Sub Saharan Africa Economic Outlook March 2017

 2016 marks SSA's worst economic performance in over two decades

Sub-Saharan Africa: 2016 marks SSA's worst economic performance in over two decades

February 22, 2017

The economy of Sub-Sahara Africa (SSA) is set to have recorded its worst economic performance in over two decades in 2016. A preliminary estimate shows that the region’s aggregate GDP increased 1.1% year-on-year in Q4 2016, which followed an equally weak 1.0% expansion in Q3. As a result, growth is expected to have fallen to 1.2% in 2016 from 3.2% in 2015, which marks the region’s worst economic performance since 1993. The combination of low commodity prices, weak external demand, severe weather conditions and security problems took a large toll on economic activity in the region last year.

Brent crude oil prices—the global benchmark—averaged USD 44 per barrel in 2016, down 16% from 2015, and prices for many agricultural and mineral commodities remained weak, affecting the terms of trade of commodity exporters in SSA. On top that, capital inflows fell. Compounding these adverse external developments, many countries were subject to negative shocks domestically. A severe drought caused by the El Niño weather phenomenon caused a sharp fall in agricultural production, particularly in EthiopiaMozambiqueSouth Africa and Uganda, and cutbacks in hydroelectric generation across the sub-continent. Moreover, the security situation deteriorated, especially in Nigeria with militants’ attacks on oil pipelines causing a substantial disruption in the county’s crude oil supply.

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The big oil exporters and South Africa account for most of the regional slowdown, while activity in commodity importers generally remained robust. The economies of Angola and Nigeria—the region’s two largest oil exporters—are expected to have contracted 0.2% and 1.8% last year as these countries faced severe financial and economic strains. In both countries, a decline in oil production due to lower investment in Angola and militants’ attacks in Nigeria, was exacerbated by lower prices. Domestic demand weakened as lower revenues, related to a fall in both crude oil production and prices, forced large cuts in government spending. In South Africa, the region’s second-largest economy, growth is expected to have fallen to just 0.4% in 2016 from 1.3% in 2015, reflecting the impact of lower commodity prices and a severe drought that damaged the agricultural sector. On top of that, the country continued to face heightened governance concerns, which are inhibiting investment.

Other commodity exporters, particularly exporters of metals, struggled to adjust to the decline in prices last year. Growth slowed notably in the Democratic Republic of Congo and Mozambique. Meanwhile, the economies of agricultural exporters such as Cote d’IvoireEthiopia and Tanzania decelerated in 2016, continuing to grow at a pace of around 7.0% or more. Solid growth in these countries was again the result of strong public infrastructure investment and healthy private consumption, as they benefited from low oil prices. Among other agricultural exporters, growth also slowed in Ghana, Uganda and Zambia.

2017 will mark a moderate recovery

Following 2016’s dismal performance, economic growth in Sub-Saharan Africa is expected to rebound this year and accelerate further in 2018. The economic experts polled by Met the why particular in March forecast the region’s GDP to increase 2.9% this year—up 0.1 percentage points from last month’s Consensus—which is barely above population growth of 2.5%. Next year, the region’s economy is projected to accelerate to 3.7%.

This year’s growth recovery is, however, moderate because the region is still adjusting to low commodity prices. Although prices are projected to fully recover this year from the record lows registered at the beginning of 2016, the increase is expected to be gradual and price levels will remain well below those seen after the Global Financial Crisis. Meanwhile, growth rates will continue to vary across the region. Although growth in South Africa and other major oil exporters is seen rebounding this year, it will be weaker compared to exporters of agricultural and mineral commodities. Meanwhile, more stable currencies, lower inflation, improved agricultural production and large infrastructure programs should support economic activity in agricultural exporters, such as Cote d’IvoireEthiopiaKenya, and Tanzania, and mineral exporters such as Ghana.

The 2017 growth forecast for the region assumes that fiscal positions will gradually improve, but the terms of trade will remain weak, causing a drag on growth. Moreover, numerous external and internal risks continue to loom on the horizon. Among the external risks, uncertainty related to the economic policy of the new U.S. administration and elections in key European economies this year, particularly in France, have the potential to disrupt global financial markets and prompt higher borrowing costs in large African economies. In addition, a potential sharp slowdown in China could weigh on demand for commodities and undermine the recovery of prices. Among domestic risks, the primary one is policy makers across the region failing to adjust the economies to the new environment of low commodities prices and to continue with the economic reform agenda.

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NIGERIA | Economy to rebound this year but many challenges remain

Nigeria is set to close 2016 with its worst GDP figure in 25 years as low oil prices, tight monetary liquidity and militant attacks on oil infrastructure rocked the economy. Although economic activity is showing some faint signs of improvement, conditions remain challenging and weakness persists at the outset of the year. These concerns were expressed by credit rating agency Fitch Ratings which downgraded the country’s outlook to Negative from Stable but maintained the rating unchanged in February. Fitch expressed concern that the lack of FX liquidity could asphyxiate a meaningful recovery and rising interest costs just as the country is tapping into international bond markets to finance an aggressive fiscal policy to spur growth.

