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Economic Insight:
Africa
Quarterly briefing Q2 2015
Welcome to the first edition of ICAEW’s
Economic Insight: Africa, a quarterly forecast for
the region prepared specifically for the finance
profession. Produced by Cebr, ICAEW’s partner
and acknowledged experts in global economic
forecasting, it provides a unique perspective on
the prospects for African economies over the
coming years.
In this issue of Economic Insight: Africa, we examine
the African economies’ progress on diversification.
In summary we find that:
• African economies are now better prepared for
the end of the ‘commodity price super cycle’;
• there is progress at diversifying sources of
growth away from commodities;
• African economies have become easier to invest
in, moving up the ranks of the World Bank’s
‘Ease of Doing Business’ Index;
• institutional and legal reforms are needed to
support risk management; using fiscal policy to
smooth the economic cycle;
• the US rate rise is another risk as African
economies are vulnerable to financial outflows;
and
• regional outlook remains bright, with growth
above the world average.
World economy in recovery mode; but
risks for Africa are on the downside
Almost seven years have passed since the financial
crisis of 2008. Prospects have improved since, but
risks remain. Global output expanded by 2.6%
last year; its fastest pace since 2011 but still below
pre-crisis norms. Growth is forecast to accelerate
to 3.1% in 2015. Downside risks remain, such as
a hard landing in China, another eurozone crisis,
and geopolitical tensions in the Middle East and
Eastern Europe. Even so, the fundamentals point to
a relatively strong year. The major economic boost
is from lower oil and commodity prices. These are
acting as a shot in the arm for consumers around
the world by lowering households’ living costs and
making room for central banks to keep interest rates
low without having to worry about inflation.
But, as often happens in economics, such price
falls create winners but also losers. In essence, the
economic balance of power shifts from commodity
exporters (as they face lower revenue and lower
profits) to commodity importers (who can now
consume more for the same cost). On balance,
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this is good for the world economy. The increase in
consumer spending power is greater than the reduction
in oil investment caused by lower prices. This means that
the net impact for the global economy is positive. But
for individual oil- and commodity-exporting economies
the fall in prices is a negative shock. It reduces profits for
firms in those sectors and associated tax revenues. It also
reduces the spending power of the country as the same
volume of exports can now buy fewer imports, and risks
making the economy less attractive to investors because
sectors are now less profitable.
Africa hosts many oil- and commodity-exporting
economies. In Nigeria, its biggest economy and home
to its second-largest oil reserves, oil accounts for the
vast majority of exports. Angola, Africa’s second-largest
producer, also depends heavily on oil when it comes to
the make-up of its exports. In recent years, Africa has
been fairly resilient to negative external shocks such
as the global financial crisis and the weak economic
years that followed it. Although world output declined
by 2.1% in 2009, most African countries continued to
see strong growth in that year. In 2014, sub-Saharan
Africa’s Gross Domestic Product (GDP) expanded
by 5.0%, almost twice as fast as global output. This
is partly because Africa’s exposure to downturns in
advanced economies has fallen significantly in recent
years. Back in 1990, high-income countries made up
93.6% of sub-Saharan Africa’s export destinations.
According to the World Bank, China is now Africa’s
major trading partner1, while the BRICs2 as a whole buy
44% of Africa’s exports. This is why, looking ahead, an
economic slowdown in the BRICs, manifested through
lower demand for commodities and lower appetite for
foreign investment, poses the most important external
downside risk to Africa’s economic outlook.
Tough times for commodity exporters
The sharp fall in the price of oil and other commodities
has been a crucial economic event of 2014. While oil
prices are still higher than in the 1980s and the 1990s
(even in inflation-adjusted terms), the collapse has been
very significant with crude oil prices now down by about
50% since last year. Most other commodity groups have
also seen hefty price falls, as illustrated in Figure 1.
To understand the outlook ahead, we need to consider
the drivers. Exchange rate developments have certainly
played a role; the relative strength of the US recovery is
making the dollar stronger. Since most commodities are
priced in dollars, their price has fallen.
But more fundamentally, price movements reflect
changes in the demand for, and supply of, commodities.
In the case of the oil market today, both sides are
pushing prices down. On the demand side, there is
slowing economic activity in China, which in 2014 –
for the first time – missed its growth target. Weakness
elsewhere – notably in Europe – has also curbed
demand. On the supply side, a glut in the market
has pushed prices further down. This has been partly
driven by strong growth in the US shale market but
also elsewhere – Iraqi oil output, for example, reached
a 35-year high in December 2014. On top of this,
the November 2014 decision of the Organisation of
Petroleum-Exporting Countries (OPEC) to maintain
its production quota of 30m barrels a day sent prices
plunging.
