Sub-Saharan Africa: SSA's economy stays stuck in low gear
November 16, 2016
Growth in the Sub-Saharan Africa region (SSA) has disappointed so far this year. The economy decelerated in the first half of 2016 and monthly indicators from major economies point to another weak expansion in the second half. GDP expanded 1.1% over the same quarter of the previous year in Q2, which was a deceleration compared to the previous quarter’s 1.6% increase and marked the weakest expansion in over six years. The sharp slowdown is being driven by both external and domestic headwinds. In particular, the deterioration in the external environment due to subdued commodity prices and tight financial conditions has negatively affected growth. Moreover, the governments’ policy responses aimed at counteracting the economic slowdown have been very slow, thus deterring investment and raising uncertainty.
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Aggregate regional growth numbers hide considerable diversity in economic paths across countries. The region’s non-commodity dependent economies have benefited from lower oil prices this year and countries such as Cote d’Ivoire, Ethiopia and Tanzania have shown robust growth rates due to an improved business environment and strong infrastructure investments. On the other hand, commodity exporting countries such as Nigeria and Angola remain beleaguered despite the recent modest pickup in oil prices. In these countries, the negative consequences from the initial oil shock have now also spread to the non-oil sectors of the economy, which threatens to keep growth weak.
In global politics, the consequences of the U.S elections in the region remain unclear since president-elect Donald Trump rarely addressed American policy in SSA in his campaign speeches. However, his general stand on international issues and the isolationist tendencies as outlined in the campaign have raised questions over America’s future relations with the rest of the world, including the SSA region. Many African currencies depreciated in the election aftermath. South Africa’s rand lost significant value against the U.S dollar amid a sell-off in emerging markets currencies on 11 November. Fears that Africa will slide down the foreign priority list of America’s next government have decreased investors’ risk appetite for the African markets. In particular, there are concerns that the U.S. will decrease its foreign aid in the region and that the current bilateral trade agreements will not be extended under Trump’s presidency.
SSA faces challenging issues at home as well. Earlier this month, South Africa’s President Jacob Zuma survived another non-confidence vote—the fifth one since he took power in 2012—amid increasing calls for his resignation. The country’s economy continues to suffer as structural constraints, weak external demand and political turmoil have taken a toll on growth this year. However, Nigeria—the region’s biggest economy—secured a USD 600 million loan from the African Development Bank for budget funding, a support which the cash-strapped government very much needed. The remaining USD 400 million disbursement is dependent on the implementation of reforms.
2017 growth prospects down by 0.2 percentage points
The economy of SSA will decelerate in 2016 on the back of low prices for raw materials and a myriad of domestic challenges. For next year, growth is projected to improve from this year’s timid expansion on the back of a gradual pickup in the world economy and a recovery in commodity prices. Economic advancement will also depend on how fast governments implement reforms aimed at promoting growth and reestablishing macroeconomic stability. Moreover, prudent fiscal policies coupled with tighter monetary policy should tackle sharp increases in inflation and keep public fiscal balances in check.
This month, our panel of analysts downgraded SSA’s GDP forecast for 2017 and they expect economic growth of 3.2% next year, which represents an improvement over the 1.5% increase forecast for 2016. This month’s 2017 GDP estimate was down 0.2 percentage points from last month’s forecast.
The cut to the region’s 2017 economic outlook reflects a downward revision for nine of the region’s 13 economies including Kenya and Nigeria. Growth forecasts were left unchanged for four countries including South Africa and Tanzania. Cote d’Ivoire will be next year’s fastest growing economy followed by Ethiopia and Tanzania. In contrast, South Africa is forecast to be the worst performer with an expansion rate of 1.2%.
NIGERIA | Recent data do not support an economic recovery in H2
The Nigerian economy entered a recession in Q2 for the first time in over 20 years. Prospects of an economic recovery in the second half of the year are bleak as still-low oil prices and the depreciation of the naira have hampered the oil and non-oil sectors. Although forward-looking indicators point to an improvement, data remain weak. Business confidence rebounded from September’s multi-year low and the Manufacturing PMI improved but still points to a contraction. While President Muhammadu Buhari met for the first time with leaders from the militant Niger Delta Avengers group to negotiate a cessation of hostilities, the country secured a USD 600 million loan from the African Development Bank for budget support in November. An additional USD 400 million disbursement is dependent on the implementation of reforms.
