Sub-Saharan Africa: Uncertainty over new French president looms heavy over the region
March 22, 2017
France keeps the foreign exchange reserves of 14 African economies in its Central Bank and is considered a key player for political stability and counterterrorism in Sub-Saharan Africa. Many French businesses also have deep roots in the continent, particularly in economic activities related to mining and crude oil exploration and extraction. The second round of the French presidential election will be held on 7 May between the two frontrunners Marine Le Pen of the National Front (FN) party and Emanuel Macron, an independent candidate. As French ties with former colonies have been close for decades, the newly elected French president’s foreign policy will have a significant impact on them. While a victory for Marine Le Pen is not analysts’ baseline scenario—which is Macron being elected and policy continuation in general—, it is not yet beyond the realm of possibility. If Le Pen wins the presidential election, she is likely to change the relationship with Sub-Saharan Africa, in particular with francophone Africa.
France’s security presence in Africa is significant and it plays an important role in managing civil unrest and extremism. Besides combating the jihadi threat across the Sahel, France is also involved in peacekeeping operations in various African countries, as in the Central African Republic in 2008 and in Côte d'Ivoire in 2011. So, in terms of security and counterterrorism the policy of an FN administration is ambiguous at best. On the one hand, Le Pen and her party are positioned against foreign military ventures, which may suggest a scaling-down of military involvement on the continent. On the other hand, the FN is the party of former supporters of French Algeria and an inheritor of the former colonialist and imperialist ideology of France. That said, given Le Pen’s tough rhetoric on terrorism, counterterrorism initiatives are likely to be maintained.
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Regarding aid, Africa is the primary beneficiary of France’s development aid (55%), with Sub-Saharan Africa receiving 41% of France’s total development aid. Le Pen claims an isolationist and protectionist agenda, but has also stated that she backs greater French investment in francophone Africa's development. Indeed, she has told the press that she will use such aid "as one way to avoid gigantic migration flows", suggesting that aid would be channeled under renegotiated conditions that are specifically intended to curb migration flows to France. Regarding immigration, the abolition of family reunification and the expulsion of all migrants in an irregular situation, or immigrants unemployed for more than a year, are central to the FN's policies.
Regarding trade, given the FN’s focus on France's interests, it would probably prioritize bilateral rather than multilateral trade, focusing on African countries where France has economic interests in oil, minerals, infrastructure projects, telecommunications, utilities, banking and insurance. One of Le Pen’s central policies is the withdrawal of France from the Eurozone, which has the potential to cause financial turmoil. Although this would not be easy to implement, the election of Le Pen as president would lead to a drop in market sentiment and weaken the euro against the U.S. dollar. Consequently, near-term volatility following the election would negatively affect the CFA franc, the currency of eight West African states, and six Central African states, which is pegged to the euro. This could increase the competitiveness of these country’s exports, but a depreciation of the euro would also increase inflationary pressures in the economies.
Growth will accelerate this year but downside risks persist
Despite looming political risks, the economy of Sub-Saharan Africa should rebound this year and then accelerate in 2018 after having recorded its worst economic performance in over two decades in 2016. The Consensus Forecast of economic experts surveyed by FocusEconomics this month projects that the region’s GDP will increase 2.8% this year, which was cut 0.1 percentage points from last month’s forecast. Going forward, as the world economy gains momentum and many commodity markets rebalance, the regional economic performance is set to improve further next year, with analysts forecasting that SSA’s GDP will increase 3.7%.
The 2017 growth forecast for the region assumes a gradual adjustment of commodity prices and improving terms of terms among commodity exporters, but still tight fiscal positions. Meanwhile, growth rates will continue to vary across the region. Although growth in South Africa and other major oil exporters, such as Angola and Nigeria, is seen rebounding this year, it will be softer relative to in exporter countries of agricultural raw materials, such as Cote d’Ivoire, Ethiopia, Kenya, and Tanzania, and mineral exporters such as Ghana.
Internal risks to the growth outlook, however, include security and humanitarian concerns in some parts of the sub-continent, as well as the failure of policymakers across the region to adjust their economies to the new environment of low commodity prices and to press ahead with economic reforms. External risks, beyond the aforementioned potential victory of Marine Le Pen in the French elections, include the new U.S. administration’s opposition to free trade and its potential to disrupt international trade.
NIGERIA | Signs of an incipient recovery emerge
The year 2016 will be remembered as one of the most challenging in Nigeria’s recent history. Tight monetary liquidity and a slump in oil earnings are chiefly to blame for the country suffering its first contraction in over two decades. Nevertheless, the first green shoots of recovery are starting to emerge. Q4’s contraction was softer than expected, the latest leading indicator readings are positive and February’s inflation print suggests that the country is finally over the worst. In March, the government published a much-anticipated reform plan that envisages jumpstarting the ailing economy by selling state assets and liberalizing the naira, among other measures. Although the Central Bank governor quickly dismissed claims of removing capital controls, there is some hopeful expectation that the government will accelerate its reform agenda. The date for presidential elections has been set and the government is hoping to secure a World Bank loan by implementing much-needed reforms.