Looking ahead, there should be some pick-up in prices
from their current lows. On the supply side, today’s
low prices are forcing many US shale extractors out
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of the market. This means that the oversupply that is
pushing prices down is slowly being eroded. On the
demand side, cheap oil today reduces incentives for oil
consumers to switch to alternative energy sources. These
factors suggest that prices should start rising once the
global economic recovery strengthens. Still, with global
growth staying structurally lower in the coming decade
compared to the pre-financial crisis era, oil prices are
likely to struggle to reach levels as high as before their
recent collapse; instead they will most likely stabilise at
lower rates.
Figure 1: Commodity price indices
%
50
Year 2013–2015 change (estimate)
40
Year 2010–2012 change
30
20
10
0
-10
-20
-30
-40
-50
Food &
Beverage
Fuel
Agricultural
Raw Materials
Metals
Source: International Monetary Fund (IMF), Cebr analysis
The story is similar for most other commodities: the IMF
expects that, between 2013 and 2015, metals prices
will have fallen by a quarter and food and beverage
prices will have fallen by almost a fifth. Agricultural
raw materials, such as timber, cotton and wool, are
also expected to see their prices decline but by a lesser
extent.
Economic slowdown in China is a key factor behind
the softer performance in commodities. This is further
reinforced by China’s structural transformation away
from commodity-intensive production and into a
maturing economy with a greater role for services
and domestic consumption. This will put pressure
on African economies to diversify their exports away
from commodities. While this will create short-term
challenges, diversification will create new opportunities
for Africa’s economies.
Africa and commodities: fates no longer tied
If the past were a good guide, African economies should
be particularly alarmed by the bearish outlook for
commodities. As Figure 2 shows, output growth in the
region has tended to be strongly tied to the ups and
downs of the commodities world in the past. During
the commodity cycle bust phases in the early 1980s and
1990s, sub-Saharan Africa fell into recession.
Results from simulation exercises3 conducted by the
World Bank on the income effects of commodity price
declines show that even today, sub-Saharan Africa is still
relatively more vulnerable to a weakening in commodity
prices compared to other regions of the developing
world. In the case of oil, for example, losses for exporters
such as Angola or the Republic of Congo are shown
to be large enough to outweigh the benefits to oil
importers such as Ivory Coast or Kenya. This makes the
net effect of an oil price decline negative for the overall
region.
ECONOMIC INSIGHT – A FRIC A
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Figure 2: Sub-Saharan Africa GDP (LHS) and
commodity prices (RHS)
Figure 3: Value added by sector, as a share of GDP,
selected countries in 20117
%
%
10
9
Commodity prices
8
Sub-Saharan Africa GDP
Estimate
80
70
CAR
Nigeria
Somalia
Angola
Congo (DR)
7
60
6
50
Zambia
40
Ivory Coast
5
4
30
3
20
2
1
10
0
0
-1
-10
-2
-20
-3
-30
-4
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020
Ethiopia
Burundi
Swaziland
Mozambique
Tanzania
Sudan
Zimbabwe
Ghana
Malawi
Uganda
Botswana
Rwanda
Source: World Bank 4, United Nations Conference on Trade and Development (UNCTAD), IMF,
Cebr analysis
Kenya
Namibia
South Africa
However, compared to its own past, the link between
commodity prices and economic performance in Africa
is weakening. Despite a 20.3% decline in commodity
prices expected for 2015, growth is forecast to decelerate
only slightly to 3.6% from 2014’s 4.0% 5. Looking ahead,
we even expect the trend to go into reverse, with subSaharan Africa’s economic performance strengthening in
the years up to 2020, despite softening commodity price
inflation.
Is Africa becoming better prepared to
weather a commodity storm?
A critical factor behind the expected divergence in
the path of commodity prices and Africa’s economic
performance is that growth in many African countries is
starting to become more broad-based. The manufacturing
and services sectors are growing in importance in many
economies, at the expense of more traditional sectors
such as agriculture and the extractive industries. In 1990,
less than half of sub-Saharan Africa’s GDP came from the
services which today contribute close to 60%. This overall
trend is becoming representative of more and more
economies, as shown in Figure 3. The tourism industry is
growing particularly fast: since the new millennium the
number of foreign visitors has doubled and receipts have
quadrupled6.
