standard chartered africa - resources for growth july 6

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Standard Chartered Global Focus | 06 July 2010

Charts of the year – Africa

Chart 1: CPI trends allow for easy monetary policy‘Frontier’ Africa inflation, by region, % y/y

Chart 2: Global outlook still mattersWorld growth vs. African export volumes, %

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2007 2008 2009 2010

Southern Africa East AfricaWest Africa

-15

-10

-5

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1980 1984 1988 1992 1996 2000 2004 2008

-2

-1

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Africa export volume World GDP growth (RHS)

Sources: Datastream, Standard Chartered Research Sources: IMF, Standard Chartered Research

Chart 3: Africa’s hopes lie in increased South-Southand intra-regional tradeDestinations of Africa’s exports, % of total exports

Chart 4: Rapid urbanisation should spur productivitygrowthRural-urban population mix

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EU Asia US Emerging markets

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SSA World LDCs China India

Urban % Rural %

Sources: IMF DoTS (Jan-Oct 09), Standard Chartered Research Sources: Standard Chartered Research United Nations, data

estimates for 2010

Chart 6: Still-elusive Green Revolution could be agame-changer

Top 10 African countries in terms of potential arable land

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40,00060,000

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C o n g o

A n g o l a

S u d a n

T a n z a n i a

N i g e r i a

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o z a m b i q u e

Z a m b i a

C e n t r a f .

R e p .

E t h i o p i a

C a m e r o u n

T h o u s a n d H a

Chart 5: Return on infrastructure rises witheconomies of agglomeration and city growth

Number of cities with more than 1mn people

No. of cities withpopulation >1mn

Sub Saharan Africa(SSA)

51

China 107

India 51

Western Europe 18

Middle East(Western Asia) 19

Sources: Standard Chartered Research ,UN World Urbanisation

Prospects, 2007 Sources: FAO, Standard Chartered Research

41




Africa

Razia Khan, Global Head of Macroeconomic ResearchStandard Chartered Bank, United Kingdom+44 20 7885 6914, [email protected]

42

Africa’s more rapid growth recovery relative to

previous crises is rooted in several factors: (1) the

unprecedented counter-cyclical policy response to

the crisis; (2) unexpectedly large aid and

concessional flows, especially from the

international financial institutions (IFIs); (3) China’s

healthy growth and the resulting support to

commodity prices, which has helped to stem the

deterioration in FDI inflows; and (4) the resurgence

of risk appetite, which is partly responsible for the

post-crisis stabilisation in African FX rates. Along

with lower food and fuel prices, this also fed more

moderate inflation, helping to create an

environment more conducive to monetary easing.

There are risks, however. An initial global

consensus on the urgent need for counter-cyclical

policy has given way to a greater divergence of

opinion, as evidenced by the outcome of the latest

G20 meeting in June 2010. Following the euro-

area sovereign crisis, even frontier African

economies are being assessed in a different light,

with the market focus now shifting to the

sustainability of fiscal stimulus plans. Prior to the

depths of the financial-market crisis in Q4-2008,

African frontier markets, unlike more established

emerging markets, had been largely insulated from

global contagion when risk aversion peaked. This

has now changed. Recent market volatility

associated with the European crisis has made its

mark on smaller African frontier markets as well,

with most African currencies weakening in

response. Despite the fact that Africa’s trade with

Europe is dominated by the core economies rather

than the peripheral ones, the market reaction

reflects the view that Africa will be negatively

impacted by any renewed downturn in euro-area

growth prospects. This would be the case

especially if other developing regions, with which

Africa’s trade is increasing, were to slow as well –

with a knock-on impact on commodity prices.

Africa’s ambitious plans for eurobond issuance in

2010 may also need to be scaled back. Despite

generally favourable public debt ratios, most

frontier African economies are sub-investment

Resources for growth

Economic outlook

Fears that the global economic crisis would result

in a structural setback for Sub-Saharan Africa

have largely dissipated. Real GDP growth has

recovered from the weak but mostly positive levels

recorded in 2009, with rising expectations that

2011 may see a return to trend growth across

most Sub-Saharan African economies. This stands

in contrast to earlier economic slowdowns in

Africa, when weakness in the global economy

(Chart 1) had a marked lagged effect on African

economies. African economies entered this

downturn with strong growth momentum. Perhaps

as a result of this, the recovery from the crisis also

appears to have been more rapid.

Nonetheless, headwinds associated with

continuing global uncertainty persist. Africa is not

immune to the slowdown. With intra-regional trade

estimated to account for as little as 11% of total

trade (poor infrastructure is largely to blame),

Africa’s export growth remains highly correlated

with world growth (see ‘Charts of the Year –

Africa’, Chart 2, ‘Global outlook still matters’).

