PREVIEW
Governments will have to raise far more revenue and staunch capital flight if they are to boost growth and investment this year
Africa will be thrown back on its own resources and internal revenue-raising capacity, at least for the short term, as the economies of major trading partners in Asia and Europe slow down. The terms of commercial finance in Africa could be more onerous for many countries in 2020, and the pool of concessional finance for the continent has remained almost unchanged for two decades, despite a quadrupling of Africa's gross domestic product to US$2.1 trillion in that period.
The launching of the African Continental Free Trade Area (AfCFTA) in July, likely to dominate the African Union summit on 9-10 February in Addis Ababa, is a recognition of the limits of external finance. It will take two to three years to see an appreciable difference in trade patterns and growth, according to Carlos Lopes, former executive secretary of the UN's Economic Commission for Africa and an advisor to and negotiator for the AU on the new free trade zone. Intra-African trade is running at just under 20% of all trade on the continent; levels for intra-continental trade in Asia and Europe are running at over 60%.
To make a success of the free trade area, argues Lopes, governments will have to boost domestic revenues, currently averaging around 17% of GDP, to something approaching double that. Higher revenues are needed to finance investment in production, power and transport and services in the fast-growing towns and cities.
Revenue mobilisation will go far beyond raising personal and corporate taxation and will require a sweeping formalisation and modernisation of the continent's economies, he said. Governments such as Ghana and Kenya are moving to compulsory electronic payments for all government services, customs and taxes, for better monitoring and accounting.
As that raises revenue collection, more countries are following the push for formalisation and digitisation. Governments will also be finding ways to prevent the wealthy from avoiding tax, says Lopes, in moves that could clash with vested interests but reward some populist politicians. The resource nationalist push in the mining and oil industries will be critical to the revenue-raising picture, delegates to the Mining Indaba in South Africa from 3 to 6 February were told by successive government ministers from across the continent.
Shortfalls
Without a determined bid to raise revenues, staunch illicit outflows and use innovative financing techniques, such as drawing on national pension funds and foreign reserves currently banked in Western economies, shortfalls in financing could become still more of a brake on growth.
That explains some of the modest growth forecasts for 2020. International institutions predict that average real GDP growth across African economies will accelerate this year but more slowly than previous forecasts said. The continent's growth picture will again be held back by the poor performance of its biggest economies: Angola, Nigeria and South Africa are joined in the low-growth league by Algeria, stuck in a problematic political transition.
The flipside is that 21 countries – where some 650 million people live – are forecast to grow by 5% or more this year and will have the resources to push ahead with modernisation, says Lopes.
Governments and businesses will have to navigate trade wars and other disruptions, harsher financing conditions, downturns in rich countries and falls in commodity prices. The Coronavirus crisis in China will slow business with Africa's biggest trade partner.
Another risk comes from the conflicts that 13 countries, out of 54, are facing, which hit internal and regional GDP growth. Yet many mining houses are still planning projects in insurgency-hit Mali, Burkina Faso and Niger. However, the growth in informal mining and taxation systems from which insurgent groups benefit is a growing risk. Far better amelioration mechanisms will be needed to face the climate crisis, as it raises sea-levels in Africa's faster growing coastal economies.
There will be a mixed picture on macro-economic reforms in 2020, as some get derailed by political or financing pressures while others make progress on the fiscal consolidation pushed by the International Monetary Fund, which has been cutting into capital spending.
Debt burdens
The debt and debt service picture in several economies – compared to revenues – is getting more serious. Debt levels in several economies including Mozambique, Zambia and South Africa are far higher as a percentage of GDP than prior to the global financial crisis in 2008.
Several economies are in debt distress or at high risk of it. Yet according to Tellimer Group (formerly Exotix Capital) chief economist Stuart Culverhouse, the signs are that international financing conditions could remain favourable for some African economies, with Ghana and Gabon Eurobond issues in the works.
The share of revenues paid to service debts will be excessive in oil-exporters Nigeria and Angola and resource-intensive Ghana and Zambia. The latter three have the twin burden of a high debt/GDP ratio and, like Nigeria, weaker commodity prices. The shift in Africa's borrowing away from concessional debt towards commercial, foreign currency borrowings and Eurobond debt reinforces that trend, although some economies can extend the maturity of their borrowings.
Past IMF and World Bank warnings of substantial 2019-20 debt-refinancing risks (AC Vol 59 No 21, Struggling to keep pace) contrast with an easier near-term Eurobond debt maturity picture, before a spike in Eurobond redemptions due in 2024-25.
Ratings agency Moody's now points to 'elevated' liquidity risks in economies such as Zambia, Mozambique and Congo-Brazzaville. Senior Moody's analyst David Rogovic points to upcoming payments on bilateral loans, including from China, that complicate the refinancing picture and warns that persistent high debt burdens and fiscal deficits are reducing governments' ability to respond to shocks.
Some economists see China acting as a commercial creditor, at times extending favourable terms to borrowers and backing growth-boosting infrastructure projects. Others – such as Moody's – warn of the high cost of the collateralisation of Chinese loans, the lack of transparency on debt terms, especially the high concentration of debts to China in countries such as Zambia.
Rogovic warns of a lack of open discussion on how China might restructure upcoming debt and how this could be managed. Project finance is often outside the direct control of the African treasuries, and this makes up a growing proportion of the national debt (AC Vol 60 No 9, Treasury in the red).
