Sub-Saharan Africa: SSA's poor economic performance in Q2 urges policy action
October 19, 2016
A complete set of GDP data confirm that the Sub-Saharan Africa region (SSA) decelerated notably in the second quarter. Economic activity expanded 1.2% over the same quarter of the previous year, which was down from Q1’s 1.7% increase and the slowest expansion since Q1 2010. The deceleration in Q2 was broadly due to Nigeria’s poor economic performance and to slowdowns in other countries of the region such as Botswana and Ghana. The region’s silver lining in the second quarter was South Africa, which rebounded and grew at the fastest rate in over a year due to a surge in manufacturing production.
Head on over to our Sub-Saharan Africa page for more recent economic news on the region.
Growth in the region continues to be constrained by subdued commodity prices, weakness in global financial markets, security threats and a slowdown in SSA’s main trading partners. In particular, the region’s oil-producing countries are experiencing a severe economic slowdown and the poor policy response from governments has escalated uncertainty and deterred investment. Moreover, droughts caused by adverse weather conditions in the southern part of the continent and political insecurity have unfavorably affected growth this year. However, east African countries such as Tanzania are recording robust growth rates due to more effective economic policies. The preliminary agreement reached by OPEC members in late September to cut oil output comes as good news for the oil-producing countries of the region, though doubts remain as to whether the agreement will be enough to reduce the global oil glut and to support the public finances of the countries in the region.
2016 growth prospects downgraded for fifth consecutive month
The economic outlook for SSA keeps deteriorating on the back of low prices for raw materials and a myriad of domestic challenges. This month, our panel of analysts downgraded SSA’s outlook for the fifth consecutive month and they expect economic growth this year of 1.8%, which is slightly more than half of the previous year’s expansion. The forecast is down 0.2 percentage points from last month’s estimate. For 2017, our panel expects the SSA region to regain momentum and expand 3.4%.
This month’s cut to the region’s 2016 economic outlook reflects a downward revision for 10 of the region’s 13 economies including Kenya and Nigeria—the region’s biggest economy. Growth forecasts were left unchanged for South Africa and Tanzania, while Zambia’s GDP outlook was the only one upgraded.
Cote d’Ivoire will be this year’s fastest growing economy followed by Tanzania and Ethiopia. In contrast, Nigeria is forecast to be the worst performer with a contraction rate of 0.4%. South Africa, another big player in the region, is expected to grow a weak 0.3%.
NIGERIA | Economy set to contract for first time in over two decades in 2016
Nigeria’s economy is in recession. The contraction in GDP intensified in Q2, dragged down by depressed oil prices, falling oil production, a lack of foreign currency, and fuel and power shortages. In Q3, business confidence fell to an unprecedented low in September and the PMI was depressed in August and September. The black market naira depreciated drastically in Q3 and at the outset of October, while the continuation of import restrictions kept the official exchange rate artificially strong. To make matters worse, a ceasefire between the government and the militant group whose attacks on infrastructure caused Q2’s drop in oil output seemed to fade in late September, renewing concerns about production. Much-needed support for the economy may come from an USD 1.0 billion AfDB-loan, which will likely be approved in November. Meanwhile, President Muhammadu Buhari plans a record budget of USD 22.6 billion for 2017, which still needs to be approved by lawmakers and is based on an oil price of USD 42.5 per barrel, to revive the ailing economy.
Nigeria’s economy is set to contract for the first time in over two decades this year. Our panelists revised down the country’s 2016 growth prospects for an eleventh consecutive month, this time by 0.5 percentage points. They now see the economy shrinking 0.4% this year. For 2017, they expect a return to growth with a 2.5% expansion
SOUTH AFRICA | Political uncertainty will drag on growth this year
Subdued commodity prices, weak global demand and a lack of structural reforms are stopping South Africa’s economic growth from reaching its potential. However, recent data point to another expansion of economic activity in the third quarter following the rebound in the second quarter. Growth in manufacturing production recovered in August and the PMI index jumped into expansionary territory in September, signaling improving business conditions in the manufacturing sector. That said, the exchange rate has been highly volatile lately following the political turmoil in the country. In the wake of the news that Finance Minister Pravin Gordhan had been summoned to appear in court on fraud charges, the rand plummeted nearly 5.0% against the U.S. dollar on 11 October and yields on the government’s 10-year bonds were up 25 basis points. The latest developments cast doubts on Gordhan’s future in politics and jeopardize the government’s popularity ahead of the budget statement on 26 October.
