Africa faces five headwinds of concern – Daniel Silke

WITH gross domestic product increases of at least fivefold since 2000, Africa’s growth story has been the good news narrative of recent years.

As if little could derail the rise of hitherto uncharted frontier markets like Nigeria, Ethiopia, Angola and Rwanda, economists and related experts have waxed lyrical about almost every business opportunity from infrastructure to consumer to agriculture and financial services.

But recent domestic and international events are precipitating the rise of some stormy headwinds that threaten – at the very least – to provide the exciting growth markets of late with a degree of harsh reality. Here’s a list of the top five issues, which could retard or even set back the advance of the continent.

The China and other syndromes

Africa’s recent rise has coincided with the advance of the Chinese economy and a quest for the supply of commodities that initially attracted Beijing to the continent. Over the last decade, China has become Africa’s single largest trading country (the European Union collectively is still a larger partner) and has forged close economic and political bonds with just about every African state.

Clearly, those countries most exposed to China’s current economic woes may feel the aftershocks. China’s voracious demand for commodities has already contracted. Beijing’s imports from Africa in July were down about 40% from the same month a year ago. A sluggish domestic environment will continue this trend and as China moves more to a consumption-driven economy, expect lower demand for commodities and related raw materials.

And it’s not just China – ongoing EU uncertainty, a slowly normalising US interest rate environment and a sharp decline in other developing markets like Brazil and Russia all add to Africa’s uncertainty.

Commodities collapse

Across the board, commodity prices have fallen – and hard. From iron ore to copper to coal, African countries reliant on these exports have begun to feel a contraction. But the real kicker is the price of oil that is still a core export earner for Nigeria, Angola and the Democratic Republic of Congo to name but a few.

Only a year ago, Nigeria and Angola needed oil at over $120 per barrel to balance their respective budgets. With prices now well below half that, national treasuries are slashing their budgets. Cost-cutting is now the order of the day. And, unfortunately, big capital expenditure items like infrastructure may well bear the brunt of financial pruning.

State business interests are also likely to be severely curtailed for a period that could last some time as countries adjust – painfully – to lower state revenues. Already Nigeria’s GDP has almost halved, falling to just 2.3% in the second quarter compared to 3.9% a year ago.

It’s not just oil; the end of the broader commodity super-cycle puts Zambia’s recent advances at risk along with those of Sierra Leone and Liberia.

Currencies crash

With commodities and oil under severe pressure, it comes as no surprise that African currencies have tumbled. The Nigerian naira has slumped 15% over the last year and – unless oil prices rise – may tumble another 10% by the beginning of 2016. The same crisis has befallen South Africa, Kenya, Ghana and Angola whose unit is now 19% weaker against the US dollar.

Crashing currencies have all sorts of negative consequences. Higher rates of borrowing will result in growing budget deficits and possible repayment crises. Ghana has already had to be bailed out by the International Monetary Fund even before the latest bout of global financial flu.

Inflationary pressures on imported goods naturally add strain to a shifting sentiment that may retard global foreign direct investment into the continent after a very bullish decade. And sentiment can be a big driver on equity markets – the Nairobi Stock Exchange has lost almost $1.5bn in value since Januar, confirming a more negative trend.

Middle class can become a floating class

Much has been said about the 330 million plus Africans who have moved up the income ladder over the last decade. However, a large proportion of this ‘middle class’ – about 200 million – live on only $2 to $4 per day. Any broad-based economic decline can push many back into lower categories, thereby upsetting the substantial boom in consumer demand these last few years.

There is a new-found vulnerability to domestic consumption demand as a result of falling GDP rates. These also have the potential to raise political temperatures as austerity-induced budget cuts fuel rising discontent.

Inability to diversify sufficiently

A common human failing is to enjoy the good times but fail to plan for the bad. Africa’s decade of tremendous growth largely failed to transform a continent still reliant on extraction into a continent of manufacturing.

Africa has 12% of global oil reserves, 40% of gold and 80% of chromium and platinum – but still just 1% of global manufacturing and 2% of world exports. Clearly, this is an unsustainable model given the volatility in the current era. The foundations for job-creation for massive future population increases have not been laid nearly adequately. Africa’s cities need substantial infrastructure capex to be competitive, and face serious lags as budgets shrink.

Finally, the continent still has at least 50% of the world’s remaining arable cropland. But environmental issues and drought also place a strain on a sector that, if harnessed wisely, can make Africa hugely resourceful. Land policy and utilisation needs to be a priority like never before.

So, for the first time in over a decade, Africa looks more vulnerable. This represents a major challenge to the continent’s status quo. But equally, Africa is more equipped to deal with change than never before. Regional integration and trade blocks are stronger than ever. Democratic accountability has improved. Technological advances can provide hitherto unimaginable opportunities. And there are green shoots in new manufacturing industries and ICT start-ups that will be critical in fighting these headwinds.

It’s a testing time for the continent – perhaps the most arduous since the ‘Arise Africa’ theme gained global traction. The coming few years will be the real test. It’s now not just about ever-increasing GDP or FDI statistics; it’s how resilient the management of economies can become in times of strain.

It’s not going to be one-way upward traffic any more and global volatility is likely to extend to this continent too. But then again, that’s just the new normal for us all.

*Daniel Silke is director of the Political Futures Consultancy and is a noted keynote speaker and commentator. Views expressed are his own.

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