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Congo DRC – Instability Prolongs Growth Slowdown

Proshare

Monday, August 28, 2017 12:55 PM / BMI

BMI View: Economic activity in the DRC will remain weak through end-2017 due to sluggish exports, high inflation and political instability. In 2018, strong mining sector production and stabilising external accounts will support an acceleration of economic growth.

Economic activity growth in the DRC will remain near multi-year lows in 2017. Although rising production of copper, cobalt and gold will offer key tailwinds, the economy faces significant near-term headwinds. Foreign assistance and investment are slumping amid political instability and conflicts in the southern and eastern regions, straining the country's external accounts and driving rapid currency depreciation and elevated inflation. Trade volumes remain low, suggesting relative shortages of consumer and capital goods, leading indicators of consumption and investment.

We maintain our view that robust production growth from the mining sector will remain the key driver of expansion over the coming years. However, preliminary data put real GDP growth at just 2.4% in 2016, a 15-year low and well below our 4.2% estimate. With improvement in economic conditions hinging on elections that we do not expect to take place in 2017, we have downgraded our forecast for 2017 to 2.9%, from 5.2% previously (see 'Tepid Recovery As Copper Boosts But Inflation Weighs On GDP Growth', February 27 2017). We see growth picking up in 2018 to 6.4% as elections support improving political stability, multilateral assistance and investment.


Mining Sector Remains Key

With the political environment stabilising in 2018, the DRC's economy will benefit from robust mining production growth. Indeed, even in light of the country's ongoing political crisis, production has been rising, expanding 23.7% in Q117. This has been the key driver that kept the economy from falling into recession over recent quarters. In particular, the sale of the country's largest copper mine Tenke Fungurume to China Molybdenum and the expansion of Glencore's Katanga mine will support output gains over a multi-quarter time frame.

Our Mining team expects the DRC will be the fastest growing major mining market in the world over the coming years as high ore grades and large untapped reserves encourage exploration and production (see 'DRC To Top Global Mining Sector Growth In Coming Years', May 2 2017).


Near-Term Headwinds Will Persist

Nonetheless, activity outside of the mining sector will be undermined over the coming quarters by the country's deteriorating external accounts. Our Commodities team expects copper prices will weaken due to softening Chinese demand in H217, which will keep hard currency inflows under pressure and underpin the continued sell-off of the Congolese franc (see 'CDF: Bottom Not Yet Reached As Support Dries Up', June 1 2017).

This will keep inflation in double digit territory – we forecast it will average 40.9% in 2017 – eroding household purchasing power (see 'Elevated Inflation Will Carry Into 2018', May 31 2017). Although the dollarisation of the formal economy limits the impact of local currency inflation on business operations, we believe that accelerating price growth represents sharply increasing business costs.


Moreover, falling import volumes suggest downside to consumption and investment. Given the DRC's dependence on imports of consumer and capital goods, import volumes are a key leading indicator of consumption and investment. Among the only high frequency trade data available, import volumes at the main port in Matadi fell 22.4% y-o-y in 2016 and 45.4% in the first two months of 2017, the latest data available.


Furthermore, government support will remain weak due financing difficulties, in large part as foreign assistance is curtailed in light of the government's failure to hold elections this year. In the year through May, spending cuts have largely come from social transfers and capital expenditure.


The stabilisation of the political environment will be a prerequisite of a broader improvement in economic conditions. Foreign donors have tied financial support to the government's commitment to holding overdue elections. While we do not expect elections will be held in 2017, we believe the government will take gradual steps toward holding elections in 2018, which will keep donors engaged.

As needed financial assistance returns, the country's external accounts will stabilise, tempering downward pressure on the currency, and spending will increase (see 'Tshibala's Budget Suggests Expansionary Fiscal Policy', June 1 2017). Investment will follow with greater clarity on policy direction, further shoring up the external accounts and bringing down inflation.



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