World Bank Report: Commodities’ rally push growth

According to the World Bank Africa Report, Pulse, growth in Sub-Saharan Africa is forecast to pick up to 2.6 percent in 2017, rising to 3.2 percent in 2018 and 3.5 percent in 2019. The turnaround is predicated on the projected rise in commodity prices and policy actions to tackle still-large macroeconomic imbalances in several countries.

The report states that the forecasts are weaker than those in October, reflecting a more moderate recovery among metals exporters and a muted recovery in growth in South Africa. Non-resource-intensive countries are expected to continue to expand at a solid pace. Overall, growth is projected to rise only slightly above population growth, a pace that is largely insufficient for creating employment and supporting poverty reduction efforts in the region.

“Growth in South Africa is projected to recover to around 0.6 percent in 2017, rising to 1.1 percent in 2018 and 2 percent in 2019. Weaker growth of private consumption and investment is expected to offset a rebound in net to offset a rebound in net exports, as the sovereign rating downgrade to sub-investment level raises borrowing costs. For Nigeria, growth is projected to rise from 1.2 percent in 2017 to 2.5 percent in (2018-19),”reads the report.

The Pulse further states: The modest turnaround will be underpinned by a gradual rebound in oil production and an increase in fiscal spending. In Angola, growth is projected to increase from 1.2 percent in 2017 to 1.5 percent in 2019, spurred by a modest increase in oil production. In Nigeria and Angola, recovery in the non-oil sector will be constrained by foreign exchange restrictions and high inflation. The subdued outlook for Angola, Nigeria, and South Africa implies that per capita output will decline in these countries over the forecast horizon.

Growth will be weaker than previously projected in the CEMAC area, as oil production increases at a slower pace than previously projected, due to maturing oil fields in several countries, and fiscal adjustment reduces public investment. In metals exporters, high inflation and tight fiscal policy will be a greater drag on activity than previously expected in several countries.

Indications are that growth in non-resource-intensive countries should remain robust, based on infrastructure investments, buoyant services sectors, and the recovery of agricultural production. Ethiopia and Tanzania in East Africa, and Côte d’Ivoire and Senegal in WAEMU will expand at a solid pace, although some of these countries may not reach the high growth rates of the recent past. Growth is projected to strengthen in Ghana, as increased oil production boosts exports.

PROJECTED RISKS

The economic outlook for the region is subject to significant downside risks, including the following on the external front: In Sub-Saharan Africa, sovereign bond issuance has become a key financing strategy in recent years, as countries have looked to global financial markets to facilitate domestic investment. Higher global interest rates could narrow the scope for this financing.

Sustained increases in global interest rates could reduce the ability of governments in the region to raise this level of finance; Weakening of growth in advanced economies or emerging markets could reduce demand for exports, depress commodity prices, and curtail foreign direct investment in mining and infrastructure. Oil and metals exporters are particularly vulnerable to this risk, given their less diversified economies;

The change in government in the United States following the elections in November 2016 is not expected to have major effects in the region. However, there is a risk that the United States will cut back official development assistance. This will hurt the region’s smaller economies and fragile states, which have strong economic ties with the United States.

Risks on the domestic front include the following:  In countries where significant fiscal adjustments are needed, especially in CEMAC countries, failure to implement appropriate policies could weaken macroeconomic stability and slow the recovery; Worsening security, drought conditions, or political uncertainty ahead of key elections pose risks to the outlook for some countries, including Kenya, Nigeria, and South Africa.

CHALLENGES

The region faces a myriad of challenges to regaining the momentum on growth. Addressing these challenges will require deep reforms to improve institutions for private sector growth, develop local capital markets, improve the quantity and quality of public infrastructure, enhance the efficiency of utilities, and strengthen domestic resource mobilization. In this report, we spotlight a few pressing challenges that several African countries are facing: a slowdown in investment, still high trade logistics costs that impede competitiveness and export diversification, and rising debt levels.

2016 RECORDED DECELERATION

Economic activity decelerated sharply in Sub-Saharan Africa in 2016 to an estimated 1.3 percent growth, its worst outcome in more than two decades. This low growth rate was driven mainly by unfavourable external developments, with commodity prices remaining low, and difficult domestic conditions.

