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Friday,
February 28, 2020 / 12:32 PM / By Eric Olander of The Africa Report / Header Image Credit: Africa Report
How will African economies weather the impact of the
coronavirus? 'Buckle up' says Jeremy Stevens, the Chief China Economist at
Standard Bank in Beijing.
In the latest edition of Stevens's regular Inside
China newsletter that he sends to clients and subscribers, Jeremy forecasts how
this burgeoning crisis will impact Africa. The newsletter is republished here
in full with the author's permission.
The novel coronavirus Covid-19 is a black swan event:
highly unlikely, and with potent potential consequences. Still, its swift
initial containment to some extent demonstrates China's capacity for
fit-for-purpose strategic solutions in times of crisis.
Near half of China's cities and districts are
currently classified as low-risk, and a return to business as usual is
apparently imminent. Nevertheless, the situation in China and globally remains
both fluid and uncertain.
We are far less optimistic when it comes to the impact
of this outbreak on China's economy.
The current consensus, that growth will slow to just
4.5% in Q1:20, followed by a robust rebound and then stabilization, seems
optimistic. The immediate downturn is likely to be far more severe and acute.
Consider that vast swathes of GDP has been frozen for an extended period:
manufacturing (32%), retail trade (10%), real estate (7%), transport (4%),
automobiles (3%), retail hotel (2%), and so on.
Even now, after an incredibly rough few weeks, the
Chinese economy is probably running at about 50% capacity.
Last week, provincial governments started to publish "resumption rates" for businesses with revenues above CNY20mn.
The variation is large: Sichuan 20%, Anhui 40%,
Zhejiang 48%, Guangdong 50%, Fujian 60%, Jiangsu 65%, Shanghai 68%, Shandong
71%. Of course, plausibly gains could be clawed back in Q2:20, but the policy
impact is likely to be smaller than in the past.
Disruptions in China will crimp revenues for companies
in sectors affected by this coronavirus and divert attention of policy banks
and commercial banks - the scaffolding for China-Africa deals.
We also doubt that the impact here and globally will
be transitory.
The comparison to the V-shaped recovery trajectory in
the aftermath of severe acute respiratory syndrome (SARS-CoV) is fraught
terrain. SARS-CoV infected far fewer people; Covid-19 has infected 10 times
more people already, directly or indirectly, affecting millions of families.
SARS-CoV infections were concentrated in Guangdong
Province and Beijing. Infections of Covid-19 have affected every district and
city across the Mainland, surpassing 500 cases in eleven provinces, and
severely disrupting business operations throughout the country in every sector.
Most notably, unlike in 2003, China does not have a
favorable cyclical and structure outlook. Then, nominal GDP growth was a
juggernaut, surging by near 20% each year in the subsequent five years up to
the global financial crisis.
Today, COVID-19 coincides with an economic
transition toward higher-quality growth. Consumption is under pressure, the
manufacturing sector is struggling, the various components of investment seem
in no position to rebound, and local governments are grappling with falling tax
revenues and rising outlays.
The financial system, which saw several episodes of
liquidity stress last year and is currently being used as a critical buffer to
prevent greater corporate disruption, will experience blowback. We expect restructuring,
mergers and acquisitions, takeovers and bankruptcies.
Impact on Africa
For Africa, the gradual adjustment of growth
expectations in China will hit sentiment and narrow anticipated interest rate
differentials with advanced economies, challenging the path of African
currencies, equities, and assets.
Already, after much hope for a global recovery in
2020 in the wake of the U.S.-China Phase One trade deal, things have changed
dramatically, and sentiment towards emerging markets has soured. Financial
markets are now adjusting and re-pricing assets.
Even before survey data and macro data can confirm
the hit to the global manufacturing recovery, central banks in key emerging
markets (Brazil, Russia, India, Mexico) have started easing interest rates.
Central banks in Africa, like Namibia, Botswana and South Africa, have also
acknowledged the COVID-19 headwinds.
Much like in 2015, African countries are likely to
see downward revisions in the coming weeks, as expectations around China are
downgraded.
