---------- Forwarded message ---------- From: John Ashworth <[email protected]> Date: Tue, Dec 6, 2011 at 9:41 AM Subject: [sudan-john-ashworth] African growth: a counter-argument To: Group <[email protected]>
Storm warning Economic gloom in Europe and North America will slow African growth next year and may spark more challenges to incumbent regimes Africa Confidential (free article), 2nd December 2011, Vol 52 No 24 For many African countries, the West’s economic travails will translate into spiralling food and fuel prices, higher unemployment and less state spending on education and health. The rumbling Eurozone crisis and the United States’ debt-burdened economy will not necessarily divert Africa from its more positive growth path but may slow its rate of progress, given its direct and indirect (via China) dependence on trade with the industrialised West (see Chart). The West’s slowdown has pulled back growth in China and India – and with it demand for African exports. That could prove a dangerous combination for some authoritarian regimes, already shakier as North Africa’s revolutions resonate across the continent. With over 30 parliamentary and presidential elections due in 2012, savvier opposition parties will hope to capitalise on tougher social and economic conditions. Inflation and interest rates are spiralling across East Africa: inflation hit 33% in Uganda and 17% in Kenya in September. As demand for minerals and oil falls in the West and Asia, resource-rich economies such as those of Angola, Congo-Kinshasa, Ghana, Nigeria and Sierra Leone will have to adjust policy quickly. Most economists and bankers are reluctant to prophesy financial doom but leave their options open. Some of those interviewed by Africa Confidential say that 2011-12 will not be as bad in Africa as the last Western crisis in 2008-09. However, this time most African economies will have fewer reserves than they had in 2009 to boost state spending to cushion against the slowdown. Over 70% of the ‘counter-cyclical’ spending came from African states’ own revenue in 2009, according to the World Bank. Now, economists see demand shocks as more dangerous than another financial crisis. An out-of-control Eurozone would hurt growth both in Europe and in its trading partners. Sluggish Western demand is already slowing the growth of Chinese exports, according to Beijing’s November trade figures. When that happened in 2009, China stopped buying Africa’s metals and oil and prices dived. Recent weeks have seen sharp downturns in the world price of almost all commodities, except for oil and gold. China’s growth accelerator Citigroup’s Africa economist, David Cowan, told us that a 1% slowdown in Chinese growth would have a greater impact on growth in low-income countries than a 1% slowdown in Western growth. China’s impact as a growth ‘accelerator’ would be reduced, especially for African commodities and basic products. Some African economies are very sensitive to the Eurozone, through tourism, horticultural products and aid. The ‘transmission mechanism’ to Africa for a European crisis would be fairly weak. Those Western banks with close links to Africa and Asia, such as Standard Chartered and Barclays, have been among those least affected by financial woes. Standard Chartered’s Head of Research for Africa, Razia Khan, says that further bank recapitalisation and refinancing in Europe could reduce bank lending, affecting Africa directly. The Director of the African Development Bank (AfDB) governance division, Gabriel Negatu, says short-term economic shifts may not seriously affect demand for commodities because China, as well as importing for current use, is building long-term inventories, taking a decades-long view, similar to that of the USA with its strategic oil reserve. Africa’s oil-producing countries have fared better than their non-oil producing counterparts. Higher oil prices have allowed them to replenish their foreign exchange reserves and redress budget deficits but future demand is changing. Ecobank’s Angus Downie points to the US and Canadian energy self-sufficiency policies, helped by shale gas discoveries, which will cut demand for African and Gulf oil in the longer term. It will be ever more important for oil-exporting economies to diversify. Some analysts, such as Renaissance Capital’s Yvonne Mhango, point out that Nigeria’s non-oil sector is the ‘primary growth driver’ (it makes up more than 60% of the gross domestic product) in a large internal market. The AfDB’s Ousmane Dore, based in Abuja, argues that Nigeria’s economic outlook is positive, given its market size and the reform policies pushed by a strong economic policy team. East African countries depend heavily on European growth. Kenya and Tanzania grew faster immediately after the 2008-09 crisis but are vulnerable to reductions in tourism and demand for luxury items, such as horticultural products, from