Angola, Nigeria, and South Africa experienced a marked slowdown in economic activity. A decline in oil production halted economic growth in Angola. In Nigeria, gross domestic product (GDP) contracted by 1.5 percent amid tight liquidity conditions, budget implementation delays, and militant attacks on oil pipelines. Growth in South Africa weakened to 0.3 percent, reflecting contractions in the mining and manufacturing sectors and the effects of the drought on agriculture. Excluding these three countries, growth in the region was estimated to be 4.1 percent in 2016.

Other oil exporters struggled to cope with a large terms-of-trade shock, as activity contracted sharply. Metals exporters fared relatively better, as they benefitted from the large drop in oil prices. Nonetheless, output levels and investments in the mining sector were also hit hard and budgetary revenues fell. Average growth among the non-resource-intensive countries remained high in 2016, reflecting their more diversified economies. Growth in these countries was partly supported by scaled-up public infrastructure investment.

Sub-Saharan Africa is seeing a recovery of growth in 2017. Rising commodity prices, strengthening external demand, and the end of the drought in several countries are among the factors contributing to the rebound. Prices of most commodities continued to rise in early 2017, from their lows in early 2016.

The oil price increase in 2017Q1 reflects steady demand growth and the agreement between some OPEC and non-OPEC oil producers to limit output. However, persistently high global oil inventories along with an improved supply outlook by the in the U.S. shale oil sector, impose constraints in the longer term price outlook of oil prices. Metals prices are strengthening, partly reflecting increased demand from China. Meanwhile, above-average rainfalls are boosting agricultural production in countries that were hit by the El Niño–related drought in 2016 (South Africa, Malawi).

Security threats subsided in several countries. In Nigeria, the decline in militants’ attacks on oil pipelines has helped oil production to rebound. The slowdown in Angola, Nigeria, and South Africa—the region’s three largest economies— appears to have bottomed out toward the end of 2016. Nonresource-intensive countries, including those in the West African Economic and Monetary Union (WAEMU), have been expanding at a solid pace.

Several factors are preventing a more rigorous recovery in the region. In Angola and Nigeria, restrictions on access to foreign exchange continue. Although the Central Bank of Nigeria and the National Bank of Angola have recently increased the sales of foreign exchange in the interbank markets, foreign exchange liquidity conditions remain tight, and are holding back activity in the non-oil sectors. The manufacturing and services sectors remain particularly weak in both countries.

In South Africa, policy uncertainty and low business confidence continue to constrain investment. Unemployment remains very high. The recent (April 2017) downgrade of the country’s credit rating to sub-investment level by Standard and Poor’s and Fitch is likely to weigh on the country’s economic prospects. Elsewhere in the region, several oil exporters in the Central African Economic and Monetary Community (CEMAC) are facing difficult economic conditions. The contraction of activity that began in the oil sector in Chad, Equatorial Guinea, and the Republic of Congo has spread to the rest of the economy.

Although the economies of Cameroon and Gabon have not contracted—due in part to their relatively more diversified exports—activity has slowed notably and oil production continues to decline. Having delayed the adjustment to lower oil revenues, CEMAC countries are now embarking on fiscal tightening to stabilize their economies. In Chad, the ongoing fiscal adjustment has entailed significant reductions in recurrent and capital expenditures, which weakened domestic demand. Elsewhere, in Mozambique, the recent government default and debt burden are deterring investment.

The drought in East Africa, which reduced agricultural production at the end of 2016, has continued into 2017, adversely affecting activity in some countries (for example, Kenya) and contributing to food insecurity in others (Somalia, South Sudan) (Current Account Deficits and Financing The current account balances of oil exporters are improving, helped by the pickup in commodity prices.

Oil exports are rebounding in Nigeria on the back of an uptick in oil production. In metal exporters, the positive impact of an improvement in metals prices is being offset by a rise in investment related imports. Current account deficits remain high in several non-resource-rich countries (including Rwanda and Uganda). In these countries, capital goods imports have also been strong, reflecting ambitious public investment agendas. Capital inflows in the region are rebounding from their low level in 2016, which saw foreign direct investment fall and Eurobond issuance decline.

A strengthening of cross-border flows this year should help finance the still-elevated current account deficits. Gross foreign direct investment in Nigeria edged up in the fourth quarter of 2016, after declining in the first three quarters. Nigeria was able to tap the Eurobond market twice at the start of the year, reflecting improved investors’ sentiment.

