OPINION: What Trump’s Presidency mean for Africa’s Economy?

LAGOS (Capital Markets in Africa) – The ‘’Trump victory” in the United States drew very similar surprises and developed market angst compared with the “Brexit leave” vote in June this year. The prospect of restrictive migration policies, more trade barriers, and protectionist policies which according to their advocates will stimulate job creation and address income equality at home should be considered as a plausible response in shaping the Sub-Saharan African economic landscape in the future.

Even more so, politicians on the African continent should not underestimate the greater perceived anti-neoliberal global drive, with enhanced accountability being demanded by the African population – which thus far is mostly considered “inadequate” – to ensure delivery of growth benefits. Even on the African continent, authorities are finding it increasingly difficult to control public perception with the coming of the digital age, smartphones and a larger and more educated middle-income class.

But exactly how many of the contentious “Trump-policies” advocated in his highly controversial campaign will eventually be implemented still remains to be seen. In his speech following the announcement of the presidential electoral outcome he tried to assure the world that the United States is willing to cooperate with other countries and that he will be a president “for all Americans.”

Current relations between Africa and the United States pivot around global- multilateral- and sub-regional policies such as environmental policies, IMF membership, investment, aid, and trade. The 2016 World Investment Report (WIR) shows that the United States is ranked the second largest holder of foreign direct investment (FDI) stock in Africa, at USD64 billion by 2014, second to the United Kingdom at USD66 billion. In 2015, US green-field investment into Africa amounted to USD6.9 billion, second to Italy’s USD7.4 billion.

The African continent benefits from trade under the African Growth and Opportunity Act (AGOA), a preferential trade agreement that allows Sub-Saharan African countries duty-free access to the US market. Although Angola, South Africa, and Nigeria benefit the most in absolute terms from the AGOA agreement in the Sub-Saharan African region, the advantages for smaller countries such as Madagascar and Lesotho have been immense. AGOA access enabled Madagascar and Lesotho to diversify their export profiles away from mineral and agricultural export dependence to include textiles. Exports from SSA to the US under the AGOA agreement amounted to USD14.2 billion during 2014. AGOA exports from SSA to the US are dominated by petroleum products, accounting for 69% of overall AGOA exports. Excluding petroleum, AGOA exports are made up of raw materials (agricultural products and minerals and metals) while transport equipment, textiles, and apparel are also traded under the AGOA agreement. Exports from SSA to the US have been declining in recent years subsequent to the increase in domestic US oil production.

Given that AGOA exports to the US are dominated by commodities, IHS Markit assumes a relatively limited impact on future trade flows under the new “Trump” policies. This outcome does not apply for all sectors, however, and some are more vulnerable than other. A shift towards more trade protection could place the highly lucrative AGOA textile and vehicle trade and investment in jeopardy. Sub-Saharan African economies benefitting from the AGOA vehicles and textile trade privileges may find it difficult to maintain trade relations with the U.S. as high operational costs and lower productivity render products less competitive. The same argument applies to prospective non-commodity trade, which is unlikely to attract significant US investment in the future due to competitive challenges.

The role of BRICS countries as trade and investment partners could, therefore, be solidified and expanded further throughout Sub-Saharan Africa, with less conditionality attached to trade agreements. Sustainable development could be jeopardized by focusing less on environmental policies, political stability, and human rights abuses. The establishment of the New Development Bank (NDB) and the leading role this institution could play in providing financing on the continent in the future strengthen this expectation.

Under the U.S. Power Africa Aid initiative development efforts have been focused more on enhancing Africa’s electricity infrastructure. This initiative has been mostly private-sector driven and forms part of the 2014 U.S.-Africa Leaders’ Summit held in Washington. At the time, U.S. companies made a USD14 billion pledge to Africa investment, of which a USD7 million pledge was made towards expanding the continent’s electricity grids and generation capacity. The program had the objective to create 60 million new connections and generate 30,000 megawatts of power. By mid-2016 only 5% of the planned new power generation has been delivered. The 2015 Infrastructure Consortium for Africa report (ICA) shows that China remains one of the largest financiers of infrastructure on the continent. According to the ICA report, USD20.9 billion infrastructure funding was announced by China during 2015, up from USD3 billion in 2014 and an average of USD12billion over the previous five years. In 2015, the U.S. allocated USD307 million infrastructure financing to the African continent, the ICA report shows.

The impact of a shift in capital flows away from emerging markets including Sub-Saharan Africa could be more pronounced. For a country such as South Africa, which relies heavily on portfolio flows to finance its current account deficit, this prospect is of great concern.

The IHS Markit Trump scenario shows a large increase in the US budget deficit since Trump’s proposed budget revenues are reduced substantially. This boosts near-term growth and inflation, compared with our baseline. But it also raises interest rates (because of more government borrowing) and puts upward pressure on the dollar—both of which cut growth and inflation in the outer years, compared with the baseline. As U.S. interest rates rise to finance a widening current account and fiscal deficit under a fast paced investment drive, global capital could follow the offerings of high U.S. yielding returns. The anticipated dollar strength could leave emerging market currencies and inflation outcomes vulnerable. The weaker currencies could furthermore increase pressures on the regions’ fiscal deficits as debt servicing obligations in local currency terms crowd-out much needed public investment spending.

Longer term, lower corporate taxes and the full expensing of capital costs could boost US growth rates of both business fixed investment and productivity. This could also increase the growth rate of potential US GDP.

Unless there is substantial financial volatility and stress in the coming days and weeks, the Federal Reserve is on track raise interest rates again in December and gradually thereafter. That said, given the negative remarks made by Donald Trump about Fed chair Janet Yellen, it seems unlikely that her appointment will be extended when her term runs out in January 2018.

Although it is still far from certain how much of what was promised during his campaign will be implemented in the global arena following the “Trump”-win, the likelihood that growth prospects will change seems highly likely. Overall, “Trump”-policies will be moderate growth restrictive for the SSA region over the long-term but the price for the environment, sustainable development and poverty alleviation could be higher.

Author’s Profile
Thea Fourie is a senior economist, Sub-Saharan Africa and forms part of the ECR-Economics team (Economics and Country Risk) at HIS Group. She focuses specifically on the Southern African region which includes South Africa, Angola, Zambia, Mozambique, Namibia, Madagascar, Comoros, and Reunion. Her responsibilities include daily coverage of the countries through the Same Day Analysis brief, a forecast of all macroeconomic variables and also country risk and sovereign risk assessment.