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Regional Growth to Accelerate, But Long-Term Political Headwinds Remain

Proshare

Friday, November 10, 2017 11:55 AM / BMI Research

 

BMI View: Growth will push higher across Sub-Saharan Africa in the coming years due to an ongoing recovery in the agricultural sector and greater activity in the extractive sector. That said, it will not match the pre-2014 commodity boom highs, with commodity prices still well below their previous levels and elevated political risk dampening investor sentiment.

 

Sub-Saharan Africa (SSA) will see real GDP growth ramp up in the coming quarters, after bottoming in 2016. Accelerating activity in the extractive sectors will play a key role in supporting economic growth, buoyed by continuing improvement in global commodity prices.

 

Moreover, the ongoing recovery in the agricultural sector following the end of severe drought across much of the continent will also offer important economic tailwinds. That said, regional growth will not return to the levels seen before the commodity bust in the near future. Structurally lower commodity prices will see major extractive sector firms maintaining a more cautious approach toward investing, while lower fiscal revenues weigh on government spending.

 

Economic growth will be also impeded by elevated political risk, deterring investment, especially in the current lower commodity price environment. Indeed, we expect that regional growth will average 3.6% between 2017 and 2021, an increase on the 1.6% in 2016 but still notably lower than the 5.6% average recorded in between 2004 and 2014.

 

Extractive And Agriculture Sectors Will Lead Growth Higher

Regional growth is set to gradually push higher in 2017 and 2018, buoyed by a recovery in the agricultural sector and an ongoing expansion in extractive sector production. After a confluence of severe dry weather and low commodity prices substantially dampened regional growth in 2016, we have already begun to see real GDP beginning to rebound.

 

All six major economies that have reported data indicate higher growth in the second quarter of the year than seen in Q117 or 2016 and we expect this trend will continue in the coming quarters. We forecast that the vast majority of the major SSA economies will record notably stronger growth in 2018 compared to the lows seen in 2016.

 

Increasing hydrocarbons production is poised to add considerable tailwinds to growth across a number of the region's large oil producers. Ghana will see double-digit growth in hydrocarbon production in 2017 and 2018 as output at the large TEN oilfield and Sankofa oil and natural gas field ramps up. Indeed, we forecast real GDP growth of 6.3% in 2017 and 6.1% in 2018, and believe the risks are skewed heavily to the upside after even stronger than anticipated economic expansion in H117 (see 'Rising Oil Output Will Spur Strong Growth', September 28).

 

Angola and Nigeria will, likewise, see an uptick in economic growth in 2018 as oil production recovers. In the former, we anticipate the 230,000b/d Kaombo field will come online in 2018, boosting production after Angola's challenging operational environment and the collapse in oil prices had weighed on crude output in previous years (see ' Crude Woes Continue ', July 24).

 

In Nigeria the resumption of amnesty payments to the biggest of the militant groups operating in the Niger Delta (Nigeria's major oil producing region) have supported production. Coupled with modestly higher Brent crude prices, this will ease pressure on liquidity in the country, bolstering business operations and investor sentiment (see 'Oil Recovery Will Unlock Modest Growth', July 21). This underpins our forecast that, after contracting in 2016, growth will return to positive territory in 2017, coming in at 1.5%, before heading higher to 2.4% in 2018.

 

In Zambia, Tanzania and Namibia, a combination of stronger mining sector activity and agricultural sector recovery will spur growth. In Zambia we forecast growth of 4.1% and 4.9% in 2017 and 2018, following 3.4% in 2016. The large Vendanta Resources' Konkola and First Quantum's Kanshasi copper mines will enter production in 2018 and we expect an ongoing gradual increase in global copper prices to 2021, all of which will boost output and support growth.

 

Adding to this will be the fading effects of drought, following severe dry weather in 2016. Aside from boosting growth in agricultural production the return to wetter weather has also reduced pressure on power generation, (which is primarily driven by hydropower), supporting greater output in mining(see ' Mining And Agriculture Will Lead Economic Rebound In 2017 ', September 5).

