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Economic Insight:
Africa
Quarterly briefing Q4 2015
Welcome to the latest 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
expert in global economic forecasting, it provides
a unique perspective on the prospects for African
economies as a whole and for individual countries
against the international economic background.
In this issue of Economic Insight: Africa, we examine
the impact of key economic events of 2015 on the
future outlook for African economies.
In summary we find that:
• the Chinese slowdown will be a big challenge
for African economies but can also create new
opportunities for trade and investment;
• African economies remain vulnerable to a US rate
rise, expected to take place in the near future;
• the end of the commodity super-cycle will harm
African economies in the short term therefore
trade integration in Africa should focus on regional
alliances to foster long-term development;
• the economic outlook for the continent remains
bright, with growth expected to be above the
world average.
China’s economic slowdown puts a dent
in African economies
One of the most headline-grabbing events of 2015
was the alarm set off by China’s flurry of weak
economic data in the summer. This worried markets
over the economic prospects of the world’s secondlargest economy, leading to significant panic. The
Shanghai Stock Exchange, for example, fell by around
26% over the course of one month in mid-June, and
then declined by an additional 27% over just 10 days
in August.
African economies are among the most exposed to a
Chinese slowdown. From humble beginnings of under
$20bn in 2003, the value of total trade between China
and Africa has risen tenfold to $210bn in 2013. To a
large extent this absolute increase in scale is because
China’s overall trade has risen as its integration into
the world economy has intensified. But even as a share
of China’s total, African economies have experienced
a golden decade: their share has more than doubled
from 2.2% in 2003 to 5.0% in 2013. As illustrated in
the last edition of this report, Africa’s trade with China
is now three times as high as trade with the US.
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We observe a similar story when looking at investment.
As documented in the last edition of this report,
African economies have witnessed substantial inflows
of Foreign Direct Investment (FDI) from China in the
past decade. In total, the continent attracted just under
$200bn of FDI between 2005 and 2015. As shown in
Figure 1, resource-rich economies such as Nigeria and
Angola feature high up in the list. Increasingly, China
has also been investing in large-scale infrastructure
projects such as roads, railways and ports. Looking
ahead, it appears that African economies will need to
do more than just showcase their resource wealth in
order to attract investment from China.
Figure 1: China’s top trading and investment
partners in Africa, trade with China in 2013 and
total FDI from China 2005-2015, current US$bn
Trade
Nigeria
Ethiopia
Angola
Kenya
South Africa
Mozambique
Guinea
Uganda
DR Congo
Zimbabwe
0
5
10
15
20
25
30
35 US$
FDI
South Africa
Angola
Nigeria
Egypt
Algeria
Congo
Libya
Ghana
Sudan
Zambia
0
10
20
30
40
50
60
70
US$
Source: American Enterprise Institute, Tralac, Cebr analysis
To an extent, some of the continent’s economies are
already feeling the bite from worsening prospects in
China. Exchange rates, despite generally being quite
volatile, can be a good indicator of market sentiment
regarding the economic prospects of a region. Partly
due to the Chinese slowdown and its expected effect
icaew.com/economicinsight cebr.com
Nigeria
Kenya
South Africa
Ghana
Tanzania
Uganda
Figure 2: Selected currencies, change in value in
relation to USD, 1 January to 27 October 2015
Angola
China’s slowdown is in large part a result of a dramatic
shift in its economy. It is changing from an emerging,
fast-growing economy powered by exports and
manufacturing to a more mature economy with a
greater focus on the services sector and domestic
consumption. The Q4 2015 edition of our Economic
Insight: Greater China report finds that while the
country’s demand for certain commodities has taken
a hit, other sectors are growing fast. This presents an
opportunity for African economies to move up the
value chain and respond to the demand from China
for finished goods exports. South Africa, Mauritius and
Ethiopia are already faring well with industries such as
wine, tourism, finance and textiles.
on African economies, African currencies have taken a hit.
Zambia’s kwacha, for example, reached an all-time low
against the US dollar in late September. The currencies of
Angola, Uganda and Tanzania have also seen significant
declines over the year (see Figure 2). The International
Monetary Fund (IMF) itself also recently noted that ‘If
China Sneezes, Africa Can Now Catch a Cold.’1 While
China’s slowdown is an important factor behind these
exchange rate movements, another important event of
2015 is also having an impact − the expectation of a rate
rise in the US.
