Africa: Reap what you sow

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Stephanie Copeland
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1 Photo courtesy: Olo Eetu on Unsplash Africa: Reap what you sow Stéphane Colliac, Africa Senior Economist Paris

2 AFRICA: THE RESOURCE CURSE IS BINDING IN THE SHORT- RUN 01

3 AFRICA: GROWTH AMID DIVERGENCE AND RISKS Regional divergences West and East Africa exhibit high growth: Ethiopia, Kenya, Rwanda, Côte d Ivoire, Ghana mainly Central and Southern Africa are suffering from a protracted low growth period: South Africa, Nigeria, Angola North Africa still divided between good performers (Egypt, Morocco) and bad performers (Algeria, Tunisia, Libya) Risk#1: A busy political calendar % 1.5% Growth and risks in Africa C3 2.9% 2.7% 2.7% Algeria 2.7% 2.5% 2. C4 Tunisia C2 Egypt Morocco B1 5.3% 5.7% % Main polls: Nigeria and Senegal (February), Algeria (April), South Africa (May), Tunisia (December) Geopolitical troubles and violence are on the rise: Boko Haram (Nigeria, Cameroon, Chad, Niger) Country specific divides: DRC, Cameroon, Ethiopia, Mali Risk#2: The resource curse Oil and metal exporters are suffering from a new price decrease. Some key economies stuck in a low growth regime, resulting from commodity output capacity depletion: Nigeria (for security reasons), South Africa, Algeria, Angola, Liquidity pressures are again increasing in countries with low or decreasing reserves (Zambia, Tunisia, Angola) Low for longer commodity prices are exerting pressure on public finance, particularly in economies with large subsidies and high debt, nurturing social protests: Zimbabwe, Sudan, Tunisia Exchange rate policy: Floating exchange rates acted as shock absorbers (South Africa, Egypt) but FX reform remains difficult particularly in CFA Franc zones (CEMAC mainly) % % 7.2% % % * C2 Ghana B1 Cameroon Sources: Allianz Research C2 Senegal Côte d Ivoire C3 3.2% 3.5% 3.5% 3.5% Nigeria D3 1.8% 2.2% 2.5% Angola * D4 DRC D4 B3 South Africa Kenya C3 Ethiopia C2 Tanzania 0.7% % 5.7% 5.5% C3 6.2% Low risk Medium risk Sensitive risk High risk

4 AFRICA: LOWER COMMODITY PRICES TO HAVE AN IMPACT 800 Commodity prices vs. EM exchange rate 40 Africa: Cumulative financing gap (USD bn) +/- means a gap/surplus Depreciation Emerging Markets' exchange rate (vs. USD, right) 58 Commodity prices (S&P GSCi, left) f Sources: IHS Global Insight. Allianz Research Exchange rate pressure is back, as a result of lower commodity prices. Low for longer commodity prices weigh on external deficits, public finance and FX reserves. Sources: Allianz Research As a result, financing needs will remain higher for longer and the rebalancing of deficit economies should be postponed 4

5 AFRICA: DEBT ACCUMULATION IS ON THE RISE Africa: Current account financing (USD bn) +/- means net inflow/net outflow Current Account Balance - Not covered Current Account Balance - Covered by remittances FDI Debt and equity flows Central Bank foreign reserves evolution Current account balance Africa: Eurobond issuance (USD bn) e 19f Others Angola Côte d'ivoire Morocco Kenya Ghana Zambia Nigeria South Africa Egypt Sources: Worldbank, Allianz Research calculations FDI inflows are no longer the main financing scheme. They should not be back to past levels in So, any debt inflows weakness should reverberate on FX reserves. The Frontier Markets story is alive and kicking to be the strongest year despite EMs woes. Is this financing well-suited to address the long-term needs? 5