 

Growth in Namibia is likely to disappoint in 2017 – with weak H117 reinforcing our forecast for full-year growth of 0.2%. However, the country will post much stronger growth in 2018 on the back of surging uranium output and an expansion of its offshore diamond mining (see ' Growth Will recover In 2018 ', September 27). As in Zambia, we will also continue to see a strong recovery in Namibia's agricultural production after drought in 2016, having already seen a double digit increase in output in H117

 

Long-Term Growth Will Be Tempered

Though growth will increase in 2017 and 2018, over a multiyear timeframe, it will not match the levels seen during the commodity boom years. This is for a number of reasons:

 

Structurally Lower Commodity Prices: Although we expect commodity prices to recover from their 2014-2016 lows, we are expecting that a moderate slowing of Chinese growth and a drop in Chinese demand will reduce the number of construction projects, weighing on global demand for industrial metals. Similarly, although oil prices will climb, it will not match the pre- 2014 level, as oversupply in the global oil market will persist due to weaker global demand and an oversupply of the market.

 

As growth in most countries in the region stems from production of key commodities, the structurally lower prices will be reflected in SSA GDP, with regional average growth falling to 3.6% in 2017-2021 as opposed to 4.7% in the 2004-2014 pre-commodity bust period. This is illustrated in the above chart, showing that the majority of countries in SSA will grow by far less than they did before 2014.

 

Fiscal Consolidation: Another major factor in our lower growth forecasts will be more tempered government spending. Major SSA economies have posted sizeable fiscal deficits in recent years due to weaker fiscal revenues amongst the commodity produces and efforts to improve logistics in a number of major East and West African economies.

 

This has contributed to a sharp ramp up in debt, not only amongst commodity plays like Angola, but in regional favourites like Ghana and Kenya as well. While we do not see the debt as unsustainable in these countries, the speed at which the debt burdens have built up does indicate unsustainability, and we expect efforts to temper spending growth in a number of countries.

 

The need for a pullback in government spending will only be exacerbated as the US continues tightening in the coming quarters, which will slowly feed through to higher borrowing costs across SSA. We believe that governments are likely to substantially target recurrent spending for cuts, paring subsidies and wage growth. That said, as governments rationalise spending – attempting to balance fiscal prudence with the political realities of maintaining popular support – spending on secondary infrastructure projects may also be cut back.

 

Political Risk: Finally, persistent elevated political risk will also weigh on growth prospects. In recent quarters we have seen an increasing embrace of resource nationalism and rhetoric, most notably in South Africa, Tanzania and Namibia. With low commodity prices weighing on investment (and thus employment) while simultaneously limiting governments' ability to cater to their base through subsidies and transfers, many of the factors that have underpinned this surge in populist sentiment will likely persist.

 

In South Africa, attempts to re-introduce a much more stringent mining charter – having introduced and repealed it once already in 2017 – will continue to create political uncertainty into 2018. The likelihood of more populist economic policies in South Africa will remain as divisions within the ruling party will drive radical regulatory changes to satiate a growing radical wing of the party.

 

South Africa saw only muted growth in H117 at 1.1%, and we believe this will continue with growth below the regional average in the coming years, rising no higher than 2.2% in 2017 – 2021 as a consequence of political uncertainty.

 

Similarly in Namibia, proposed New Equitable Empowerment Framework (NEEEF) and land reforms could undermine property rights and result in greater intervention in business activity by the state. Uncertainty over these reforms has contributed to the recession in H117, and we expect that discussions will drag out into 2018 at which point a moderated version of the reforms will be implemented, which will end uncertainty but increase the cost of compliance.

 

In Tanzania, although we expect that the export ban on unprocessed metals will be lifted, there are a number of new regulations being introduced that would see mining companies have to renegotiate all contracts and possibly hand over a larger share of their profits to the government (see 'Expropriation Reinforces Investment Risks', September 27). This will weigh on both investment and output in both countries over the coming years.

 

Meanwhile countries like Nigeria and Ethiopia are vulnerable to elevated social unrest or violent attacks due to perceived socio-economic marginalisation. In Nigeria's case, despite the resumption of amnesty payments to the Niger Delta Avengers in late 2016, other rebel groups remain active and security in oil-producing regions with the capability to disrupt oil production.

 

Although we expect that growth will recover due to oil price recovery and some expansion in oil production capacity, this political risk will weigh on growth in the coming years. Similarly, in Ethiopia, we expect that unrest due to ethnic tensions driven by the government's marginalisation of the Oromo and Amhara peoples could dampen investor sentiment, weighing on growth over the coming years.

 
Proshare Nigeria Pvt. Ltd.

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