More broadly, in a global environment characterized by low financial market volatility and increased investor risk appetite, sovereign spreads have generally narrowed across the region, with the notable exception of Ghana, where spreads rose because of concerns about fiscal policy slippages (figure 1.4). Sovereign spreads widened on South African debt in the wake of recent political developments and credit rating downgrade. Exchange Rates and Inflation The rebound in commodity prices and improved growth prospects in some countries have helped stabilize commodity exporter currencies.

However, with the Nigerian naira and Angolan kwanza remaining fixed against the U.S. dollar, the imbalance in the foreign exchange market remains substantial in both countries. Among metals exporters, the Congolese franc depreciated sharply against the U.S. dollar in the second half of 2016, with weakness continuing in 2017, reflecting heightened political uncertainty as well as loss of foreign reserves in the Democratic Republic of Congo. A debt crisis in Mozambique sharply lowered the value of the metical against the U.S. dollar in the second half of 2016, and the currency remains weak. Annex 1B explores foreign exchange market pressures in Sub-Saharan Africa.

Inflation in the region is gradually decelerating from its high level in 2016, but remains elevated. Although a process of disinflation has started in Angola and Nigeria, inflation in both countries remains high, driven by a highly depreciated parallel market exchange rate. Inflation eased in metals exporters, because of greater currency stability and lower food prices due to improved weather conditions (Namibia, Zambia). In Mozambique, inflation was in high double digits in February.

In nonresource-intensive countries, inflationary pressures have picked up in East Africa, as the drought led to an increase in food prices—notably in Kenya. However, in countries where the drought has been less severe, inflation has remained within the central banks’ targets. Inflation continues to be low in most CEMAC and WAEMU countries, reflecting the stable peg to the euro. The low inflation environment in Tanzania, Uganda, and Zambia allowed their central banks to cut interest rates at the start of the year. Bank of Ghana also cut its policy rate. Although inflation in Ghana remains in double digits, it has narrowed from over 19 percent in 2016, to around 13 percent in January.

Fiscal Positions Countries across the region face the need for fiscal consolidation to narrow fiscal deficits and stabilize government debt. Although commodity prices have recovered some ground, commodity exporters (especially oil exporters, such as Angola and Equatorial Guinea) are still running sizable fiscal deficits. The fiscal balances of non-resource-intensive countries worsened in 2016, reflecting elevated investment spending levels.

Widening fiscal deficits and, in some cases, sizable exchange rate depreciations have resulted in rising public debt levels in the region. Large non-concessional borrowing for infrastructure development has led to high debt servicing costs in several countries. South Africa’s 2017/18 budget reaffirms the government’s commitment to fiscal consolidation, with the introduction of a new personal income tax bracket to mobilize additional revenue. It remains to be seen whether the stance of fiscal policy will be affected by political developments.

Among oil exporters, Angola’s 2017 budget targets a stable fiscal deficit, but the risks of large expenditure overruns in the run-up to the election this year remain high. In Nigeria, the government plans to increase infrastructure spending, financed in part through borrowing. Elsewhere, Ghana’s 2017 budget signaled a slowdown in fiscal consolidation, which could increase fiscal risks, given limited fiscal space. Mozambique’s budget points to a moderate increase in spending. Reflecting the continued weakness of fiscal balances, caused by the fall in commodity prices and the continued upward trend in government debt, the region’s rating outlook in 2017 remains negative.

FINANCIAL RISKS

Banking sector vulnerabilities remain elevated in the region, including in Angola, CEMAC countries, the Democratic Republic of Congo, and Nigeria. Foreign exchange restrictions, policy uncertainty, and weak growth have affected the soundness of the banking sector. Non-performing loans have increased, and profitability and capital buffers have decreased. Several proactive measures have been introduced to contain risks to financial stability, including through increased provisioning and by intensifying the monitoring and supervision of banks. While banking system resilience needs to be strengthened, steps by banks to limit credit risks, by tightening lending standards and reducing credit to the private sector while continuing to invest in government securities, are contributing to the slow recovery in economic activity.

(Adopted from World Bank Africa report, Pulse)

Source: Weekend Post

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