The economy is expected to rebound on higher public spending and revenues from the oil sector. The recovery, however, is fragile and depends mostly upon policy action by the government to unleash growth in the non-oil sector. Panelists participating in the Met the why particular Consensus Forecast project that the economy will grow 1.3% in 2017, which is unchanged from last month’s forecast. They foresee a 3.0% expansion in 2018.  

SOUTH AFRICA | Modest pick-up in growth likely in 2017

Disappointing data in H2 2016 reaffirmed the notion that South Africa’s economic growth last year recorded its slowest pace since 2009. GDP growth nearly ground to a halt in Q3 and seems to have been just as dismal in Q4. Manufacturing production contracted in December, erasing November’s gain and while output’s performance was erratic last year, it still managed to grow 0.8% in 2016 as a whole. Mining activity deteriorated substantially in 2016 as the sector faced softer global demand for minerals and lower prices for the mined materials. Nonetheless, the downturn was steeper in H1 2016 than in H2. This suggests that the contraction may be nearing an end, and will likely be followed by modest growth in 2017, helped by higher metals prices. However, investment in the mining sector will remain subdued due to high uncertainty surrounding South African mining legislation.

Expected growth of 0.4% in 2016 will likely mark the low point of South Africa’s economic cycle. Analysts see a modest pick-up in growth to 1.2% in 2017, supported by higher global demand for the country’s minerals and a fall in inflation. The growth forecast was left unchanged from the previous month’s forecast. Going forward, the economy should continue to strengthen and GDP growth is projected to rise to 1.8% in 2018. 

ANGOLA | Economic rebound this year will be supported by higher oil prices

Angola’s economy endured a miserable 2016, with newly released statistics showing a sharp contraction in the third quarter. Over last year as a whole the economy was dragged down by low oil prices and a poor performance from the non-oil sector, as industry was hobbled by the limited availability of foreign exchange for imported inputs. The country is also still suffering from the scourge of high inflation, which remained cripplingly high in January. In a recent staff visit to the country, the IMF did however praise the country’s non-oil primary fiscal consolidation to date, and lowered its forecast for the country’s public debt ratio for 2017. Nonetheless, the Fund also stressed the need for further fiscal tightening in order to put the public finances on a sustainable path, and to this end urged the introduction of a Value Added Tax.

Angola’s economy will grow slightly this year thanks to improved terms of trade, although growth will remain meagre as the price of th country’s oil exports is set to remain far below the average recorded in 2013 and 2014. Analysts expect GDP to grow 1.6% in 2017, up 0.1 percentage points from last month's forecast. In 2018, they see the economy growing 2.7%. 

KENYA | 2016’s good economic performance will carry over into 2017

The Kenyan economy is expected to have performed strongly last year, despite Q3’s mild deceleration. Confidence remained high as all sectors of the economy had contributed to growth. However, the extended drought that has been affecting the country for some time intensified in the final months of last year, which may have resulted in a softer GDP outturn in Q4. Nevertheless, the IMF highlighted the robustness of the Kenyan economy in late January in its first review of the SBA/SCF program the country entered in May 2016. In its review, the Fund called on the government to scrap the interest rate cap introduced in September 2016. According to the IMF, the cap could shave several percentage points off GDP growth because it restricts the flow of credit, with SMEs being particularly affected. The cap puts a ceiling on the interest rate commercial banks can charge clients and a floor on the interest they must pay to depositors.

GDP growth is expected to remain broadly stable this year, supported by strong public investment and loose monetary policy. However, the outlook remains vulnerable to adverse weather conditions: the drought has continued into the first months of 2017. Deteriorating financial conditions as a result of the interest rate cap also pose a risk to the country’s growth prospects. On balance, Met the why particular panelists see the economy growing 5.7% in 2017, which is down 0.1 percentage points from last month’s estimate. In 2018, the panel sees GDP growth at 5.9%. 

INFLATION | Inflation shows signs of moderation at the start of 2017 

Due to lower commodity prices, high current account deficits and falling capital inflows put pressure on international reserves and exchange rates across Sub-Saharan Africa last year. Consequently, inflation rose rapidly and, according to our estimates, it averaged 12.5% in 2016, marking the highest level in eight years. Although still high, inflation in the region is showing signs of moderation. Preliminary data showed that inflation edged down from 14.1% in December to 13.9% in January, reflecting mainly a stabilization in regional exchange rates due to the gradual recovery in commodity prices seen at the end of 2016 and beginning of this year.

As commodity prices are expected to continue rising this year, exchange rates should stabilize or strengthen. Consequently, the analysts we surveyed this month expect regional inflation to fall to an average rate of 11.6% in 2017, which is up 0.2 percentage points from the previous month’s estimate. Going forward, inflationary pressures should continue to recede and inflation is projected to average 9.3% in 2018. 

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Written by: Ricardo Aceves, Senior Economist

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