Low commodity prices and domestic headwinds kept Q3 GDP growth at low levels
January 26, 2016
In Q3, growth in the Sub-Saharan Africa (SSA) region stabilized on an annual basis according to a more complete set of data, which account for about 75% of the region’s nominal GDP. In fact, the economy expanded 3.3% over the same period of the previous year, thus mirroring the second quarter’s increase. Q2’s figure had marked the slowest pace of expansion since Q4 2009. The SSA region likely expanded at the slowest rate in five years in 2015 amid external and domestic headwinds. Low commodity prices— especially for oil—coupled with the slowdown in the region’s main trading partners undermined growth last year. On the domestic front, political instability as well as water and electricity shortages kept growth under potential.
Results of note in Q3 include an acceleration in Nigeria’s economy due to higher oil production. Despite the pickup in GDP growth, the figure marked the second-lowest reading in over four years. The economies of Kenya and Mozambique also gained speed in Q3 reflecting lower exposure to the commodity slowdown. On the other end of the spectrum, South Africa’s GDP recorded a deceleration in annual terms. The economy expanded at the slowest pace in over two years as severe droughts and poor performance in the key mining and manufacturing sectors took a toll on growth. In addition, the economies of Ghana and Tanzania slowed in Q3.
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While growth in the SSA region is expected to accelerate slightly in 2016, the rebound will likely be moderate as the main threats to growth are not projected to wane soon. Oil prices, which are currently at the lowest level in over a decade, are expected to remain low. The U.S. Federal Reserve’s monetary tightening will keep currencies under pressure this year. 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 below potential.
2016 outlook deteriorates on downward revisions to South Africa and Nigeria
This month, our panel of economic analysts cut the outlook for Sub-Saharan Africa for the second consecutive period. The outlook continues to be negatively affected by low commodity prices and weak growth among the region’s main trading partners. Panelists expect the region to expand 4.0% this year, which is down 0.2 percentage points from last month’s Consensus. This month’s forecast reflects downward revisions to the outlook for 10 of the 13 economies surveyed, including Angola, Ghana, Nigeria and South Africa. Conversely, panelists kept their projections unchanged for Cote d’Ivoire, Kenya and Tanzania. For 2017, the panel foresees the SSA economy expanding 4.6%.
Ethiopia, Cote d’Ivoire, the Democratic Republic of the Congo (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 6.0% and 3.8%, respectively.
NIGERIA | Plummeting oil revenue continues to pose a severe risk to the economy
Despite an economic acceleration in Q3 and indications of further gains in the final quarter of 2015, there is growing concern that the economy will struggle significantly in 2016. Oil prices are hovering at low levels not seen in over a decade and investors’ confidence in the government’s ability to manage the challenging economic situation is dwindling. Government finances are under severe pressure due to decreased oil revenues, and the re-entry of Iran into international oil markets could complicate the scenario further. Africa’s top oil exporter may be forced to turn to external bond financing to sustain spending this year. Meanwhile, political divisions have deepened and the risk for delayed action is increasing as the Senate continues to debate the budget for 2016. Moreover, recent allegations from a top government official that USD 9 billion was stolen from the treasury in the past seven years reveals the extent of corruption in the country.
Low oil prices, falling reserves, an artificially-strong naira and a shortage of hard currency will weigh on economic performance going forward, although there is still hope that government spending and emergency policies will support growth. FocusEconomics panelists expect the country to grow 3.8% in 2016, which is down 0.3 percentage points from last month’s forecast. For 2017, the panel expects the Nigerian economy to accelerate and expand 4.6%.
SOUTH AFRICA | Economy struggles to gain momentum in Q4
The South African economy avoided falling into technical recession in Q3, although GDP barely grew on a sequential basis, and recent data point to another quarter of weak growth in Q4. Severe droughts, coupled with a plunging currency and political turmoil, have hurt the economy badly. The growing pessimism regarding the health of the economy is also affecting business confidence, which plummeted to a multi-year low in December. Moreover, the rand continued on its downward trend and reached a new record low in early January amid concerns over the Chinese economy and a downward slide in commodity prices. The government’s inability to address major economic problems will likely jeopardize the popularity of the ruling party in the upcoming regional elections.
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 expects the economy to expand 1.3% in 2016, which is down 0.3 percentage points from last month’s estimate. For 2017, the panel projects growth of 2.0%.
ANGOLA | Growth prospects remain dim amid falling oil prices
Angola’s economic woes were reflected in Q3 as the Economic Climate Index (ECI) nosedived to the lowest reading on record. Moreover, credit ratings agency Standards & Poor’s recently commented that interest payment from debts will put significant strains on Angola’s finances. The agency emphasized that Angola was among the countries most affected by debt inflation and could see interest payments totaling 10% or more of government revenues over the next three years. This issue is further exacerbated by the most recent depreciation of the Angolan kwanza, which will raise the debt burden. In addition, as foreign currency reserves decline, the Central Bank has started to sell U.S. dollars to commercial banks to ensure liquidity and appropriate functioning of the banking system. The Bank will adopt policies to close the gap between the official kwanza and the black market exchange rate as both rates have diverged in recent months.
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 3.1% in 2016, which is down 0.7 percentage points from last month’s forecast. In 2017, the panel expects GDP to expand by 4.3%.
KENYA | Economy remains on a solid footing at the outset of 2016
Kenya’s economy gained some steam in the third quarter of last year, growing an annual 5.8% (Q2: +5.6% year-on-year). Q3’s pickup was sustained by healthy gains in agriculture, construction, financial services and commerce. The acceleration underlines that the economy proved to be fairly resilient to headwinds such as a prolonged drop in tourism, security concerns related to terrorism, currency depreciation and monetary policy tightening. Recent data suggest that Kenya remains on a solid footing: the PMI remained in expansionary territory in December and the shilling was stable in the outset of 2016.
Looking-forward, growth this year will likely be sustained by strong public spending, which will focus on infrastructure development, particularly the large-scale Standard Gauge Railway project. On the downside, Kenya’s large fiscal and current account deficits leave the country in a vulnerable external position. While the government’s recent announcement that it would cut the fiscal deficit for the current fiscal year by broadly 1% of GDP aims at reducing the country’s external exposure, Kenya is projected to continue recording sizeable twin deficits in the years ahead. Our panelists project GDP growth of 6.0% for 2016, which is unchanged from last month’s forecast. For 2017, the panel sees growth ticking up to 6.2%.
INFLATION | Inflation ends 2015 at highest level in three years
According to preliminary data, inflation in Sub-Saharan Africa increased from November’s 8.3% to 8.7% in December, which represented the highest reading in three years. Weaker currencies across the region and power supply shortages coupled with food scarcity amid severe droughts in the east and south of the continent are putting upward pressure on consumer prices. FocusEconomics Consensus Forecast panelists expect regional inflation to average 8.7% in 2016, which is up 0.2 percentage points from last month’s estimate. In 2017, inflation is seen moderating to 7.7%.
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