This trend, while a natural by-product of the economic
development process, is being reinforced by external
factors. China, one of Africa’s biggest investors, is reaching
a stage of maturity in its economic journey as it develops
from a manufacturing, export-based economy to one with
a greater role for services and domestic consumption.
This means that demand for commodities is starting to
ease. Instead, the world’s second-largest economy is
now putting emphasis on climbing up the global supply
chain from its current status as ‘the world’s factory’. So
far, much of the space freed by China has been filled by
South East Asia where the landscape is relatively more
competitive for companies looking to set up labourintensive factories due to lower wages. But Africa could fill
this space too. This would help with diversifying further
away from dependence on commodities and accelerate
the process of development and economic catching-up.
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Mauritius
Djibouti
0
20
Agriculture
40
60
Manufacturing
80
Non-manufacturing
100
Services
Source: World Bank African Development Indicators, Cebr analysis
Africa is getting ready to welcome foreign investment,
with governments across the continent taking measures
to improve the ground for investors. According to the
World Bank’s Doing Business report, sub-Saharan Africa
was the top-performing region in terms of the number
of regulatory reforms in 2013/14 globally – 39 countries
reduced the complexity and cost of regulatory processes
and 36 strengthened legal institutions. Mauritius – Africa’s
top performer on the index – is 28th on the Bank’s list,
ahead of Japan and Spain. Rwanda is ranked as an easier
place to set up a business than Italy. And as shown in
Figure 4, all of Africa’s top-10 performers rank higher than
South America’s biggest economies, Brazil and Argentina.
Figure 4: Ease of Doing Business Index (less is better),
Global Rank in 20158, Africa’s top 10 performers plus
selected non-African economies
UK
Mauritius
Japan
Spain
South Africa
Rwanda
Italy
Tunisia
Ghana
African top 10 performers
Selected non-African economies
Morocco
Botswana
Seychelles
Namibia
Swaziland
Brazil
Argentina
0
30
60
90
120
Source: World Bank, Cebr analysis
ECONOMIC INSIGHT – A FRIC A
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The role of fiscal policy
While regulatory reforms that encourage foreign
investment are one way to diversify, investment and new
business creation alone are not a sufficient shield to the
so-called ‘resource curse’. Natural resources form a crucial
part of many African economies’ DNA. These should
not only try and diversify away from their resources
given volatility in prices and production, but also work
hard to set up ways to manage this volatility in order to
successfully exploit the resources and turn them from a
‘curse’ into a ‘blessing’.
One way to do so is through market-based risk
management strategies such as financial risk-management
mechanisms. These include derivatives such as forward
contracts, futures contracts, and options. For example, a
government wishing to guarantee its commodity export
revenues may want to set a futures agreement that allows
it to determine the revenue ex ante and thus hedge
against future price fluctuations. Such instruments have
been used successfully in Chile and Mexico but are less
widespread in Africa due to poor institutional and legal
frameworks and less sophisticated financial sectors, as well
as a lack of familiarity with these instruments. Weatherbased insurance is another way of tempering the impact
of shocks on agricultural commodities in particular.
Ethiopia and Malawi are already running such instruments
but their implementation can be tricky in practice due to
the lack of reliable data on weather and the marketing
cost of insurance contracts9.
Using fiscal policy is another way. Many African governments
are awakening to the power of fiscal policy as a tool to
smooth out the booms and busts of commodity markets,
as well as the volatility associated with weather
fluctuations in agriculture. Economic theory favourably
views the practice of saving in good times and spending
in downturns (termed as ‘counter-cyclical fiscal policy’).
By doing that, governments can help ensure continued
economic growth even when commodity prices fall.
Figure 5: Correlation coefficients between cyclical
fluctuations of government spending and of GDP in
Africa after 200010
during the downswings. But this trend seems to be
reversing. In a comparison of government spending and
economic growth in 46 countries, Leibfritz and Rottman
(2013) found that government spending in almost two
thirds of Africa’s economies was pro-cyclical between
1980 and 2000 – picking up during ‘good’ economic
times. However, since 2000 this applies to just 40%
of the countries, with the majority now seeing higher
government spending when economic growth is weaker
(see Figure 5).
At present, however, continuing with government
spending plans may prove challenging for African
economies, especially those heavily reliant on commodity
export revenues. This is because falls in, and uncertainty
over, such revenues remove the fiscal room that
governments have been used to. This makes the planning
of pro-growth policies such as infrastructure investment
harder. Apart from the volatility associated with
commodities, the uncertainty over future government
revenues is further elevated due to the erratic nature of
official development assistance (ODA) flows and other
foreign inflows.
