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Analysis
Renewed sub-Saharan optimism

Renewed sub-Saharan optimism

Africa must build resilience against external shocks

by Seedwell Hove in Zurich

Thu 23 Mar 2017

Sub-Saharan Africa has begun 2017 with renewed optimism. Economic growth over the year is expected to rebound to at least 2.8% from 1.5% in 2016, and rise to 3.7% in 2018, according to data from the International Monetary Fund. Growth will be supported by increased global demand, a modest recovery in the price of oil and other commodities, and increased infrastructure spending in many countries. The larger economies which dragged down regional growth in 2016 are recovering.

Stabilising commodity prices and an improving external environment will help to narrow the fiscal and current account deficits for the region to less than 4% of GDP. Inflation is expected to recede to less than 10% in 2017, boosting consumption and allowing central banks to loosen monetary policies.

However, public debt ratios are likely to remain elevated, with more than 70% of sub-Saharan countries expected to retain debt levels above 40% of GDP in 2017. This raises concerns about debt sustainability in the region. Only Ghana and South Africa issued Eurobonds in 2016, but higher issuance is expected in 2017, as countries try to close financing gaps.

The Nigerian economy contracted by 1.5% in 2016 but is expected to exit recession this year. The IMF projects the economy to expand by 0.8% in 2017, lifted by increased oil prices and a $30bn infrastructure programme. There will be a gradual rebalancing of the foreign exchange market following the floating of the naira in June 2016.

South Africa’s prospects are strengthening, with growth of 0.8% projected in 2017 after a mediocre 0.3% in 2016, as external demand gradually improves and drought shocks dissipate. However, tensions in the ruling African National Congress, a lacklustre labour market and uncertainties around US trade policies may weigh on the country’s prospects.

In the light of Donald Trump’s election, questions are being raised about the direction of US policies on Africa, such as what might happen to the African Growth and Opportunity Act and the President's Emergency Plan For Aids Relief. The prospects of multiple rate increases by the US Federal Reserve in 2017, already heralded by a 0.25% increase in March, could reignite risk aversion and tighten global financial conditions, further raising the cost of financing in Africa.

Similarly, the economic slowdown in China remains a concern. The possibility of a disorderly unwinding of the housing market is likely to stoke fears of a ‘hard landing’ for the Chinese economy. In Europe, uncertainty over the UK’s withdrawal from the European Union is likely to weaken trade and investment from the region into Africa in 2017.

Nonetheless, frontier markets such as Côte d’Ivoire, Kenya and Senegal which enjoyed robust growth in 2016 are expected to maintain their momentum. These economies are less resource intensive, net importers of oil and, in comparison to the larger regional economies, are relatively more diversified. Côte d’Ivoire is likely to be the fastest growing economy in 2017, with 8% growth, bolstered by a dynamic private sector and extensive international financial support. Kenya’s growth performance, above 6%, will be supported by increased public investment, solid private consumption and closer integration in the East African Community. That said, credit constraints following the introduction of a cap on banks’ interest rates and political uncertainty around August’s general elections could limit Kenya’s growth.

There are several elections scheduled for the region in 2017. In addition to Kenya, polls in Angola, Democratic Republic of Congo, Rwanda, Senegal, Sierra Leone and Liberia should be monitored closely. Tensions are rising in DRC following the expiry of President Joseph Kabila’s term last December amid attempts to extend his tenure to a third term. In Kenya, Liberia and Sierra Leone, elections could impede plans to consolidate fiscal positions and may delay economic adjustments.

Growth in sub-Saharan Africa is rebounding, but needs to be sustained. African countries must accelerate economic diversification to build resilience against external shocks, improve the business environment, and invest in infrastructure to sustain long-term growth.

Seedwell Hove is Senior Macroeconomist at Quantum Global Research Lab in Switzerland. He is a former Economist of the World Bank and former Senior Treasury Analyst at the Reserve Bank of Zimbabwe.

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