Rising South-South trade (‘Charts of the year –

Africa’, Chart 3) has cushioned African economies

from the brunt of the global slowdown. However,

more subdued growth in Asia and other emerging

regions would pose risks to the African outlook.

Table 1: Standard Chartered Research forecasts:Sub-Saharan Africa*

2009 2010 2011 2012

GDP (real % y/y) 1.2% 5.2% 6.0% 5.8%

IMF 4.8% 5.9% 5.5%

CPI (% y/y) 10.5% 8.8% 7.2% 7.6%

IMF 8.7% 7.2% 6.6%

Current accountbalance (% GDP)

-2.5% -0.2% 1.0% 1.7%

IMF 0.9% 0.1% 0.3%

* 2009 USD GDP, weighted total Sources: IMF, Standard Chartered Research




Africa (cont)

43

its components shows that the increase in growthstemmed mostly from rising private consumption.

Especially during the oil boom years, net exports

made a negative contribution to overall Sub-

Saharan growth, although commodities were an

important contributor to fiscal resources in

resource-rich countries. (2) While there is evidence

that African oil exporters achieved higher growth

rates than oil importers, it is difficult to find a strong

correlation between terms-of-trade developments

and trend GDP growth in a region-wide context.

Commodities may have been important, but otherfactors have been bigger drivers of African growth.

(3) There is evidence that in absolute terms,

political change and a gradual move towards

greater political accountability – often via the

establishment of regular multi-party elections –

have had a greater impact on African growth than

rising commodity prices. The democracy dividend,

with consumption booms accompanying political

transitions in both South Africa and Nigeria (albeit

at different paces), has been clear. Together, the

two economies account for over half of Sub-Saharan African GDP. Although each economy is

resource-rich, the democratic transition appears to

have had a greater impact on GDP growth. (4)

Recent research has highlighted the success of

poverty alleviation efforts in Africa, demonstrating

that poverty rates may have fallen faster than

previously thought. For most African economies,

and for the region as a whole, charts show

Commodity price trends will remain an importantdeterminant of the availability of private external

financing for Africa (whether FDI or portfolio flows),

although the importance of resources in driving

actual economic growth in Sub-Saharan Africa has

traditionally been overplayed. A number of factors

suggest that commodities have played a limited

role in the outperformance of African economies

since 2001. (1) A breakdown of African growth into

grade. A further deterioration in global risk appetitemay negatively impact the cost of borrowing for

maiden issuers.

With Africa’s development partners now forced to

undergo more rapid fiscal consolidation, markets

are wary of the prospect of further cuts in foreign

aid budgets. The recent round of East African

budgets in June 2010 already showed signs of

reduced donor support to Tanzania and Uganda,

although in both cases, the causes have more to

do with the pace of reform in recipient economiesthan fiscal rebalancing in donor countries.

Nonetheless, with increasing talk that the previous

Gleneagles commitments on foreign assistance

may be de-emphasised as a consequence of the

global crisis, reductions in official development

assistance (ODA) are a threat to Africa’s medium-

term outlook. For now, IFI and multilateral

development bank lending to Africa continue to be

scaled up, led by the African Development Bank.

ing

Chart 2: African currencies succumb to global risk

aversion (versus USD, rebased)

0.8

1.0

1.2

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NGN UGX ZMK GHS

Chart 1: Global and Sub-Saharan African GDP

growth (%)

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1980 1985 1990 1995 2000 2005 2010

Sources: Reuters, Standard Chartered Research

World SSA

Sources:IMF WEO April 2010, Standard Chartered Research




Africa (cont)

44

coverage – Botswana and South Africa –

experienced outright GDP contractions in 2009.

Botswana was hit particularly hard because of its

narrow economic base and the four-month closure

of its diamond mines in 2008-09. Even so, its

recovery from the crisis has not been dramatic. In

South Africa, positive growth is back following a

contraction of 1.8% last year. But the recovery is

mainly led by the external sectors of the economy,

and is already waning in the case of manufacturing

as restocking momentum subsides. Domestic

demand, the key driver of the pre-crisis upswing, is

off its lows but still subdued.

The picture of a gradual improvement in GDP

growth is consistent with trends in most of Africa’s

economies. Two of the economies under our

Elsewhere, a more mixed picture emerges.

Ethiopia, which is not resource-rich, has managed

to deliver near double-digit growth as reforms

continue. Kenyan growth had been negatively

impacted by both the global crisis and the post-

election political fallout, which has marred recovery

prospects. Nonetheless, leading indicators are

now improving, and Kenya is a key beneficiary of

more robust regional growth. Nigerian growth had

been encumbered by reduced oil earnings and a

domestic banking crisis, but is expected to post a

strong recovery thanks to pre-election spending

(the FY10 budget currently envisages a 48% y/y

spending increase). However, Ghana and Uganda

are expected to be the real emerging stars over

the medium term, with a step-change in GDP

growth expected in both economies as they

become oil producers for the first time. In other

countries, more gradual improvement is expected.