FOCUS Effect of US monetary policy
tightening on African capital flows
The US was a bright spot in the global economy last year
and has carried this momentum into 2015 so far. This is
setting the scene for an interest rate rise, which markets
are currently pricing in for July 2015. Tighter monetary
policy raises the dollar’s returns to investors. This increases
demand for that currency leading to an appreciation. The
recent prolonged period of extraordinarily loose monetary
policy in the US and elsewhere in the advanced world
had created incentives for investors to reduce holdings
in dollars and substitute into higher-yield currencies,
including those of African economies. But as soon as a
move towards tightening was announced in December
2013, investors changed their behaviour accordingly,
substituting back into the dollar. This led to currency
depreciations elsewhere. In Africa, most of the continent’s
principal currencies have lost more than 10% of their
value since the Federal Reserve announced tapering the
pace of asset purchases, as shown in Figure 6.
Figure 6: US$/Local currency, % change, year to date11
%
5
0
-5
Detail
Kenya
Angola
South Africa
Tanzania
Uganda
-10
-15
Pro-cyclical
(>0.2)
Seychelles
A-cyclical
-20
Nigeria
-25
Zambia
(-0.2 to 0.2)
-30
Counter-cyclical
<-0.2
-35
Mauritius
No data
-40
Jan
2014
Apr
2014
Jul
2014
Oct
2014
Jan
2015
Apr
2015
Ghana
Source: Leibfritz and Rottman (2013)
Source: Macrobond, Cebr analysis
Despite this, the economic mantra in most African
economies, until recently, was one of spending in the
good times, only to be left without savings and having
to cut down on much needed government stimulus
For commodity-exporting countries, the trend towards
depreciation is normally reinforced when commodity
prices fall. This usually damages investors’ confidence over
economic prospects in these economies, in turn reducing
their appetite for investment. While this was broadly true
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ECONOMIC INSIGHT – A FRIC A
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West Africa is expected to continue growing rapidly.
After a slow start to 2015 due to low levels of business and
consumer confidence in a climate of political instability,
Nigeria’s new government has set expectations high.
Investment should remain sluggish and a weak oil sector is
expected to keep export revenues subdued. However, the
non-oil sector should support strong economic growth
of 4.9% this year, accelerating further to 7.3% in 2016 as
oil prices see a slight correction. In Ghana the picture is
less rosy, with high inflation levels and the need for fiscal
consolidation keeping economic activity subdued. Still,
growth is expected to be close to the sub-Saharan African
average at 4.6%, supported by the commercialisation
of the country’s gas sector. Prospects should gradually
improve in 2016 and 2017, as confidence in the economy
is restored. Ivory Coast is also expected to remain on a
high growth path, expanding by 7.9% in 2015; one of the
fastest rates seen on the continent.
this time around, the effect of falling commodity prices
on Africa’s economies was less pronounced than on
previous occasions. It is telling that the continent’s worstperforming currency was not-so-commodity-dependent
Ghana’s cedi, which lost almost 30% of its value against
the dollar over 2014. This was due to the country’s wary
financial situation, characterised by double-digit levels of
inflation, high interest rates, and a high budget deficit.
The other way that US monetary policy may affect
African economies is through its impact on foreign
direct investment (FDI) and portfolio investment flows,
on remittance flows, and on sovereign bond issuance.
Specifically, tighter monetary policy in the US raises the
cost of investment and thus reduces its levels. Portfolio
and FDI flows are thus expected to decline from present
levels once the first rate hike happens. As shown in Figure
7, these flows are now a sizeable share of Africa’s total
financial inflows.
In East Africa, closer regional integration among the
countries of the East African Community is expected to
help drive expansion. Domestic demand will be a key
driver of growth for Kenya, whose economy is expected
to expand by 4.5% this year, accelerating to 5.3% in 2016
and 5.5% in 2017. The pace of expansion is forecast to
be even higher at 7.2% in Tanzania in 2015, supported
by loose fiscal policy in anticipation of the election later
this year. After that, growth is forecast to decelerate
slightly but remain robust and close to 6.0%. Growth is
also expected to be strong in Ethiopia as the benefits of
increased transport infrastructure are reaped. However,
unfavourable weather trends remain a key risk, as is the
continued weakness in the price of coffee, one of the
country’s major exports.
When it comes to sovereign bond issuance, African
economies’ capacity to issue these was enhanced greatly
in the low-interest-rate international environment. Loose
monetary policy in the US, Europe and Japan meant that
investors looked for higher yields in African sovereign
bond markets. Monetary policy tightening in the US is
thus expected to have negatively affected Africa’s inflows
through this channel.
