Tough times are coming for some African economies.
Take the recent and surprising admission by Nestlé that it overestimated the size of Africa’s growing middle class as parable for the current economic situation in some countries:
In that vein, these are my five countries to worry about most in Africa.
The Angolan story is the tale (or story of warning) given to many leaders: being resource dependent is OK…but plan for the periodical commodity price downturn and accordingly utilize the monies from resources to invest in other sectors.
Global oil prices hover at or below $50 per barrel which hurts many countries, especially Angola where almost 70 percent of revenue and nearly 90 percent of foreign exchange depend on oil.
The government has cut public investments by as much as, 60 percent and the Angolan kwanza has depreciated nearly 25 percent against the dollar this year. Fitch downgraded sovereign debt from BB- to B+ in September. Yet officials dream of a soft landing in the bond market with its first Eurobond offering for $1.5 billion. China’s lending of $6 billion-plus to cover infrastructure projects among other things through the rest of this year and next will be on the forefront of investors’ minds. The country’s only trading international security is its US$1 billion 2019 bonds, issued through a private placement in 2011.
The country could use a boost of entrepreneurship and luck in other sectors. But it struggled in this aspect during the good times and probably more during this downturn. Forbes reported recently that only about 50 percent of Angolans surveyed would like to start a business compared to about 80 percent in the rest of sub-Saharan countries. These are tough times for this promising country.
The South African economy is an obvious candidate for this list. A contraction in GDP growth during the second quarter of 2015 was a realization of fears for many investors. Widespread electricity rationing, rising petrol prices, personal tax hikes, and falling commodity prices contribute to the struggling GDP. Slowing Chinese demand will not stop the downward-trending tailwinds and commodity prices will further cause pain for South Africa — as much or more than its African peers.
The country’s power company ESKOM projects a slowing in the electricity shedding. But any slowing in the shedding process will likely require a rise in tariffs over time. Any rise in electricity only compounds the inflationary tailwinds on basic South African necessities, including food. The South African Medium-Term Budget Policy Statement (MTBPS), released by Finance Minister Nhlanhla Nene on Oct. 21 accordingly cut GDP growth to 1.5 percent in 2015 and 1.7 percent in 2016, down 25 percent and 30 percent respectively from the February forecast. Those numbers do not bode well for a country struggling to balance government receipts with government expenses.
A new president and positive outlook are great. But Nigerians are calling for quicker action. The screening of Nigeria’s ministerial nominees is expected to take nearly two months. The Senate announced that it will screen a maximum of three nominees per day. Local politicos joke that this process could drag out until the Christmas holiday. The confirmation of the nominees and their appointment to specific cabinet seats could oil the economy (no pun intended). Economic policy – whether reality or not – appears stalled by the lack of a fully installed government.
Truth be told, even if decision making is stalled, the underpinnings of the economy are improving. Refineries are working, electricity is better, and previous challenges are slowly disappearing (under new leadership), investors say off the record. Another plus is Vice President Yemi Osinbajo’s announcement that the government plans to split the long-awaited Petroleum Industry Bill to make it easier — it has been delayed seven years.
All this said, the weight of a falling oil price – hovering around $50 – weighs heavy on the Nigerian current accounts. The current account balance sits around $2 billion but will be tested with a rising deficit at around 2-to-2.5 percent this year. Market indicators suggest that the Nigerian Central Bank may devalue the Nigerian currency 10-to- 12 percent over the next 8 to 10 months as “something must be done.” JP Morgan’s decision to exclude Nigerian bonds from its local currency emerging market bond indice after restrictions on foreign exchange transactions is an indication that it may have to get worse before it gets better.
Zambia’s challenges can be characterized by three realities: an ailing copper price, a suffering currency and overall struggling business environment. The copper price fall is well documented – down nearly 20 percent this year despite a 5 percent bump up in the last two months. Research suggests that prices should rise in due time, but definitely not quick enough for the current leadership. The surplus years in revenue created a buffer for the downturn through investments in other sectors and government accounts. But the copper price fall is living longer than many officials predicted.
The longevity of the price depreciation is accordingly squeezing the kwacha. Down 45 percent against the dollar this year, the Zambian currency is the worst performing currency this year of all 150-plus currencies tracked by Bloomberg. Zambia issued its third Eurobond (US$1.25 billion) in four years in July as the economy is starved for cash. Since then, GDP projections have nosedived from 5.8 percent to around 3.4 percent with Finance Minister Alexander Chikwanda warning that growth may not surpass 5 percent due to low copper prices and electricity shortages.
The electricity shortages highlight the overall struggling business environment. The current drought continues to devastate the agriculture and mining output through its impact on electricity output, 95 percent of which is from hydropower. The country’s major dam, Kariba, is less than 50 percent capacity from a year ago, underlining the country’s electricity deficit of 560 MW. The president’s call for a national day of prayer may be the best effort to combat the perfect storm.
Ghana is doing better than expected. Last year was tough for Ghana and pessimists on the Ghanaian leadership and the IMF, for the sake of the country’s reputation, have to eat their words. The country beat deficit and revenue targets in the last quarter, with officials talking confidently that it will achieve the 2015 deficit target of 7.3 percent of GDP. Despite the positive report, investors are still reluctant with this country.
Ghana’s $1.5-billion Eurobond, launched in October, nearly avoided a yield of 11 percent (landing at 10.75 percent) despite the backing of the IMF. This follows the government’s initial delay with the issue. Thing have surely changed since the 8 percent yield it achieved in 2013.
The reality of the economic slowdown speaks to the changing outlook with investors. Economic growth is slowing, with year-over-year growth in the second quarter at 3.9 percent compared to 4.3 percent in the first quarter. Officials worry that this number could be drop as low as 3.2 percent for the year which would be a 20-percent decline against last year’s 4 percent growth. The completion of the Tweneboa-Enyenra-Ntomme (TEN) field by Tullow by mid-2016 could mean 6 percent or higher growth in 2016. Until then, it is delicate times in Ghana.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.