Nigeria’s economy is set to contract for the first time in over two decades this year. The FocusEconomics panel foresees the Nigerian economy contracting 1.1% in 2016. For 2017, panelists expect the economy to rebound and grow 1.9%, which is down 0.6 percentage points from last month’s forecast. The strength of the recovery, however, will depend on the recovery of oil prices, improvements in liquidity conditions in the economy and the implementation of structural reforms.
SOUTH AFRICA | Economy remains depressed
South Africa’s economy remains in the doldrums following Q2’s weak expansion and recent monthly indicators do not provide much hope for an economic acceleration in the second half of the year. The economy is also threatened by political turmoil. Earlier this month, President Jacob Zuma survived a no-confidence vote backed by his party, which holds a wide majority in parliament. Numerous corruption scandals and the delay in passing key reforms have not only increased calls for Zuma’s resignation but are also deterring investors and putting the country’s credit rating at risk. In late October, the government delivered its Medium-Term Budget Policy Statement and announced that it will opt for more restrictive fiscal policy against the backdrop of slower economic growth, which has in turn reduced tax revenues. More details about the budget and fiscal targets will be presented in February of next year.
A gradual improvement in the world economy and a recovery in commodity prices will support the economy next year, though ongoing political scandals and the dire state of the labor market will weigh on growth. On balance, the FocusEconomics panel expects the economy to expand a meagre 0.4% this year and 1.2% next year, which is unchanged from last month’s estimate.
ANGOLA | Government targets smaller fiscal deficit next year
Angola’s economy continues to suffer from the spillovers of the weak oil market in H2 2016. Fiscal and external positions have deteriorated due to the drop in oil prices, which negatively impacted government investment and the currency. The weak kwanza has also lowered consumer purchasing power. In late October, the government approved a draft for the 2017 budget, which totals almost USD 45 billion and projects a fiscal deficit of 5.9% of GDP, below the revised 6.8% estimate for this year. The government is basing its prediction on crude at USD 46 per barrel and on stronger non-oil fiscal revenues. More information about the government’s spending plan will be disclosed on 17 November, when parliament will discuss and vote on the draft law.
Angola faces political uncertainty ahead of the next general election in August 2017 and the country’s growth prospects remain grim in a low oil price environment, as oil revenues constitute approximately 95% of exports and over 66% of fiscal revenues. Analysts expect GDP to grow 0.9% in 2016. In 2017, they see the economy growing 2.1%, which is down 0.2 percentage points from last month’s forecast.
KENYA | Slower credit growth and troubled politics threaten the economy next year
Kenya continues to show resilient growth in the face of a regional slowdown. So far this year, the country has been one of the best performing economies in Sub-Saharan Africa and the positive trend is attributed to an improvement in the large agricultural sector, rising public investment spending, subdued oil prices and a pickup in remittances. Strong PMI readings throughout Q3 point to healthy growth again following Q2’s acceleration. Earlier this month, delegates from the IMF concluded the first review of Kenya’s economy under its USD 1.5 billion precautionary credit facility program. The mission urged the local authorities to maintain a prudent fiscal stance as envisaged under the program and also warned that the government’s recent decision to limit commercial banks’ interest rates might have negative consequences for growth.
Public investment, loose monetary policy and a closer integration in the East African Community will support Kenya’s economy in 2017. However, slowing private sector credit growth and rising political uncertainty regarding presidential elections in August next year will put pressure on growth. FocusEconomics panelists see the economy growing 5.8% this year. Next year, the panel sees GDP growth decelerating slightly to 5.7%, which is down 0.2 percentage points from last month's projection.
INFLATION | Inflation stable in October
A preliminary estimate for October shows that inflation in the SSA region remained unchanged compared to the previous month’s figure. Inflation was 13.5% in October. Inflationary pressures remain elevated due to weakness in currencies across the region as well as energy and water shortages. In October, lower inflation for five countries offset higher inflation for four countries including Nigeria.
Panelists participating in this month’s FocusEconomics Consensus Forecast expect regional inflation to average 10.5% in 2017, which is down 0.2 percentage points from the previous month’s estimate. The downward revision mostly reflects decreased inflation forecast for Nigeria. Panelists see regional inflation receding to an average of 12.4% this year.
Written by: Dirina Mançellari, Senior Economist