Zambia
This trade is mostly concentrated in raw commodities.
The top five exports from the African continent to
China are crude oil, iron ore, platinum, diamonds
and copper. It is no surprise then, that resource-rich
economies such as South Africa, Angola and Nigeria
are China’s top trading partners in Africa. While this
immediately makes them the ones most vulnerable to
China’s slowdown, it is important to understand how
these economies can respond to the challenge created
by future changes in China.
0
-10
-10.7
-20
-30
-23.9
-21.6
-20.3
-17.1
-7.8
-15.3
-40
-50 -47.2
Change in value in relation to USD
Source: Macrobond, Cebr analysis
A US Federal Reserve rate rise is expected
to hit Ghana the most, but Tanzania and
Kenya also highly vulnerable
The US Federal Reserve has been a major source of
uncertainty for the world economy this year. Despite
markets widely anticipating an interest rate rise at the
central bank’s September 2015 meeting, global risks and
uncertainty (notably those that can be traced back to
China) led it to refrain from acting. Still, looking ahead,
markets now expect a rate rise in December 2015. Beyond
this, rates are expected to follow a gradual upwards path
throughout 2016. An important question for the rest of
the world then, is what impact the movement will have
on other economies.
The world got an early flavour of what the results
could be back in December 2013, when the US Federal
Reserve announced that it would begin tapering its asset
purchases programme. As a result, emerging market
currencies took a hit as capital flows started reversing
back to the US dollar. Similar risks exist now in the face
of the Fed’s imminent action, although the alarm has to
be caveated: firstly, to an extent, markets have already
priced Fed action into their behaviour, and secondly,
interest rates, even when they rise, are expected to do so
gradually and settle at levels much lower than what was
seen before the financial crisis. It is, also, possible that the
Fed will have to lower rates again soon after if the risk of a
new downturn increases.
With reference to Africa in particular, it is misleading to
make claims such as ‘Emerging markets are vulnerable
to a Fed rate rise’ or ‘Africa is vulnerable to a Fed rate
rise’. Instead, a more subtle approach is needed as the
risk levels vary greatly from economy to economy. In this
edition of Economic Insight: Africa, we attempt to provide
this insight by constructing a ‘vulnerability index’ which
focuses on three measures that are broadly accepted
in the economic literature as good indicators for risk to
sudden capital outflows.
ECONOMIC INSIGHT – AFRIC A Q 4 2 015
1. The current account balance. This measures the
The maximum risk of 300 is equivalent to the highest
possible score across these three measures. Although no
country reaches that number, Ghana is very close with
a score of 273. Its economy suffers from both a very
high current account deficit and a history of rapid credit
growth. The current account deficit stood at 9.6% in 2014
according to estimates from the IMF’s World Economic
Outlook. While this is far from being the highest on
the continent (the equivalent share in Mozambique is
35% while Libya, Mauritania and Liberia have current
account deficits worth around 30% of their GDP), it is
still expected to be a significant drag on Ghana’s ability
to cope with the potential havoc caused by a US rate rise
in the near future.6 Within the major African economies,
Kenya and Uganda are also considered vulnerable with
current account deficits of 10.4% and 9.7% respectively.
Tanzania (9.3%) and Ethiopia (8.0%) follow closely
behind. At the other end of the spectrum, Botswana,
Gabon, Swaziland and Nigeria all have current account
surpluses, meaning that they usually import less than they
export.7 These economies are, therefore, at a lesser risk of
suffering when imports become more expensive in the
face of a stronger dollar.
balance of goods and services exports v imports, as
well as overseas investment income, as a share of GDP.
Generally, an economy with a higher current account
deficit will be more vulnerable to sudden capital
outflows given the suggested dependence on imports.
As its currency depreciates, imports become more
expensive to the local population.
2. Growth in private sector credit. Rapid credit growth
often, but not always, underpins strong growth in
asset prices such as housing or equities. With the
reversal of capital flows, the prices of such markets can
often correct quite sharply rather quickly. This makes
the rate of growth in private sector credit another
indicator relevant to a vulnerability index.2
3. The ratio of foreign debt to reserves. High levels
of external debt correspond to a high vulnerability to
capital outflows and currency depreciation in a given
economy. This is because as the currency depreciates,
the value of a debt denominated in foreign currency
increases when converted back to local currency
(external debt is usually priced in US$). To mitigate
this impact, it helps if economies have a large stock of
foreign reserves with which they can defend the value
of the currency. With this in mind, we include the ratio
between foreign debt3 and reserves4 as an input to our
composite vulnerability index.