Borrowing Costs Expected to Rise
Worse still, African sovereign borrowing rates may
move against them. Indeed, since the global financial crisis of 2008/9 and
during times of low rates, African governments have now accumulated record
levels of debt. Gross government debt across SSA has surged by an average of 20
percentage points (pps) of gross domestic product (GDP) since 2010, nearing an
average of 60% of GDP in 2019.
Countries like Zambia (+72pps), Mozambique (+65pps)
and Angola (+57pps) have led the way, but several regionally important
economies like Ghana and South Africa have also seen sizeable gains.
Whilst financial deepening and building out the
yield curve obviously has benefits - especially if the debt raised is used in
ways that lay the foundation for future economic activity and boosts
productivity - the speed of growth is worthy of pause.
Also, the debt is increasingly from commercial
sources and, increasingly, denominated in foreign currencies. African Eurobond
issuance alone has increased by near USD60bn in the past two years.
Economic Growth Expected to Slow
Should the Chinese economy expand by 4.5% in 2020 - down from 6.1% in 2019 and far lower than currently expected - the entire
global economy will struggle, expanding by just 2.5% in 2020.
The less favorable external environment could end
up shaving-off at least 1.2pps from SSA growth. Indeed, the IMF has responded
by lowering its GDP forecast for Nigeria - SSA's largest economy - from 2.5% to
2.0% due to a fall in oil prices, which has already placed the currency under
pressure.
Much like in 2015, African countries are likely to
see downward revisions in the coming weeks, as expectations around China are
downgraded. As recently as 2015-16, adjusted expectations for China's medium-
to long-term economic growth rate, demand for resources and volatility in its
financial market were felt across Africa.
Fastened to longstanding historical trends, a
stumble by a major commercial partner echoed into Africa.
SSA GDP slumped from 5.1% in 2014 to 3.1% in 2015,
and then to just 1.3% in 2016 - slower than advanced economies for the first
time since the aftermath of the Asian financial crisis.
Time for Africa to Adapt to China's Changing
Economy
Even before Covid-19, we argued that Africa should
take heed of changes in China. Since 2016, Beijing has shown foresight and fortitude,
allowing the slowdown to play out without reverting to traditional levers to
support near-term growth, giving air to rebalancing, emphasizing Belt and Road
ahead of all other outward initiatives.
Most tangibly though, the landscape has been altered
by the de-risking of the financial system, which has been the over-arching
domestic policy framework since 2016, focusing the domestic policy tilt on
ensuring that resources - land, labor, and capital - are allocated towards
productivity-enhancing ends.
China had signaled these changes for some time.
Recall, after ballooning every three years, China's financing commitments to
Africa stayed flat at FOCAC in 2018, and a smaller share of the commitment was
comprised of pledges of aid, interest-free and preferential loans, and export
credit lines.
This shift in emphasis is correct.
The heavy lifting by diplomats, policy banks and
Chinese SOEs has been completed, ushering in thousands of entrepreneurs and
private businesses. Given the objective of FOCAC was always to strengthen
China-African commercial and economic cooperation, trade and investment,
handing the reigns over to business to focus on bidirectional commercial
opportunities is desirable and more sustainable.
China Importing Less From Africa
Evidence of China's adjustment is also evident in
Chinese imports of Africa, which contracted by 4% and remain below 2013 peaks.
Recall that a one percentage point decrease in China's domestic investment
growth is associated with an average 0.6 percentage point decrease in Africa's
exports. Indeed, China's rebalancing translates into investment doing less
heavy lifting and expanding much more sluggishly.
Back in 2010, domestic investment was growing at
30% y/y but has slowed steadily in each of the past 10 years, slipping to just
4% in 2019. And 2020 is likely to be closer to zero.
Meanwhile, African countries have fallen in
relative importance to China: South Africa, for instance, slipped from China's
12th-largest source of goods in 2013 to outside the top 20 last year.
This year, a demand shock and price decline would
be very difficult for Africa. Even though tallying the impact of this
coronavirus is not yet possible, already expectations for oil consumption have
been reduced by 1.5mn barrels per day in Q1:20 and demand for copper is
forecast to fall by 300,000 metric tons in 2020.
Already, prices of key commodities, like copper,
oil and thermal coal have already fallen by 20% since mid-January, and a few
reports are emerging that Chinese buyers have postponed overseas orders, some
declaring force majeure.
