East Africa to Lead Growth in Next Decade

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 Saturday, October 22, 2016/ 9.07pm /BMI Research

BMI View: East Africa's real GDP growth will outpace that of Central, West and Southern Africa over the next decade. The sub-region will benefit from deepening integration and comparatively well- diversified economies, buoying investment and export growth.  
 

• East Africa is poised for the strongest real GDP growth in Sub-Saharan Africa (SSA) over the next decade.

• Economic activity across the sub-region will be supported by comparatively well-diversified economies, buffering East Africa from the fallout from the commodity bust, while increasing regional integration will lower the cost of doing business and encourage investment.

• Moreover, East Africa also benefits from a multitude of economic centres, limiting reliance on one key economy.

• However, East Africa's political risk profile is relatively weak and the country has only limited macroeconomic buffers, suggesting that the risks are skewed to the downside.

Over the next decade, we forecast that East Africa will outpace growth in the other sub-regions of SSA, recording an average real GDP growth rate of 5.6% annually, compared to 5.0% in Central Africa, 4.7% in West Africa and 4.4% in Southern Africa.

Growth in East Africa will be supported by greater economic diversification and integration, allowing it to outpace the other sub-regions of SSA whose growth stories will be undermined by persistent low commodity prices in the coming years.

That said, East Africa also faces some of the most significant risks. Indeed, East Africa fares worst on our Long-Term Political and Economic Risk Indices, suggesting that any political upheaval or price shock could cause the region to lose its lustre.  

Greater Integration Key to Strong Growth  

Increasing sub-regional integration within the East African Community (EAC) will be one of the primary drivers of East Africa's stronger growth over the next 10 years. Of the 11 countries in East Africa, six are members of the EAC bloc, accounting for 57% of the sub-region's economy as a whole.

As the EAC states pursue greater integration, cutting trade barriers and improving infrastructural links between them, this will help to support economic development across the bulk of the region.

While West Africa's Economic Community of West African States has struggled to substantially improve transport links and strengthen economic ties, the EAC has made significant steps forward in its integration efforts in recent years, including a common external tariff and customs procedures.

A regional EAC passport due to be introduced in January 2017 will further help to facilitate trade and support growth. Similarly, we expect significant investment in infrastructure links will further support EAC integration.

For example, Rwanda is planning a 1,672kmrail link through Burundi to Dares Salaam in Tanzania, in order to improve access to Indian Ocean ports and facilitate the movement of goods in the region.

The development forms part of the Central Corridor project (linking Rwanda, Burundi, the DRC and Tanzania) with the aim or improving access to the Port of Dar es Salaam in Tanzania for landlocked countries.

When completed, new transport links will lower the cost of transporting goods, reduce the load on regional road networks and help to unlock the sizeable untapped natural resources and consumer markets in the region.

The June 2016 edition of the World Bank's connecting to compete report, which comes out bi-annually, noted that integration efforts in the EAC had already cut the cost of trade in the bloc.  

Economic Diversification Will Insulate East Africa from Commodity Bust  

Aside from the benefits of greater integration, the East Africa region – and the EAC in particular – benefits from more diversified economies than the other regions of SSA, with a much lesser reliance on the export of just one or two commodities. 

As we expect commodity prices to remain far from the pre-2014 highs in the coming years, this will offer an advantage to East Africa, while keeping growth in West, Central and Southern Africa structurally weaker. 

Kenya and Tanzania, the second- and fourth largest economies in our East Africa grouping (Sudan and Ethiopia being first and third) have major agriculture and horticulture, tourism and mining industries, and we expect diversification efforts in the region will continue. 

Both Rwanda and Kenya are investing to develop themselves as regional tech hubs and Ethiopia has a nascent manufacturing sector. The sub-region is also leading in terms of financial services development, with mobile money having taken off rapidly.

This enables rural households to save, small- and medium-sized enterprises to borrow, and facilitates tax collection. Toward the latter part of our forecast period, resource windfalls will be a boost to growth in Kenya, Uganda and Tanzania in particular, with major oil (Kenya and Uganda) and gas (Tanzania) projects set to come online between 2020 and 2022. 

These will not only boost exports following their launch, but the investment associated with such major developments will also bolster GDP growth in the meantime. The crucial difference between East Africa and much of the rest of SSA is that these are a boost to growth rather than the sole driver.  

East Africa Not Weighed Down By Regional Behemoth  

Finally, East Africa benefits from multiple centres of economic activity across the sub-region. Kenya, Tanzania and Rwanda are among our favourite economies in SSA. 

 Moreover, as no single country in the sub-region represents more than half of sub-regional GDP, should we see one economy falter, this will not undermine economic prospects of the region at large.  

In contrast, in West and Southern Africa, Nigeria and South Africa, will be a drag on real GDP growth in their respective regions over our forecast period, with Nigeria taking an average 1.6 percentage points (pp) off West Africa's growth each year, and South Africa 1.1pp from Southern Africa's.  

Nigeria accounts for 74% of the GDP of our West Africa grouping, while South Africa makes up 68% of Southern Africa but both are struggling to make crucial structural reforms.  

South Africa remains prey to the unions and will likely remain so with the ANC veering to the left, while we see little chance of Nigeria successfully diversifying its economy away from an overreliance on oil exports once prices pick up once more.  

This will not only drag down the sub-regional average for West and Southern Africa, but means neighbouring states heavily reliant on trade with Nigeria and South Africa are face weaker growth prospects.  
 

Higher Growth, But Also Greater Risk  

We expect East Africa's real GDP growth will ...continued from front page outpace that of the other three regions over the next 10 years, but the sub-region faces greater political risks, and should there be a major flare-up in unrest, this could prompt a rapid re-evaluation of our forecasts.  

According to our proprietary Long-Term Political Risk Index, the 11 countries in the East Africa region score on average 41.9 out of 100. This is a higher score than Central Africa (37.4) but suggests the region is riskier than West Africa (48.8) and Southern Africa (56.1).  

These scores are not weighted averages and so countries like Somalia and South Sudan likely have significant roles in pulling down the scores for East Africa. That said, risk of spill over of violence from these two failing states into their neighbours is significant.  

This has already been seen in Kenya, where terrorists linked to Somali group al-Shabaab have carried out major terrorist attacks, negatively impacting upon the country's tourism sector.  

Moreover, there are significant political risk factors across the bulk of the sub-region, not only in those two headline-grabbing troubled states. Upcoming 2017 presidential elections in Kenya have the potential to see an outbreak of violence akin to   Wanes', June 13), while Burundi will remain at risk of unrest following the election of President Pierre Nkurunziza to a third term in 2015 (see 'Neighbouring Tensions On The Rise', April 1).  

By contrast, the more developed nature of the Southern African states results in slower economic growth, but with the benefit of reduced political risk. The East Africa region also has weaker macroeconomic buffers than many of its neighbours.  

On our Long-Term Economic Risk Index, it scores just 41.0 out of 100, a weaker performance than all the other regions (although the margins are not as great as with political risk, with top-ranking West Africa scoring only 43.4).  

These scores take into account a range of indicators including months' import cover, fiscal deficits, inflation rates and level of central bank independence in order to quantify the economic risk facing SSA states.  

High current account and fiscal deficits are a concern in the East Africa region, as states such as Uganda invest in infrastructure projects, banking on the windfall that their oil production is projected to provide them from 2020 onwards.  

As this is for the most part productive spending we do not think them cause for particular worry, but we acknowledge the risk should oil prices fail to rise significantly or there are project delays, these countries could find themselves struggling to cover their external shortfalls. Should political unrest flare up this would significantly exacerbate the risk of project delays.  
 

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