AFRICA INSIGHT: Recovery in Economic Growth to Prove Fleeting

LAGOS (Capital Markets in Africa) – Sub-Saharan Africa should benefit from stronger economic activity in Nigeria and South Africa this year. But we expect this recovery to be temporary. A weak investment climate and a high reliance on commodity exports will probably come back to haunt Africa’s two largest economies.

Second-tier economies, such as Ghana, Ivory Coast, Kenya and Senegal are likely to keep expanding strongly in the near term, although they are testing critical levels of indebtedness.

A slowdown in Nigeria and South Africa has largely caused growth in Sub-Saharan Africa to decline since 2014. Together the two countries represent around half of regional GDP. Both economies picked up speed in 2H18, although for different reasons. Although this growth spurt should continue in 2019, we expect weak investment to limit its duration.

Stuttering Twin Engines Slow Africa’s Growth
In South Africa, the recovery in 2H18 from recession in the first half of the year was largely consumer-led as food price inflation fell to a seven-year low in December. Moreover, South Africa’s householders have halted, at least temporarily, their deleveraging drive which began in 2008, indicating a more positive economic outlook.

We expect consumer demand to maintain its momentum in 1Q, boosted by a sharp drop in fuel prices in January and December. But this appetite is likely to weaken as the year progresses. The economy will also remain vulnerable to adverse shocks, such as a sharper weakening in the rand or higher fuel prices, which could cause a steeper slowdown or even a contraction.

Private Consumption to Keep Driving South Africa
If personal consumption weakens that will have a significant impact on South Africa’s economy, given it’s the only growth engine that’s currently firing. Moreover, it would limit the scope for any fiscal or monetary stimulus.

Capital Investment Still Weak
Gross fixed capital formation in South Africa contracted 1.4% in 2018, despite a sharp improvement in business confidence after Cyril Ramaphosa’s presidential inauguration in February. We expect GFCF to expand 1.7% in 2019, while remaining below its 2015 level in real terms. Most of the increase will probably be cyclical after several years of under-investment. The government’s extension of successful, but costly, financial incentives for the automotive industry to 2035 should also unlock some capital investment.

But the longer term outlook remains troubling with many South African companies focused on expanding their overseas business. Moreover, the capital-intensive mining sector is likely to keep contracting in 2019. This will weigh on exports and the current account, making the rand more vulnerable to shifting financial flows.

The increasing number of power blackouts reinforces the picture of a strong demand-side eventually being constrained by a weak supply side. We forecast South Africa will show growth of 1.4% in 2019, just below its potential rate of 1.5%. But we envisage increasing downside risks to this projection.

Investment, Oil to Help Nigeria
In Nigeria, it’s a similar story in terms of the longer-term investment outlook, which remains bleak in the wake of the re-election of President Muhammadu Buhari in February. In the near term, the picture is somewhat different. We expect investment in the oil and gas sector and increased hydrocarbon output to give the economy a boost this year.

Nigeria’s economy expanded 1.1% quarter-over-quarter in 4Q18, the strongest rate since 2Q17, according to our seasonal adjustment of the official GDP data. We assume that increased capital investment in the oil and gas industry played a part in the acceleration. The offshore Egina oil field, with a capacity of 200,000 barrels a day, started production in early 2019 and should boost the economy this year. But the extent of this support will depend on to what degree Nigeria complies with OPEC output quotas.

The completion of the $12 billion Dangote refinery, due in 2020, is likely to underpin investment spending. With a capacity to refine 700,000 barrels a day, the plant could rid Nigeria of the need for fuel imports. We estimate that this may add as much as 1.5-2% directly to GDP, and more if secondary effects are included.

Policy Intervention to Dissuade Investors
The Dangote refinery is in line with Buhari’s drive toward increased import substitution to rid Nigeria off its reliance on oil exports and foreign goods. But we highlight that the investment decisions of the refinery and Egina were taken before Buhari took office in 2015.

Buhari’s first four-year term was characterized by an interventionist approach to economic policy, including restrictions on imports and access to foreign-exchange aimed at boosting import substitutions, and large fines for foreign companies like South African telecoms operator MTN Group. This is likely to impair overseas investment and economic growth in the longer term.

Second-Tier Economies Growing Strongly
The dire medium-term economic outlook for Nigeria and South Africa are in stark contrast to economic growth of 5-8% in most of the other top 10 economies in Sub-Saharan Africa. They include Ethiopia, Ghana, Ivory Coast and Kenya as well as Senegal and Uganda. These countries have made progress in infrastructure, governance and the business environment and are now reaping the gains.

Countries Slipping in Government Revenue
But the pace of external borrowing, following debt relief granted by international lenders during the early 2000s, is still playing a substantial role in driving growth and is unsustainable. These countries will need to reverse a decline in government revenue if they are to maintain investment and economic growth.

Mark Bohlund covers Africa for Bloomberg Economics in London. He has previously worked as an economist at IHS Global Insight, BMI Research (now part of Fitch Group) and the Swedish Foreign Office.

Source: Bloomberg Business News