The economy is expected to rebound this year on higher oil earnings and fiscal spending. The recovery, however, is fragile and depends mostly upon policy action by the government to unleash growth in the non-oil sector. Panelists participating in the FocusEconomics Consensus Forecast project that the economy will grow 1.2% in 2017, which is down 0.1 percentage points from last month’s forecast, and 3.0% in 2018.
SOUTH AFRICA | 2017 budget well received by rating agencies
A dismal performance in the mining and manufacturing sectors caused GDP to contract in Q4 2016. Due to the worse-than-expected result, South Africa’s economy grew just 0.3% in the full year 2016, which represented the weakest pace of growth in seven years. The economy has been consistently falling behind the government’s growth targets, which is having serious implications for business and consumer confidence. In late February, Finance Minister Pravin Gorhan presented the 2017 budget review, which was generally well received by the business community and credit rating agencies in the circumstances, the latter of which have already downgraded the country’s sovereign debt close to junk status. Although the Treasury remains ostensibly committed to fiscal consolidation, this has not prevented speculation that President Jacob Zuma is set to replace Gorhan in an expected cabinet reshuffle.
GDP growth is projected to pick up to 1.2% this year—unchanged from last month’s estimate—as an improving agricultural sector should be more supportive of economic activity, at the same time as higher prices for several of the country’s key export commodities will help mining and oil production. Next year, the economy should continue to strengthen and GDP growth is projected to rise to 1.8% in 2018.
ANGOLA | Rising global oil inventories cause Cabinda oil prices to fall
2016 was a year to forget for Angola’s economy, with the recently released economic sentiment indicator showing firms remain highly pessimistic in virtually all sectors. Growth last year was choked off by low oil prices and a poor performance from the non-oil sector, which suffered from a lack of foreign exchange for imported inputs and rock-bottom business confidence. The country is also suffering from dangerously high inflation, with the central bank holding fire in recent months. Although Angola continued to comply with the OPEC deal in February, doubts emerged in early March regarding the deal’s effectiveness, following reports of rising global oil inventories. This has caused the price of Angola’s Cabinda oil to drop in the last few weeks. With oil such a key component of the economy, Angola remains highly vulnerable to price swings, and lower oil prices than previously anticipated going forward could threaten growth.
Angola’s economy will grow slightly this year thanks to improved terms of trade, although growth will remain meagre as the price of the country’s oil exports is set to remain far below the average recorded in 2013 and 2014, and low business confidence will drag on growth. Analysts expect GDP to expand 1.5% in 2017, down 0.1 percentage points from last month's forecast. In 2018, they see the economy growing 2.8%.
KENYA | Rate cap may have dampened growth in Q4 2016
The Kenyan economy is in seemingly good health, with growth having been robust and rather well balanced over the first three quarters of last year. However, there is mounting evidence the interest rate cap introduced in September 2016 dampened growth in Q4 and at the start of this year. Bank lending to the real economy has slowed down sharply, as banks restrict lending to smaller, riskier businesses. This in turn has caused bank profitability to fall, dragging bank share prices down with it. The government has had to postpone several bond issuances because investors drove interest rates above the cap. Should this situation persist, there is a risk that government investment projects could be delayed this year. Just last month the IMF advised the government to scrap the policy to avoid lowering the country’s growth potential. It seems the government has taken note, as President Kenyatta in his State of the Union speech in March vowed to re-examine the policy.
Downside risks related to the imposition of interest rate caps have led our panelists to lower their forecasts for this year and next. They now expect GDP growth to slow down and average 5.5% in 2017, which is down 0.2 percentage points from last month’s forecast, before picking up slightly to 5.7% growth in 2018. The slowdown this year is expected to come as a result of a sharp drop in investment growth.
INFLATION | Inflation moderates in February
Although still high, inflation in Sub-Saharan Africa is showing signs of moderation. An aggregate estimate showed that inflation edged down from 13.8% in January to 13.6% in February, reflecting mainly a stabilization in regional exchange rates due to the gradual recovery in commodity prices seen at the end of 2016 and beginning of this year.
As commodity prices are expected to continue rising this year, exchange rates should strengthen, or stabilize at best, which will diminish inflationary pressures. Consequently, the analysts we surveyed this month expect regional inflation to fall from 12.3% in 2016 to an average rate of 11.8% in 2017, which was revised up 0.2 percentage points from last month’s forecast. Going forward, inflationary pressures should continue to recede and inflation is projected to average 9.4% in 2018.
Written by: Ricardo Aceves, Senior Economist