Moving on to growth in private sector credit, this
presents a risk as it indicates a dependence on credit
to support strong economic growth, something that
is always difficult to break away from without leading
to an economic crash. A few economies in the African
continent have seen domestic credit increase rapidly: in
Eritrea, Guinea and Liberia, the average pace of growth
in credit to the private sector over the past three years
has been over 25%. Within the major African economies,
Ghana again tops the list with a rate of 18.4%, followed
closely by Kenya with a rate of 17.8%. Economies such as
Botswana and Mauritius have seen more steady and stable
growth of under 10%. Other economies have actually
seen credit decline. While this is not captured as such in
our index, it can also be a negative sign for the economy
in general. Zimbabwe, for example, one of the continent’s
worst-faring economies, saw credit to the private sector
decline by 24% over the last three years.
To construct the composite index, we first harmonised the
indicators to make them comparable, scaling each subindex from 0-100. Then we added all three components
together to provide the overall ‘vulnerability’ score for
each economy located in the African continent. The
results are shown below.
Figure 3: Score for vulnerability to US Federal Reserve
rate increase (1-300, where 300 is most vulnerable)
Ghana
Seychelles
Guinea
Tanzania
D R Congo
Kenya
Tunisia
Benin
Ethiopia
Mauritius
Mozambique
Togo
Republic of Congo
Rwanda
Liberia
Chad
Burkina Faso
Eritrea
Zimbabwe
Libya
Djibouti
Comoros
Niger
Sudan
Mauritania
Côte d'Ivoire
Zambia
Mali
Madagascar
Uganda
Algeria
Cameroon
Senegal
Equatorial Guinea
Nigeria
Gabon
Lesotho
Sierra Leone
Angola
South Africa
Central African Republic
Burundi
Morocco
São Tomé and Príncipe
Egypt
The Gambia
Namibia
Guinea-Bissau
Cabo Verde
Malawi
Swaziland
Botswana
As for the level of external debt, on an absolute scale,
South Africa tops the list with a total of just under $30bn
worth of foreign debt ($27bn of short-term debt plus
$2.4bn of interest payments). However, this reflects the
size of the economy. When the level of reserves is taken
into account (at $49bn), South Africa’s harmonised score
drops to 70, which is still relatively high compared to
other economies in the continent. Sudan on the other
hand, despite having a relatively low level of debt in
absolute terms ($5.4bn), is more vulnerable because of its
incredibly low level of foreign exchange reserves at just
$181m. Of the major economies covered in this report,
Nigeria comes out best − partly thanks to its Sovereign
Wealth Fund, the Nigerian Sovereign Investment
Authority, which adds another $1.4bn to its stock of
reserves, bringing the total up to $39bn and vastly above
its total debt of under $182m.
0
50
100
150
Vulnerability score
Current account balance
Source: Cebr
200
Credit growth
250
300
It is important to note that while this index goes far in
providing nuance to the usually crude analysis of the
vulnerability of emerging markets to a US Federal Reserve
rate hike, it is certainly not exhaustive. Other factors
matter too, such as financial openness and the level of
integration into the world economy, which raise the
vulnerability to global economic shocks such as those
potentially caused by an increase in US interest rates.
Ideally, a country-by-country analysis should be relied
Foreign debt
analysis5
icaew.com/economicinsight cebr.com
ECONOMIC INSIGHT – AFRIC A Q 4 2 015
upon to draw policy conclusions in order for countryspecific factors to be accounted for. Overall, however, we
believe that this index should serve as a useful basis for
thoughtful discussion and debate.
What will the end of the commodity
super-cycle mean for Africa?
A combination of demand-side, supply-side and
exchange rate factors have kept the price of oil and other
commodities low throughout 2015. On the demand
side, the world had become used to China’s insatiable
appetite for oil and other commodities to fuel its rapid
expansion during industrialisation. This can no longer be
taken for granted. The world’s second-largest economy
is not only slowing, it is also witnessing a shift in the
nature of its system which means that demand for certain
commodities will be low even if China manages to lift
up its growth rate. On the supply side, a nuclear deal
between Iran and the P5+1 was signed earlier this year,
raising expectations for more supply to come onto the
market in the near future. A stronger US dollar also puts
downward pressure on commodity prices as most of these
are priced in dollar terms. We expect these factors to
remain fairly persistent. Consequently, oil and commodity
prices are expected to correct only slowly and to settle at
levels lower than those seen before the latest downturn.