Unfortunately, resource sales (and prices) play an
oversized role in fiscal revenue collection to help fund public expenditure.
Consider that resource exports account for 40% of
total exports in nearly half of SSA, and for eight the ratio is about 70% of
exports.
Furthermore, the path of commodity prices has one
other significance. Making matters worse, around a quarter of China's loans
have been backed by resource concessions. On this score, the more indebted - often to China, backed by resources - are Angola and Zambia.
Expect Fewer Chinese Deals in Africa
It is also plausible that the China-related deal
pipeline will be smaller than it otherwise would have been. Disruptions in
China will crimp revenues for companies in sectors affected by this coronavirus
and divert attention of policy banks and commercial banks - the scaffolding for
China-Africa deals.
That said, much of the rationale for China's
endeavors in Africa (or Belt and Road, for that matter) are to leverage China's
competitive advantage in infrastructure, offshore some overcapacity sectors,
and heavier industry, and tap into fast-growing consumer markets. All of this
remains.
Infrastructure Development Disruptions
Meanwhile, China's infrastructure projects in
Africa will face disruptions as people flow is restricted. Granted, most
Chinese workers in Africa seem to have remained in Africa over the Chinese New
Year - an estimated 70% of the Chinese workforce for Standard Bank clients - and more and more firms have hired locally.
However, the biggest issue is that supply chains
for key inputs are very much broken down, making key inputs, components,
equipment and machinery harder to source, whilst transport hubs and ports in
China may be operational, but only at depressed levels, may create costly
delays.
Chinese Exports to Africa
China's sales to Africa are likely to rise just a
fraction in 2020 while China's purchases will depend on commodity prices.
Chinese goods have penetrated markets deeply,
increasing from 3% of Africa's total imports in 2001 to 19% in 2019. Around
two-thirds of African countries list China as their largest source of goods. In
contrast to China's growing penetration, Africa's traditionally large trading
partners have seen their market share decline.
Last year, China's exports to Africa expanded by
7.2% y/y, to USD113bn in 2019. And now, COVID-19 has disrupted the path ahead.
Consider Yiwu in Zhejiang: as much as 7% of all of China's exports to Africa
originate from Yiwu. But today, Yiwu is far from business as usual. In terms of
sourcing from China for domestic demand, South Africa and Nigeria purchase the
most from China, but the risk of disruptions affecting cities in Africa is more
a function of the relative share of China's production in overall supply.
For many, reducing reliance on the Mainland as a
supplier seems even more relevant to some now, supporting the rationale for
industrial hubs in South Africa, Ethiopia, Egypt and elsewhere.
Africa must, therefore, more forcefully and
single-mindedly prioritize tactics for further industrialization, job creation,
and technology transfer through Chinese investment in manufacturing, creating
hubs in Africa to serve as an engine for intra-Africa trade.
The Rainbow After the Storm
China's economy is likely to slow more than
originally anticipated in 2020, and this matters a great deal.
In 2015, when China's nominal GDP growth slumped to
just 6.5% - a 17-year low - equaling the cyclical trough experienced at the
height of the GFC in June 2009, SSA GDP slumped from 5.1% in 2014 to 3.1% in
2015, and then to just 1.3% in 2016 - slower than advanced economies for the
first time since the aftermath of the Asian financial crisis.
Once again, SSA growth will feel the impact in a
variety of direct and indirect ways, halting three consecutive years of
acceleration.
That said, eventually, structural forces will
reassert themselves.
China will likely see an ongoing shift towards
slower, but higher-quality, economic growth, one less factor- and
investment-driven, and buoyed by innovations from globally-minded, competitive
and ambitious corporates.
Africa is likely to see robust economic growth,
favorable demographics, rapid urbanization and industrialization, and rising
incomes as well as a growing middle class.
This novel coronavirus is therefore unlikely to
alter the formidable underpinnings of the structural, deep-rooted China-Africa
commercial ties.
Credit:
The post Coronovirus:
Africa Braces for the Economic Impact of China Slump appeared in The Africa Report on
February 28 2020 and The China
Africa Project on February 26 2020
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