While post-crisis headline growth rates will still be

healthy, the increased casualisation of the formal-

sector labour force in mining economies such as

Zambia is a concern. Africa’s informal sector has

also been hit hard by the crisis, and it may be

some time before domestic demand recovers fully.

Financial issues

Although Nigeria was the only major African

economy to experience a banking crisis, credit

growth remains subdued region-wide. The reasons

vary. Rising NPLs associated with public-sectorarrears have taken their toll on banks in Ghana,

despite the injection of increased capital, in line

rising per-capita GDP growth over time are almost

the mirror image of falling poverty rates (‘African

poverty is falling… Much faster than you think!’,

Sala-i-Martin and Pinkovskiy, 2010). Falling

poverty levels are typically not associated with

commodity-driven growth. Resource-sector gains

tend not to be widespread and are frequently

subject to rents; as a result, a limited number of

people benefit the most. Conventional thinking

casts doubt on whether resource-fuelled growth

can reduce African poverty levels, so the recent

success of poverty alleviation (and GDP growth)

must be attributed to other factors.

What does all this mean in the context of the

pressures African economies face today? While

the recent global crisis may have stalled the

reduction in poverty levels, growth is back, and the

impact of the crisis appears to have been more

cyclical than structural. Although there are

important threats to the external outlook for African

economies, much of Africa’s growth in recent

years appears to have been internally generated.

Even faced with external headwinds, Africa’s

growth recovery should continue – although the

health of the global economy may well determine

the pace of that recovery.

Chart 3: Private-sector credit growth in South Africa

and Nigeria (% y/y)

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2007 2008 2009 2010

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Nigeria South Africa (RHS)

Sources: SARB, CBN, Standard Chartered Research




Africa (con’d)

45

amid efforts to widen the tax base and extractmore revenue from the resource sector.

We expect a continuation of easy monetary policy.

Africa’s growth and inflation cycle are thought to

lag those of the rest of the world, and risks remain

tilted towards further easing rather than imminent

tightening. Fiscal policy will remain expansionary

with new regulations. In South Africa, highlyleveraged households, continuing job insecurity,

and greater caution among lenders have resulted

in weak annual credit growth, despite aggressive

easing by the South African Reserve Bank. Given

the slow response of credit growth to monetary

easing in Africa, doubts about the transmission

mechanism persist. If anything, this is an argument

for policy to remain accommodative for longer.

Politics

Political risk has taken a backseat to economic

factors in determining recent growth. However, the

economic crisis has in many cases exacerbated

pre-existing fault lines. Of particular interest in the

months ahead will be the 4 August referendum on

constitutional change in Kenya, seen as a key

litmus test for the holding of peaceful elections in

2012, and pre-election momentum in Nigeria.

Nigeria must hold elections in 2011, but the issue

of whether North-South rotation will be adhered to

within the ruling People’s Democratic Party

remains unresolved.

Policy

Table 2: Ranking of Sub-Saharan African economies by GDP

GDP (PPP)GDP GDP (PPP) GDP GDP (PPP)

Economy (2009 estimates)USD bn

GDP (PPP) per capitaper capita ranking ranking

ranking

South Africa 287.2 505.2 10,244 1 1 5

Nigeria 173.4 341.6 2,249 2 2 8

Angola 68.8 105.9 6,117 3 3 6

Kenya 32.7 62.1 1,730 4 5 11

Ethiopia 32.3 79.0 954 5 4 17

Côte d'Ivoire 22.5 35.8 1,674 6 10 12

Tanzania 22.3 57.4 1,416 7 6 15

Cameroon 22.2 42.8 2,147 8 7 9

Uganda 15.7 39.7 1,196 9 8 16

Ghana 15.5 35.8 1,551 10 9 13

Zambia 13.0 18.5 1,542 11 18 14

Senegal 12.7 22.3 1,743 12 13 10

Equatorial Guinea 12.2 23.7 18,600 13 12 1

Botswana 11.6 25.4 13,992 14 11 3

Democratic Republic of Congo 11.1 21.5 332 15 14 20

Gabon 11.0 21.1 14,318 16 15 2

Mozambique 9.8 19.8 934 17 16 18

Republic of Congo 9.5 15.6 4,146 18 20 7

Mauritius 8.8 16.1 12,527 19 19 4

Madagascar 8.6 19.4 932 20 17 19

Sources: Standard Chartered Research, IMF WEO April 2010

standard chartered africa - resources for growth july 6

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