a cash-strapped Europe. Events beyond government control, such as drought, increase their vulnerability. The sub-Saharan African region is ‘one of the strongest globally in a recessionary environment’, says Mhango, assessing the 2011-12 global recession as milder than that of 2008-09. Yet she highlights Kenya as weaker than in 2008, partly because drought has harmed agricultural production and because of ‘twin deficits’, a current account deficit of over 14% in the first quarter of 2011 and high inflation, mandating restrictive monetary policy (such as higher interest rates) which may further dampen growth. Lower-income countries or those with a large diaspora in the West may suffer as incomes and employment rates in Europe and the USA stagnate and hit remittances (which rose by 7.4% to Africa last year, says the World Bank). Somalia’s economy, for example, is almost entirely dependent on remittances from the diaspora. Those countries more dependent on Western aid will see cuts as European governments worry about shortfalls at home. The CFA Franc Zone would be more affected by a Eurozone break-up than non-CFA countries. One economist speculated that it could cause a CFA devaluation, perhaps helping the Zone’s trade competitiveness. There may be less risk that investment will be withdrawn, as much offshore portfolio investment was withdrawn from the region during the 2008 crisis. Countries receiving significant capital inflows in the past few years, such as Ghana, have generally been attracting longer-term foreign direct investment (FDI), which has remained strong in oil, information technology and telecommunications. FDI in Africa from emerging economies should increase in the longer term. Some cash-rich Western and Asian companies may see Africa as a better opportunity, having held back on investing elsewhere because of world economic conditions. More countries are raising funds by issuing sovereign bonds, others have turned to China and its financial institutions and yet others are planning, with the AfDB, to issue ‘diaspora bonds’ to citizens abroad. Funding is critical not only to help Africa weather the storm but also for investment in the roads, power stations and factories that will promote faster long-term growth. Domestic growth and regional trade would reduce sensitivity to global markets. Sub-Saharan intraregional trade has grown to 14% of total trade, up from 7% in 1990. Africa’s informal economy, which expands regardless of foreign investment, offers another buffer against recession, says Tchi Mbouani Ngaliae, who heads London-based marketing intelligence outfit Kosia. Peter Enti of Nubuke Investments sees food prices as a driver of political risk. Higher demand in China and elsewhere for staples for human consumption, as fodder for livestock or for more resource-intensive uses as consumer tastes change, offers a huge opportunity for African agricultural companies to supply the world’s biggest single market. Some economists view the current world economic risks as less important for Africa than consolidating its long-term growth trend. Citigroup’s Cowan argues that longer-term structural factors are more important for reaching the double-digit growth that would enable Africa to catch up with richer economies and relieve the plight of the poor. That would start, he argues, with much higher agricultural investment (as in China in the late 1970s) as food prices rise in the world economy. In Africa’s favour is its young, growing population (70% of people under 30) as much of the West, Japan and even China seek to manage their ageing populations. Cheap labour and China’s shift to more advanced manufacturing and services could give Africa a chance to develop a stronger productive base. Improved infrastructure would enable the development of internal markets and produce the power that industries need. Changing the structure of African economies – processing and packaging more of its natural resources in Africa – and breaking down the trade and transport restrictions that hold back regional integration will matter far more in the long term than what will admittedly be a difficult year for the continent’s political economy in 2012. http://www.africa-confidential.com/article/id/4246/Storm_warning END______________________ John Ashworth Sudan Advisor [email protected] +254 725 926 297 (Kenya mobile) +211 919 695 362 (South Sudan mobile) +27 82 853 3556 (South Africa mobile) +44 750 304 1790 (UK/international) +88 216 4334 0735 (Thuraya satphone) PO Box 52002 - 00200, Nairobi, Kenya This is a personal e-mail address and the contents do not necessarily reflect the views of any organisation -- The content of this message does not necessarily reflect John Ashworth's views. Unless explicitly stated otherwise, John Ashworth is not the author of the content and the source is always cited. 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