Developments in commodity markets discussed in this
report have also impacted the level of financial flows
into Africa. While their importance is subsiding, natural
resource endowments remain a major determinant of
African countries’ abilities to attract FDI. As such, soft
commodity prices are weighing on investment in these
industries as they reduce expected returns to investors.
Figure 7: External financial flows to Africa. Current
US$ bn (LHS), and year-on-year % change (RHS) 12
US$bn
250
%
14
200
12
10
150
8
100
6
50
4
0
-50
2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(e)
(p)
Foreign direct investments
Official development assistance
Portfolio investments
Remittances
0
In Southern Africa, growth performance is uneven.
South Africa is expected to be one of the continent’s
slowest-growth economies this year, after taking a hit
from continued strikes in the mining sector and the
tightening of monetary policy by the Reserve Bank of
South Africa. In the outer years, economic performance is
forecast to accelerate, benefiting from a pickup in global
growth and an expansion in regional trade. Angola on
the other hand, is expected to see fairly strong growth
this year, despite the challenges faced by its large
oil sector. Both government spending and business
investments are expected to make strong contributions
to growth, especially in the transport, manufacturing and
services sectors. However, structural challenges such as a
relatively undeveloped private sector, poor regulation and
a lack of skills, are expected to hold back the economy
from accelerating significantly in the outer years.
Figure 8: GDP forecasts, annual growth, selected
African economies
%
8
2015
% GDP
Source: African Economic Outlook 2014
7
On the upside, the effect of a downturn on capital inflows
could be tempered by the ability of African economies to
absorb excess capital and commodities through domestic
investment if exports weaken. Such investment would
both alleviate the problem of declining external demand
and set the ground for higher growth in the future.
6
2016
2017
5
4
3
2
West and East Africa to show fastest growth
Economic growth varies widely across the continent,
reflecting differences in stages of development, the
political and social climate, the natural resources
endowment and weather conditions.
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1
0
Angola
Ivory
Coast
Ethiopia Ghana
Kenya
Nigeria
South Tanzania
Africa
Source: Cebr forecasts
ECONOMIC INSIGHT – A FRIC A
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Footnotes:
1 Latest data are for 2013, see more here: http://www.worldbank.org/content/dam/Worldbank/GEP/GEP2015a/pdfs/GEP2015a_
chapter2_regionaloutlook_SSA.pdf
2 Country grouping that includes Brazil, Russia, India and China
3 The scenario considered by the Bank has a price decline from the baseline of 10% for metals (aluminium, copper, gold, iron ore,
and silver), 5% for agricultural commodities (cocoa, coffee, tea, cotton and tobacco) and 30% for crude oil.
4 This measure of African GDP is an average including countries with full national accounts and balance of payments data only.
As such it excludes Liberia, Chad, Somalia, Central African Republic and Sao Tome and Principe. Data limitations prevent the
forecasting of GDP components of Balance of Payments details for these countries.
5 Ibid.
6 Source: World Bank World Development Indicators
7 Due to missing data, earlier years have been used for some countries as follows: Benin (2010); Cameroon (2007); Central African
Republic (2004); Chad (2008); Comoros (2009); Djibouti (2007); Equatorial Guinea (2008); Eritrea (2009); Guinea Bissau (2002);
Madagascar (2009); Mali (2007); Niger (2003); Nigeria (2006); Sao Tome and Principe (2006); Somalia (1986).
8 Economies are ranked on their ease of doing business, from 1–189. A high ease of doing business ranking means the regulatory
environment is more conducive to the starting and operation of a local firm. The rankings are determined by sorting the
aggregate distance to frontier scores on 10 topics, each consisting of several indicators, giving equal weight to each topic. Topics
include ‘starting a business’, ‘dealing with construction permits’, ‘getting electricity’, ‘registering property’, ‘getting credit’,
‘protecting minority investors’, ‘paying taxes’, ‘trading across borders’, ‘enforcing contracts’ and ‘resolving insolvency’.
9 Source: UNCTAD (2015)
10 The authors define a noticeable pro-cyclical spending behaviour if the correlation coefficient between cyclical fluctuations of real
government spending and of real GDP is 0.22 or higher, a noticeable counter-cyclical spending if the correlation coefficient is
-0.22 or lower, and a-cyclical spending if the correlation coefficient is between -0.22 and 0.22.
11 The starting date is 18 December 2013, the date on which a tapering of asset purchases was announced by the US Federal
Reserve.
12 2013 data are estimates (e) and 2014 data are projected (p)
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