What will this mean for Africa? Insights from the first
edition of this report published earlier this year highlight
that African economies are making substantial progress
in diversifying away from commodities as a source of
government and export revenue. For example, less than
half of sub-Saharan Africa’s GDP came from the services
sector back in 1990. Today, they contribute close to 60%.
Additionally, in the second edition of this report, we
looked at trade and FDI and found that, although mineral
resource-rich economies have long attracted the lion’s
share of FDI into Africa, this is now starting to reverse.
Economies in East Africa are catching up fast thanks
to booming services sectors and the emergence of a
consumer class, particularly in Kenya.
Overall, the impact of lower commodity prices will be felt
very differently across the continent. Figure 4 lists African
economies according to the role of natural resource rents
in the economy. Economies such as Equatorial Guinea,
Angola and Zambia are much more exposed to the end
of the commodity super-cycle and should make a greater
effort to diversify and to manage resource revenues
through Sovereign Wealth Funds in order to smooth the
impact of fluctuations in the market.
Figure 4: Total natural resources rents,8 % of GDP
in 2013, selected African economies
%
70
This should be viewed as an opportunity for African
economies. Given the slowdown in global growth and
global trade, an important strategy for African economies
should be regional integration within the continent.
This will help them take advantage of the fact that, as
a whole, they are still growing faster than the rest of
the world. This can be achieved through the building
of ‘hard infrastructure’ such as transport infrastructure,
ports, roads, railways and airports, communications
technologies and broadband as well as ‘soft infrastructure’
such as the removal of trade barriers and red tape, and the
harmonisation of regulation across regional trade alliances.
As shown in Figure 5, COMESA 9 is the trade bloc with the
highest levels of trade with both the EU (although it is a
close call between that and SADC10 ) and India. COMESA is
also Africa’s regional bloc with the highest levels of trade
with China between 2002 and 2012. The East African
Community (EAC11), as the youngest and smallest group,
is lagging behind in terms of the absolute levels of trade.
However, it has seen strong growth over the past decade.
For example, trade between the EAC and the EU more than
doubled between 1999 and 2013.
Figure 5: Trade between African trade blocs and
external economies in 2002 –12, current US$ bn
800
600
400
200
0
Brazil
China
EAC
COMESA
India
EU
SADC
Source: Tralac, Cebr analysis
Global risks to weigh on economic
prospects but strong domestic
fundamentals remain favourable
60
50
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.
40
30
20
Mauritius
Botswana
Kenya
South Africa
Tanzania
Côte d'Ivoire
Cameroon
Zimbabwe
Uganda
Mozambique
Nigeria
Ethiopia
Ghana
Zambia
Liberia
Angola
D R Congo
Gabon
Equatorial Guinea
Congo Rep.
10
0
For some economies that are net importers of oil and
other raw materials, the new normal of persistent lower
prices can even be seen as good news. It translates into
an income boost to consumers, who now have to pay
less to satisfy basic needs such as access to food and
energy. It also means that the target for industrialisation
and development can now be achieved at a lower price.
Building roads and railways to improve Africa’s transport
infrastructure, for example, will be cheaper if the price of
raw materials such as steel, iron ore and other key inputs,
is lower.
The picture in West Africa remains mixed. Nigeria has
been hit hard by low oil prices this year. Low oil revenues
are having a knock-on impact on the rest of the economy
as it means that the government has less room for
manoeuvre to invest and support the economy through
public spending and tax cuts. Growth is expected to
Source: World Bank African Development Indicators, Cebr analysis
icaew.com/economicinsight cebr.com
ECONOMIC INSIGHT – AFRIC A Q 4 2 015
In Southern Africa, several challenges are hitting
the region in the short term but the outlook ahead
is expected to be brighter. The outlook for South
Africa – the continent’s second-biggest economy –
remains bleak. A decline in demand for its mineral
exports, continued power shortages, and a decline in
icaew.com/economicinsight cebr.com
Figure 6: GDP forecasts, annual % growth, selected
African economies
%
10
8
6
4
2015
2016
Côte d'Ivoire
Tanzania
Kenya
Ethiopia
Ghana
0
Angola
2
Nigeria
In East Africa, closer regional integration among
the countries of the EAC is expected to help drive
economic expansion. Kenya continues to enjoy
strong economic prospects with growth close to
5.5% over the next three years. However, several risks
remain. In particular, tightening monetary policy and
unfavourable weather conditions expected for the end
of this year have caused us to revise down the forecast
for 2015. Tanzania is expected to fare slightly better.
