Africa’s financial markets have been battered in the past year by a slowdown in growth, the collapse of commodity prices, security threats, adverse weather, rising debt – and now the shock of global risk-aversion sparked by Brexit. Yet in this era of unprecedented volatility, a new report from the Institute of International Finance offers seven reasons to take comfort in the poorest continent.
1. Divergent Growth
Growth for Africa slowed last year and is set to weaken further – but the performance varies widely. Some countries have suffered stress and a significant slowdown – like Nigeria, Ghana, Zambia and Tunisia. Others have seen solid, if unspectacular, growth: Mauritius and Morocco, for example. And then there are those that have continued to grow rapidly, such as Côte d’Ivoire, Tanzania and Kenya. The structural changes in China that reduced demand for industrial materials and led to a sharp drop in non-agricultural commodity prices have had a minimal impact on Kenya, where growth held at 5.6% last year, only slightly below the five-year average.
2. Reining Deficits
Big budget deficits have pushed government debt higher – but not yet to unsustainable levels for most countries. While Sub-Saharan nations have issued an increasing amount of Eurobonds in the past five years, higher borrowing costs have deterred several from returning more recently. Meantime, efforts are being made to rein in expenditure and increase revenue in order to stabilize government debt. In Ghana, where the deficit ballooned to over 12% of GDP in 2013 and 2014, an IMF program agreed last year cut the deficit to 5% and further progress is expected. In Kenya, the budget deficit is large at around 8% of GDP in 2015-16, but this partly reflects rapid growth in infrastructure spending. The government plans to reduce the shortfall by about 3% of GDP over the next three years, while still maintaining space for high-priority infrastructure projects and increasing spending on health and education.
3. No More Tightening
Exchange rate depreciation and weather-related food price increases led to a surge in inflation in several countries last year, prompting central banks in the region to tighten monetary policy. However, in the IIF’s view, the tightening cycle has now run its course in most countries. Inflation is probably past its peak with food price increases moderating and exchange rates stabilizing.
4. Low Correlation
Despite the economic challenges facing the region and the sharp swings in global risk appetite in recent years, investor interest continues to grow. A particular feature of Frontier Africa equities is their very low correlation with other asset classes, which offers good opportunities for portfolio diversification.
5. Deeper Markets
Financial markets are rapidly deepening. Frontier Africa sovereign bonds in dollars now account for over a quarter of JP Morgan’s NEXGEM index. Local currency bond markets—while not cheap— are also providing an alternative source of funding, helped by significant development of the domestic institutional investor base. Pension funds have been growing particularly in Mauritius, Morocco and Kenya, albeit from a very small base. Given Frontier Africa’s relatively young population, the pension sector should see further growth as the work force expands. Financial inclusion has also been on the rise. Pan-African banking groups and mobile money have broadened access to financial services to almost half of the adult population, from 37% in 2011, across an IIF sample of nine countries: Kenya, Tanzania, Cote D’Ivoire, South Africa, Ghana, Zambia, Nigeria, Mauritius and Tunisia.
6. Demographic Dividend
Frontier Africa has the potential to capture the demographic dividend that Asia enjoyed in the second half of the 20th century. The number of working age Sub-Saharan Africans will have tripled to 1.25 billion and will exceed that of the rest of the world combined by 2035, according to IMF forecasts. In order to seize the benefits from this demographic trend, policies need to ensure the growing population has access to good healthcare and education as well as better physical infrastructure. Decades of neglect have left a massive infrastructure backlog in key areas like power, roads, railways and ports. The paucity of power generation and limited distribution of electricity is a particular impediment to economic activity and inclusive growth. These challenges are starting to be addressed with increased vigor in many countries. Kenya’s government is investing heavily in geothermal, while in Ghana and Tanzania, gas fired power stations are being built to tap into recent gas discoveries. The power sector in Nigeria was privatized several years ago, but benefits have been slow to materialize and there remains very heavy reliance on costly private generators.
7. Africa Rising
The “Africa Rising” story has been knocked off course by a barrage of external shocks, especially the collapse in commodity prices and the resulting effect on export earnings, government revenue and exchange rates. Countries will continue to face headwinds, particularly those with higher single commodity dependence and those that have been slower to take remedial policy action, leaving potentially painful adjustments still to come. Facing the stiffest challenges are Nigeria, with its dependence on oil and gas and where exchange rate adjustment has only just been implemented, and Zambia, with its dependence on copper and a stringent IMF-backed fiscal policy likely to follow the August general election. Nevertheless, with macroeconomic policy adjustments now being implemented in most countries, Frontier Africa should be in better shape to take advantage ultimately of the next global upswing.
The “Frontier Africa: Adjusting to New Realities” report was presented at the IIF-Exotix Partners Investing in Frontier Africa conference in London on June 29 by IIF Executive Managing Director Hung Q. Tran, Chief Economist for Sub-Saharan Africa David Headley and Global Capital Markets Senior Director Sonja Gibbs.
