The woes of the West and key emerging markets are, for the most part, eclipsing the stories of other key regions. If the slowdown is truly global, how is Sub-Saharan Africa faring?
Global boom-times were good to the sub-continent. Region-wide output growth almost doubled, from a 3-3.5% pace to 6% annually. Sharply higher commodity prices boosted regional export receipts, attracting investor attention enough to ensure a steep, double-digit pace of spending growth annually in five of the past six years. Pan-regional benefits were manifold. The collective trade balance swelled from just 1.4% of GDP in 2002 to 7.2% last year. Six years ago, aggregate external debt weighed in at a punishing 52% of GDP, but last year, the figure was just 15.2%, a remarkable improvement that reflects a succession of debt settlements and in some cases, pre-payment of outstanding obligations. Domestic-held public debt saw the same trend.
Times have changed. Global economic weakness has been slow to spill into the region, but has now doused the searing demand for Africa’s products. Plunging commodity prices have cut foreign exchange earnings sharply, and lowered growth overnight in South Africa, Nigeria and Angola. Economic growth for the region is now forecast to be about half the pace of the boom years. Unfortunately, the impact on the region’s fundamentals is staggering. The IMF forecasts that the fiscal balance will fall into deficit, plunging by 6% as a share of GDP. The trade balance is also expected to tumble into the red to the tune of 2% of GDP. A reversal that’s hard to fathom.
Investment, already in retreat globally, is at risk in the region. The general realization that the planet is not running out of key commodities has taken the shine off many investment projects in the region. In addition, borrowing costs have soared. Pan-African sovereign bond spreads took a sudden, 600-basis-point jump last fall, and despite a subsequent retreat, still remain 675 basis points above comparable US bonds. This together with deteriorating public finances casts doubt on the ability of governments to fill the investment gap with publicly-funded projects. The IMF has worried aloud that 22 of the most vulnerable economies will require about US $25 billion in additional concessional financing to shore up foreign reserves, and seems prepared to ante up.
The region’s about-face will be felt in Canada. Recently, Canadian exports to the region have soared. From 2006 to 2008, average annual export growth hit 29%. Price spikes in food and energy exports had a lot to do with this, but exports of machinery and equipment – far less subject to price swings – saw average annual growth of 26% over the same period. Aerospace and rail exports fared even better. Current conditions suggest a temporary setback to recent gains, but Canada’s new foothold in the region suggests brighter long-term export prospects.
On a brighter note, individual countries – notably Botswana, Ghana and Tanzania – will fare much better than average. Also, a modest rebound in commodity prices will provide some relief.
The bottom line? Sub-Saharan Africa is taking a turn for the worse, and conditions will deteriorate before they improve. In time, a resources-hungry world will once again be at Africa’s doorstep. Those who maintain a presence in the market will be well-positioned to get a piece of that action.
The views expressed here are those of the author, and not necessarily of Export Development Canada.