6 Angola Benin Burkina Faso Cameroon CAR Chad Congo Cote d'ivoire Egypt Ethiopia Gabon Gambia Ghana Guinea Kenya Madagascar Malawi Mali Mozambique Niger Nigeria Rwanda Senegal South africa Tanzania Tunisia Uganda Zambia AFRICA: RISING DEBT COMPLICATES THE FISCAL EQUATION Debt in % of GDP: Public (1st panel) vs. external (2 nd panel) Public debt increased, particularly in some oil exporters, but debt levels are not back to past highs, except in some specific cases Angola Benin Burkina Faso Cameroon CAR Chad Congo rep Cote d'ivoire Egypt Ethiopia Gabon Gambia Ghana Guinea Kenya Madagascar Malawi Mali Mozambique Niger Nigeria Rwanda Senegal South africa Tanzania Tunisia Uganda Zambia Africa: Subsidies (% of public spending) vs. public debt (% of GDP) 10 Public debt EGY BFA AGO ZMB NAM UGA NGA TUN MUS KEN DZA The double dip observed on commodity prices will test public finance probably more strongly this time. Countries with high subsidies to be the more challenged, as subsidies cut can exacerbate protests (e.g. Zimbabwe). CIV RWA TZA SEN ETH ZAF Subsidies

7 Current account balance (% GDP) AFRICA: THE ADJUSTMENT DILEMMA, INFLATION OR DEFLATION? 25% 15% 1 5% Exchange rate vulnerability Commodity exposure, current account balance, exchange rates and import cover of FX reserves North & West CIV MARCMR % EGY BFA COD GHA GNQ MLI GAB -1 SEN DZA -15% - -25% NGA Size of the bubble: currency depreciation 6 4 currency appreciation/ stability vs. USD Commodity exports (% GDP) Sources: IHS Global insight, Allianz Research Color of the bubble: import cover (months) 7+ months 5-7 months 4-5 months 0-4 months COG Current account balance (% GDP) 15% 1 5% East & South BWA AGO ZAF NAM MUS MDG -5% UGA ZMB KEN RWA -1-15% ETH Size of the bubble: currency depreciation vs. USD Currency appreciation/ stability vs. USD 6 4 Commodity exports (% GDP) Sources: IHS Global insight, Allianz Research Color of the bubble: import cover (months) 7+ months 5-7 months 4-5 months 0-4 months CFA Franc zone Inflation in %: 2019 vs Cameroon Congo Cote d'ivoire Senegal Togo Benin Chad Morocco Burkina Faso Gabon Mali Rwanda Tanzania CAR Zimbabwe Uganda South Africa Algeria Kenya Tunisia Madagascar Ethiopia Ghana Guinea Nigeria Egypt Zambia Angola DRC Sources: IHS Global insight, Allianz Research Countries with the poorest liquidity levels are vulnerable to capital flows reversals. The main weaknesses arise from high commodity exposure (Central Africa mainly), low reserves amid high exchange rate pressure (Southern Africa). East Africa has more buffers (except Ethiopia). Economic woes were led by inflation in some regions (FX depreciation consequences). Now, the pain is deflation (lower income) for Central Africa CFA zone.

8 AFRICA: CONFIDENCE IN TOMORROW 02

9 AFRICA: SHAPE OF THE FUTURE, INFRASTRUCTURE 1/ Africa: Power generation, expected spending through 2030 (USD bn) Africa: Capital stock increase (annual average growth, last 10 years), current account balance (% of GDP, 5-year average), and share of the deficit financed through FDI 6% 4% 2% Capital stock NGA increase 2% 4% 6% 8% 1-2% CIV ZMB -4% EGY MOR CMR ZAF -6% KEN AGO MUS UGA -8% -1 Current account balance SEN TUN FDI % curr. acc. deficit: 10 or above 1 or below GHA TZA ETH 0-12% -14% DZA Fast-growing East African Economies RWA -16% Basic infrastructure needs are strong, about USD 1000bn for power generation only in the 15 main African economies: assuming that about one third will be matched still make a USD 330bn opportunity. Upgrading infrastructure level requires the adequate financing. Too high external deficits and/or too low FDI are endangering East African rapid capital stock accumulation path. 9

