Accra, November 16, 2017//-Despite a number of challenges facing the African region, it still offers new areas of growth. Although Africa’s energy sector has been exposed to oil price shocks, the sector remains a major lucrative area in the region (mainly coal, oil and natural gas).
However, oil price volatility poses major risks. Infrastructure-related business areas including power, construction, ICT and internet infrastructure have emerged as major areas of growth and investment in the region.
Emerging hotspots include Senegal, Ghana, Cote’d’Ivoire and Ethiopia. These economies have seen a rise in greenfield investments in recent years, thanks to improving economic fundamentals and to some extent, stable political environments. Côte d’Ivoire is another major hotspot although rising political tensions and security issues pose some downside risks to the country’s prospects. Ghana’s investment profile has also improved.
Ecobank Group Research added that it expects economic activity in sectors such as transport, energy, construction, ICT and trade-related services to expand, presenting new business opportunities. Strong population growth and rising urbanisation rates will also offer opportunities for investors, and in turn support exports and help underpin increased flows of FDI over the coming years.
Economy
Growth in Sub-Saharan Africa (SSA) fell to its lowest level since 1994 reflecting the effect of the commodity price slump that began in 2014. Economic growth in Sub-Sahara Africa is expected to strengthen: from an estimated 1.3% in 2016 to an average of around 3.0% in 2017-18, reflecting improved prospects in a large number of countries, including key oil exporters.
However, growth rates will remain uneven across the region, with the region’s economic giants, Nigeria, South Africa and Angola posting weaker growth rates compared with other minerals and agricultural producers such as Ghana and Cote d’Ivoire.
While most countries will continue to reel from the effect of the commodity price shock, we expect economic activity to recover over the forecast period supported by an improving commodity price outlook.
“This will help to drive growth in key commodity-rich countries, creating multiplier effects in the non-commodities sector. This is specifically in Nigeria, South Africa and Angola, which together account for around 57% of total nominal GDP in SSA.
Increased drive by African governments to boost public investment spending and strengthen the productive capacities of their countries will also underpin growth, although financing challenges and capacity problems are likely to persist resulting in slow progress”.
The former countries will continue to adjust to the commodity price shock, despite our expectation of higher commodity prices in 2017-18. The commodity price shock led to significant economic imbalances in such economies, evidenced by larger budget deficits, increased FX liquidity risk and higher inflation resulting from pass-through effect from currency weakness; as a result, it will take some time before we see such economies post growth at pre-crisis levels.
While the improved commodity outlook will go some way towards boosting growth in these countries, it will be crucial for political leaders to adopt bold policies that will effectively address structural imbalances and send positive signals to investors to restore confidence.
Inflation is likely to remain elevated in 2017-18 on a combination of higher oil prices, exchange rate pressures and possible drought-related shocks, especially in east and southern Africa. However, price increases are likely to be limited by an expected improvement in harvests, which will help moderate food prices (the largest component of the CPI basket in most countries) and greater infrastructure development, which will help to reduce supply bottlenecks and hence inflationary stresses.
Inflation in Francophone Africa, which has currency pegs to the euro, will soften on the back of general EUR strengthening since H2 2017 and will remain lower than rates in Anglophone Africa.
Despite this, increased uncertainty in the global economy and further hikes in US interest rates suggests that the scope for monetary policy easing will be limited; as such, monetary authorities are likely to adopt a broadly tight policy stance in 2017-18, sustaining high T-Bill yields.
Current account deficits look to remain elevated owing to the ongoing high level of infrastructure investment, FDI-related imports, and imports of food and consumer goods. As most countries in sub-Saharan Africa are oil importers, the rebound in global oil prices will also increase external sector pressures despite somewhat higher demand for exports from key export markets. This will continue to sustain high demand for FX in African countries.
Capital flows into SSA looks set to recover as improving commodity prices and ongoing interest rate differentials stoke investor appetite. This was evident in the rebound in Eurobond issuances in H1 2017 where despite US rate hikes, subscription levels remained robust.
Furthermore, yields on SSA debt have declined since the start of the year. Nonetheless, while FDI flows into Africa will be boosted by a recovery in global commodity prices, such gains will undermined by the tightening of developed economy monetary policies. The loosening of developed economies’ monetary policies following the 2008-09 global crisis led to large portfolio capital inflows into sub-Saharan Africa’s largest markets.
As monetary policies are “normalised” in many developed economies, particularly the US’ tightening since mid-December 2015 (with further hikes expected), SSA economies remain vulnerable to sudden portfolio flow reversals and higher financing conditions.
The overall positive scenario for SSA Africa in 2017-18 is beset by numerous risks. External factors continue to pose the largest threats to the region as a whole, but domestic risks are more significant in some countries. African countries continue to be blighted by power constraints; undermining Africa’s growth potential, and sustaining high costs for doing business in the region.
The short term outlook for power provision is positive, but progress will be limited given the huge investment required against the backdrop of weak commodity receipts (albeit improving) and tighter global financing conditions. Other risks include security threats associated with terrorism, political instability and high currency risk.
African Eye Report