Growth is expected to stay above 6.5% over the threeyear forecast horizon as the new government moves
to implement reforms and complete investment and
infrastructure projects. Ethiopia remains the region’s
top performer for this year, with growth of 7%. Given
continued weak food prices we expect to see a dip
in 2016. However, the outlook for the agriculturalexporting country should start improving in 2017
once food prices start to recover.
tourism due to stricter visa regulations are all expected to
hold growth back this year. Still, at 1.8% it is higher than
other economies at similar stages of development. We
expect growth to slowly accelerate thanks to middle class
expansion and the completion of infrastructure projects.
The weak oil price environment has weighed heavily on
Angola. The government has already cut its forecast for
2015 by more than half from 9.7% to 4.4%. In our view,
this is still too optimistic. Growth is expected to be close to
3% this year. Looking ahead, with oil prices expected to rise
somewhat, we see growth at 4.5% in 2016 and at 5.8% in
2017. But important structural challenges remain, and to
sustain continued strong growth Angola will need to invest
in education and skills, and foster its private sector.
South Africa
decelerate to 3% by the end of 2015, a very weak
rate given the economy’s state of development.
Further ahead, while growth is expected to accelerate
gradually as oil prices slowly recover, the outlook
remains subdued. High inflation, a weak currency
and damaged business and consumer confidence
continue to weigh on the Ghanaian economy. Growth
is expected to remain weak at 3.5% this year although
the outlook is expected to accelerate slightly nearing
the election in 2016. In 2017 we expect to see a strong
rebound as the Tweneboa-Enyenra-Ntomme (TEN)
oilfields project is completed. The outlook for the Ivory
Coast is expected to stay fairly stable with growth
close to 7% in the next three years. This is thanks to
political stability and a strong record of economic
reforms that have aided the investment environment.
2017
Source: Cebr forecasts
ECONOMIC INSIGHT – AFRIC A Q 4 2 015
Footnotes:
1
Source: http://blog-imfdirect.imf.org/2014/03/20/if-china-sneezes-africa-can-now-catch-a-cold/
2
To smooth out short-term volatility in growth rates we have included the compound average growth
rate (CAGR) over the three years to 2014 when the latest data were available. Earlier data were used for
the following countries: Eritrea (2013), Ethiopia (2008), Ghana (2013), Guinea (2011), Liberia (2013),
Mauritania (2012), Rwanda (2005), Tunisia (2013) and Zimbabwe
3
This is the sum of short-term external debt and interest on debt repayments.
4
This is the sum of foreign currency reserves, gold reserves and the assets stored in Sovereign Wealth
Funds where these exist.
5
We have combined data from the following sources to create this index: International Monetary Fund,
World Bank, the Sovereign Wealth Fund Institute.
6
Generally, countries with a current account deficit higher than 9.5% are considered ‘outliers’ in our
approach and are assigned a score of 100.
7
Usually, but not always, as the current account deficit includes things beyond trade, such as overseas
investment income.
8
The sum of oil rents, natural gas rents, coal rents (hard and soft), mineral rents and forest rents.
9
The Common Market for Eastern and Southern Africa (COMESA) includes the following countries:
Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya,
Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia
and Zimbabwe.
10 The Southern Africa Development Community (SADC) includes the following countries: Angola,
Botswana, Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique,
Namibia, Seychelles, South Africa, Swaziland, United Republic of Tanzania, Zambia and Zimbabwe.
11 The East African Community (EAC) includes the following countries: Burundi, Kenya, Rwanda, Tanzania
and Uganda.
Cebr
The Centre for Economics and Business Research is an independent consultancy with
a reputation for sound business advice based on thorough and insightful analysis.
Since 1993 Cebr has been at the forefront of business and public interest research.
They provide analysis, forecasts and strategic advice to major multinational companies,
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