Despite Headwinds, Africa's Economy is Still Strong

Published on 1st August 2016

The African Development Bank, in its latest African economic outlook, forecasts economic growth in Africa to be 3.7% for 2016, almost eight-tenths of a percent lower than its forecast for 2015 (4.5%). This lower forecast is as a result of a mixture of factors: the dip in the price of commodities, the economic slowdown in China, droughts in parts of Eastern and Southern Africa, rising levels of insecurity in the Horn of Africa, in the Sahel and in the Lake Chad Basin. In spite of this drop in Africa’s expected growth rate in 2016, it is still forecast to be the second fastest growing continent in the world, just behind Asia (6.3%). The global economy is forecast to grow by 3.2% as compared to 1.9% for the United States, 1.5% for the euro zone and 0.5% for Japan.

In addition, Africa still has about six of the fastest growing economies in the world, with economic growth rates all above 6.5%, and these include Ethiopia (10%), the DRC (7.7%), Tanzania (7%), Côte d’Ivoire (8.6%), Rwanda (6.9%) and Kenya (6%). With the exception of the DRC and Côte d’Ivoire, all the countries with the stellar economic growth rates are in East Africa - the most integrated region in Africa.

So, being the second fastest growing region in the world, why then are some analysts pointing to an impending economic crisis in Africa? First, the growth rates in Africa’s two largest economies - Nigeria and South Africa - has been well below optimal levels for the past several quarters. Nigeria’s real GDP growth rate was 2.7 % in 2015 and its economy is forecast to grow by 2.3 % in 2016. Meanwhile, South Africa’s real GDP growth rate was 1.3% in 2015 and its economy is forecast to grow by a paltry 0.6% in 2016. The two economies also face other sets of economic problems. South Africa is dogged by some governance challenges that almost cost it its investment status by the global ratings agencies. And in Nigeria, the authorities’ exchange rate policy resulted in its expulsion from the JP Morgan Emerging Markets Bond Index and significant portfolio outflows.

Second, some countries such as Kenya, Angola, Mozambique and Ghana have seen their debt levels rise above 60% and 70% of GDP, and have approached the International Monetary Fund (IMF) for Stand-by Credit Facilities (SCF) and Extended Credit Facilities (ECF), respectively. In spite of these, the debt levels in Africa are still just about 20% so the continent is nowhere close to a debt crisis.

Strong fundamentals in African economies

Huge Infrastructure investments

But besides the fact that the continent’s giants are operating at sub-optimal levels, and that some countries have been severely affected by the slump in the prices of commodities and that others have been significantly affected by the El-Nino effect, the fundamentals of African economies are strong - the economies are resilient. First, it is important to note that with the exception of Côte d’Ivoire, which exports cocoa and coffee, the countries above which have experienced economic growth rates over 6% are not producers and/or exporters of commodities. In particular, they are net oil importers. This implies that commodity exports are not the only catalyst for economic growth in Africa, and that economic prosperity can be achieved through sound economic policies, particularly through targeted investments, especially in the infrastructure sector.

FDI inflows into Africa and financial aggregates

Secondly, besides huge infrastructure investments, Africa is the second largest destination for Foreign Direct Investment (FDI) inflows in the world, behind the Asia Pacific region. FDI inflows to Africa have risen from just about $10 billion in 2000 to over $53 billion in 2015 and annual private equity inflows currently stand at about $20 billion. Africa has been attributed a third of the total number of investment climate reforms that have been implemented in the past decade and for the 21 countries in the world that have implemented at least three business reforms, six are African.

It should also be highlighted that Africa’s 200 largest banks have increased their combined assets to over $1.5 trillion – almost 75% of the continent’s overall GDP. The combined turnover of Africa’s 500 biggest companies reached $700 billion in 2014 – almost a third of the continent’s overall GDP. The market value of Africa’s largest 250 companies is $770 billion - over a third of the continent’s GDP. Between $330-350 billion worth of trade finance is intermediated through African banks. In addition, Sovereign Wealth Funds in Africa currently stand at about 162 billion, pension funds at $334 billion and remittances at about $62 billion.

The continent is no doubt facing economic headwinds as a result of the dip in the price of commodities, the economic slowdown in China, droughts in parts of Eastern and Southern Africa, rising levels of insecurity in the Horn of Africa, in the Sahel and in the Lake Chad Basin. But Africa still remains the second fastest growing continent, with six of the fastest growing economies in the world with real GDP growth rates above 6% and which have invested massively in the infrastructure sector.

Africa also receives a significant amount of FDI and private equity flows ($53 billion and $20 billion, respectively). In addition, African banks are healthy (the 200 largest banks have combined assets worth $1.5 trillion - about 75% of the continent’s GDP) and the continent sits on a massive amount of untapped financial resources (Sovereign Wealth Funds at about 162 billion, pension funds at $334 billion and remittances at about $62 billion).

Overall therefore, Africa is a resilient continent – over and above the talks of an impending crisis.

By John Mbu

The author is an economic and policy analyst at the African Development Bank. The views expressed are his own and not those of his employer.

Courtesy: weforum.org


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