accelerate mildly. The main external challenges that the region faced last year, such as subdued commodity prices and China’s slowdown along with domestic headwinds such as currency devaluations, political uncertainty and security threats, will likely threaten growth this year as well.
This month, our panel of analysts revised down the outlook for Sub-Saharan Africa for the fifth consecutive period. Panelists expect the region to expand 3.2% this year, which is down 0.5 percentage points from last month’s estimate. This month’s downward revision reflects cuts to the outlook for 9 of the 13 economies surveyed, including Ghana, Nigeria and South Africa. Conversely, panelists maintained projections for Kenya and Uganda. The forecasts for Botswana and Cote d’Ivoire were the only ones revised up this month. For 2017, the panel foresees the SSA economy expanding 4.3%.
Cote d’Ivoire, Ethiopia and Tanzania, in that order, are expected to grow the fastest this year with GDP growth rates above 6.0%. Conversely, South Africa is likely to be the worst performer with a projected GDP expansion of 0.7% this year. Among the other major economies in the region, Kenya and Nigeria will expand 5.8% and 2.8%, respectively.
NIGERIA | Buhari’s refusal to sign 2016 budget could stall much-needed economic reforms
Recent data show that the economy remained in a soft patch in Q1 after economic growth slowed markedly in the final quarter of 2015 due to the fall in oil prices and authorities’ willingness to maintain an artificially-strong naira. While the PMI remained in negative territory in March, business sentiment hit a series low. The situation continues to reflect the low–oil-price-environment and Nigeria's disruptive foreign exchange policy. While the approval of an expansionary budget for 2016 in March did bode well for reviving the economy, President Muhammadu Buhari has refused to sign the law as he is still in talks with the National Assembly to address some details on grey areas. This has the potential to stall much-needed economic reforms and investment plans. Meanwhile, in April, Nigeria secured a USD 6.0 billion loan from China and agreed on a currency swap deal.
Persistent policy uncertainty, low crude prices, security threats related to Boko Haram, fuel and power shortages and disruptions in oil exports are all weighing on Nigeria’s economic outlook. FocusEconomics panelists forecast that GDP will grow 2.8% in 2016, which is down 0.6 percentage points from last month's projection. In 2017, the panel expects the economy to grow 4.2%.
SOUTH AFRICA | Growth remains under pressure amid domestic headwinds and political uncertainty
Recent data show that South Africa’s economy likely recorded another weak growth rate in Q1. Manufacturing production expanded in February, however, the PMI deteriorated and hit the lowest level in nearly two years in March. In the political arena, Parliament voted against impeaching President Jacob Zuma earlier this month after the African National Congress (ANC) party backed him. The motion to remove Zuma was initiated by the opposition parties following the involvement of the President in a wave of corruption scandals. Despite being in his favor, the vote could turn out to be financially and politically costly for Zuma since there are growing calls for him to step down. Moreover, this will likely undermine the ANC’s popularity in the upcoming municipal elections scheduled for August.
The county’s outlook remains fragile as electricity and water supply constraints coupled with low commodity prices will weigh on growth. Moreover, failure of the government to push forward with fiscal consolidation reforms might provoke a downgrade of the country’s credit rating to junk territory. The FocusEconomics panel cut its GDP forecast for the ninth consecutive month and now expects the economy to expand 0.7% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, the panel projects growth of 1.4%.
ANGOLA | Government requests IMF assistance to sustain the economy
The collapse in oil prices that began in mid-2014 has severely impacted the Angolan economy and continues to constrain growth prospects. After the government cut the 2016 budget by 20% in March, Angola formally requested IMF assistance to shore up government finances. The IMF commented that the three-year extended fund facility currently under negotiation will be conditional upon Angola undertaking structural reforms aimed at diversifying the economy, improving tax collection and government finances, and increasing transparency in the banking sector. On 17 April, a key meeting between OPEC and non-OPEC members to freeze output in a bid to stem the decline in oil prices failed result to reach an agreement. The outcome of the meeting represents a big blow to oil dependent economies as oil revenues will remain subdued.
Growth expectations are grim as low oil prices pose significant challenges to government finances—oil constitutes approximately 95% of exports and 75% of fiscal revenues. FocusEconomics panelists expect that GDP will grow 1.9% this year, which is down 0.7 percentage points from last month’s projection. Next year, the panel sees GDP growth accelerating to 3.2%.
KENYA | Economy accelerates in 2015 on an across-the-board improvement
Kenya’s economic performance was more solid last year than most other large African economies. The country’s economy is fairly diversified and relies relatively little on commodities exports, making it more resilient to the price slump in raw materials. GDP growth likely ticked up to 5.5% in 2015, driven by gains in every sector except tourism, which suffered due to security concerns. While the current account deficit likely narrowed somewhat last year mainly due to low oil prices, Kenya’s large twin deficits remain a concern. Against this backdrop, the government’s recent calls for moderate fiscal consolidation and Kenya’s recently-secured USD 1.5 billion precautionary deal with the IMF are steps in the right direction to reduce macroeconomic fragility.
The outlook for Kenya’s economy is bright. GDP growth will be supported by infrastructure projects, rising agricultural production, low oil prices and a looser monetary policy, even though ongoing security issues and uncertainty surrounding next year’s elections pose downside risks. FocusEconomics Consensus Forecast panelists see the economy expanding 5.8% in 2016, which is unchanged from last month's projection. In 2017, the panel sees the economy growing 6.1%.
INFLATION | Inflation hits seven-year high in March as low commodity prices take their toll
Low commodity prices are taking a toll on the majority of the SSA currencies, thus driving up inflation in the region. According to a preliminary estimate, inflation increased from 10.3% in February to 10.9% in March, thus marking the highest reading in nearly seven years. March’s increase was driven by a pick-up in Nigeria’s inflation. Elsewhere in the region, inflation in Angola and Ghana also increased and reached multi-year highs. Persistent electricity and water scarcity coupled with food shortages in the southern parts of the continent are fueling inflationary pressures in the region. FocusEconomics Consensus Forecast panelists expect regional inflation to average 9.9% in 2016, which is up 1.0 percentage points from last month’s estimate. In 2017, inflation is seen moderating to 8.5%.
Written by: Dirina Mançellari, Senior Economist
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