10 AFRICA: SHAPE OF THE FUTURE, INFRASTRUCTURE 2/2 Africa: Urban population (% of total population) China s overseas investment and construction activity by region (USD bn) RoW North America 1, Europe MEA Asia Total Africa will be the land of urbanization: From those already there to those who will come, many opportunities to make in utilities The Belt and Road Initiative drove USD 280bn to the region since 2013 (2 nd destination behind Asia). Infrastructure to remain one of its main drivers. 10

11 AFRICA: CHINA OBORTUNITIES Africa: Eurobond issuance (USD bn) Infrastructure agreements Selected list of agreements Kenya: Standard Gauge Railway connecting Monbasa to Nairobi (approx. USD3.8bn) Nigeria: Coastal railway to link Lagos with Calabar, passing through 10 states (USD12bn) Congo DRC: Infrastructure for Mines barter deal (USD6bn) Swap contracts Egypt: currency swap agreement valued at USD2.7bn South Africa: exchange of local currencies of up to R57bn, valued at USD4.75bn Selective partnership through the OBOR projects (for infrastructure hungers) Core countries already involved in the OBOR project Expected positive economic spillovers from OBOR Loans (from 2011 onwards) Angola: USD21.2bn Ethiopia: USD12.3bn deepening financial relations with largest (Nigeria, South Africa), growth leaders (Kenya, Ethiopia) and strategic countries (Angola) 11

12 AFRICA: SHAPE OF THE FUTURE, TRADE Senegal +4/ +7 Morocco +50/ +50 The African Continental Free Trade Area should make winners and losers. Net gains expected in manufacturing, food and service exporters. Africa: Expected export gains to 2030 Côte d Ivoire +11/ +14 No FTA/ FTA Algeria +39/ +38 Ghana +38/ +52 Gabon +6/ +6 Tunisia +18/ +18 Nigeria +91/ +89 Angola +62/ +77 Cameroon +5/ +8 RD Congo +7/ +14 Egypt +39/ +49 Zambia +11/ +31 Sudan +6/ +7 Ethiopia +14/ +18 Kenya +13/ +18 Tanzania +25/ +28 Mozambique +11/ +11 South Africa +110/ +133 Africa: Additional Cash Flow freed with higher DSOs (USD bn) Morocco Côte d Ivoire +0.7 Mauritania Ghana +1.6 Mali +0.5 Algeria +4.9 Below or equal to 2% GDP Between 2% and 4% of GDP Between 4% and 6% of GDP Above 6% of GDP Niger +0.2 Nigeria +3 Tunisia Cameroon Benin Togo Gabon Republic of Congo Libya +2.3 Angola +2.6 Egypt DR Congo Rwanda +1.1 Ethiopia South Africa Kenya Mauritius Madagascar New trade opportunities to develop if supported by more manageable payment terms: going from cash payments to 30 days DSOs should free up USD 33.5bn

13 Mobile Banking Development potential Index AFRICA: SHAPE OF THE FUTURE, LEAPFROGGING Africa: Fiscal revenue (% of GDP) and access to electricity (% of population) Electricity NGA COD ETH CMR UGA AGO TZA EGY DZA Overcoming the weak government issue is needed in order to finance long-term needs. E-government techniques should be used to build the Leviathan. CIV KEN ZMB GHA RWA TUN MUS MOZ MOR SEN 5% 1 15% 25% 3 35% 4 ZAF Fiscal revenue Africa: Banking development indices, traditional vs. mobile Burundi Malaw i Mauritania Senegal Ghana Algeria Tunisia Egypt Angola Kenya Botsw ana Sw aziland Nigeria Cameroon Zambia Uganda Tanzania Benin Mozambique Burkina Faso Niger Madagascar Mauritius Low access to banking services is inhibiting growth. Mobile banking is likely to be used, e.g. in Kenya, Ghana or Mauritius. South Africa Morocco Traditional Banking Development Index 13

14 Photo by rawpixel.com on Unsplash THANK YOU!

African Economic Outlook 2018

African Development Bank Group African Economic Outlook 2018 Download the full report at: https://www.afdb.org/en/knowledge/publications/africaneconomicoutlook/ Africa Business Forum Johannesburg, South