Despite Q2’s economic rebound, severe droughts across the country, political uncertainty and low commodity prices will limit growth in 2016. The FocusEconomics panel expects the economy to expand a meagre 0.3% this year, which is unchanged from last month’s estimate. For 2017, the panel projects that the economy will rebound and grow 1.2%, mostly due to a base effect
ANGOLA | Angolan oil prices soar after OPEC preliminary agreement
The preliminary agreement reached by OPEC members in late September to cut output comes as good news for the oil-rich country and pushed Angolan oil prices in September to the highest level in nearly a year. Nevertheless, doubts remain as to whether the agreement will provide enough support to improve the country’s battered finances. Angola is currently facing a foreign currency crunch which has hampered banking activity, investment, and output in the non-oil sector. Against this backdrop, credit rating agency Fitch downgraded Angola’s rating from B+ to B and left the outlook unchanged at negative. Fitch commented that future rating cuts will be on the table if fiscal consolidation efforts prove insufficient, the recovery in oil prices fails to improve current financial pressures or macroeconomic vulnerabilities persist.
As oil revenues constitute approximately 95% of exports and over 66% of fiscal revenues, the country’s growth prospects will remain grim as long as oil prices stay subdued. Analysts expect GDP to grow 1.2% in 2016, which is down 0.4 percentage points from last month’s forecast. In 2017, they see the economy growing 2.3%.
KENYA | Economy recorded broad-based improvement in Q2
Kenya’s economy gained steam in Q2, expanding 6.2% year-on-year. The uptick was supported by broad-based increases in all sectors of the economy, including the large agricultural sector, forestry and fishing, transportation and real estate. Tourism continued to recover from security concerns. Robust PMI readings throughout Q3 point to another quarter of solid growth. However, the government’s decision to limit commercial banks’ interest rates at 4 percentage points above the CBK’s benchmark rate, which became effective in September, risks curtailing private sector credit growth and overall GDP growth going forward. Meanwhile, in a visit scheduled for later in this month, the IMF will likely take a tough stance on the country’s wide fiscal deficit, which threatens its commitment to fulfill the fiscal targets agreed under its USD 1.5 billion precautionary credit facility with the fund.
Kenya’s economy is set to expand at a robust pace this year, on the back of infrastructure development, a recovery in the tourism sector, loosening monetary policy and closer integration in the East African Community. However, slowing private sector credit growth, a wide fiscal deficit, and rising political tension ahead of next year’s general elections give some reasons for caution. FocusEconomics panelists see the economy growing 5.8% this year, which is down 0.2 percentage points from last month's projection. Next year, the panel sees GDP growth accelerating slightly to 5.9%.
INFLATION | Inflation continues upward trend in September
Weakness in currencies across the region, coupled with energy and water shortages, is keeping inflationary pressures elevated. A preliminary estimate shows that inflation in the SSA region continued to trend upwards in September and hit 13.4%. The figure was up from the previous month’s 13.1% and marked the highest reading in nearly eight years. The jump was due to higher inflation in most countries, with Angola recording the biggest increase. Inflation in September moderated only in Tanzania, Uganda and Zambia.
Panelists participating in this month’s FocusEconomics Consensus Forecast expect regional inflation to average 12.3% in 2016, which is up 0.2 percentage points from the previous month’s estimate. The upward revision mostly reflects an increased inflation forecast for Nigeria. Panelists see regional inflation receding to an average of 10.4% next year.
Written by: Dirina Mançellari, Senior Economist