Test case
Chief Citi economist for Africa David Cowan sees China negotiations with Zambia as a test case. It could show whether in subsequent negotiations China can pressure other creditors to restructure their loans too. Cowan says that funds under any IMF-Zambia deal will not materialise until after elections next year, when the copper producer's international bond redemptions will be nearer and the pressure greater.
There are deepening concerns about the cost of political and business corruption. The worst examples are the liabilities of state-owned-enterprises such as South Africa's national power utility Eskom, whose debts total about 25% of the country's sovereign debt. There is, too, the hefty cost of Ghana's banking and power sector bailouts, reckoned at over $5 billion (see AC Vol 60, No 23, Hefty down payment for 2020 & Vol 60, No 24, Grasping the Eskom nettle).
However, Ghana has just got a ratings outlook upgrade from Moody's, due partly to its completion of an IMF programme and its positive primary balance. South Africa's immediate prospects are tougher. The maintenance of its only remaining investment grade rating this year depends on its capacity to boost its revenues.
Opinion on the impact of a 2020 South Africa downgrade differs. Some point to the risk of major investment outflows, others (including Citi's Cowan) see it also as a wake-up call reinforcing the urgency of reforms.
A serious internal challenge to President Cyril Ramaphosa's leadership of the governing African National Congress, according to Cowan, would badly undermine the country's modestly improved outlook.
In Ethiopia, Cowan argues that Prime Minister Abiy Ahmed could push through the Homegrown Economic Reform strategy with IMF backing and further boost its fast-growing economy, should his new Prosperity Party succeed at the polls in August (AC Vol 61 No 2, Regime reality check).
Officially Africa's largest economy, Nigeria has one of the lowest revenue collection rates in the world. Its government hopes its revenues and fiscal position will be boosted by President Muhammadu Buhari's finance bill raising the VAT rate, and other measures.
There is debate about the revenue impact of Nigeria's amended offshore 'production sharing contract' oil law, which critics and oil company executives say introduces onerous fiscal terms that could deter investment (AC Vol 60 No 23, Oil majors tax threat).
Like South Africa and Angola, Nigeria's 2020 growth is expected to remain modest, and likely negative in per capita terms. That contrasts with Egypt, where almost 6% growth and the size of its economy make it – according to the African Development Bank – the largest statistical contributor to continental growth. Infrastructure needs in Africa, according to the World Bank, are higher as a proportion of GDP than in other emerging and developing regions.
Yet there are signs that, commodity prices permitting, fiscal balances could improve modestly this year with oil and gas exporters moving further, on average, into surplus. Fiscal deficits in other commodity exporters and the non-resource economies, on average, should improve. In some countries that is partly due to policy reform, with fiscal discipline strong in much of the CFA zone.
Policy discipline will be required should Economic Community of West African States economies move forward on broad plans for the eco currency to replace the West African CFA franc and to incorporate the non-Francophone Ecowas economies. Tellimer's Culverhouse suggests that political, institutional and economic differences among potential eco members may complicate the sustainability of the currency zone.
Côte D'Ivoire President Alassane Ouattara, although backing the initiative, will focus his energy on his country's presidential and legislative elections in October. And there is little sign of enthusiasm from Nigeria, which accounts for over two-thirds of West Africa's GDP. For officials in Nigeria, which has closed all its land borders to combat smuggling, there is much more work to do on the continental free trade area before talking about monetary union. On that there seems a consensus with the country's counterparts in Angola, South Africa, Egypt, and Algeria.
'Feeble' and 'jobless' growth risk
Only a minority of African economies are growing at high enough rates to noticeably raise average incomes in the medium term. And that is before considering the uneven distribution of growth gains among Africa's populace, the scourge of 'jobless growth' and the resilience, or not, of these economies' expansion.
The IMF has revised downwards its October projections of average 2020 real GDP growth in sub-Saharan Africa to 3.5%, thanks to lower projections in Ethiopia and South Africa. This places SSA barely above the overall global average and far behind an emerging and developing Asia approaching 6% even though, according to IMF statistics, it is outpacing some other emerging and developing regions.
The World Bank has downgraded its 2020 prediction to 2.9%, describing SSA's economic recovery as 'feeble' and it now estimates SSA 2019 growth at 2.4% which amounts to a per-capita contraction. The Bank also predicts that, in 2020, SSA per-capita growth will be lower than regions such as South Asia, Europe and Central Asia, and Latin America and the Caribbean.
The African Development Bank's revised prediction that African growth could hit 3.9% this year, compared to an estimated 3.4% in 2019, includes a North Africa region exceeding 4% growth last year, which, according to AfDB economists, drove over 40% of Africa-wide growth due its size and rate of expansion. The bank ranked East Africa as the fastest-growing Africa region last year (5%), followed by North Africa, West Africa (3.7%), Central Africa (3.2%) and a Southern Africa that is flatlining at below 1% growth because of a sluggish South Africa and the impact of cyclones Idai and Kenneth.
Like private sector Africa economists, all three institutions note the continued underperformance of Nigeria, Angola and South Africa and their drag on overall continental growth, but point to strong expansion in a number of more nimble, mostly non-resource intensive economies, primarily in East and West Africa.
According to World Bank statistics, over 20 African economies could achieve 5% growth this year which roughly equates – if persistent and based on current SSA population growth – to a doubling of per-capita incomes in almost three decades. Thirteen economies, including eight in West Africa and Rwanda, Ethiopia, Kenya and Uganda in East Africa, are projected to hit or exceed 6%.
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