Africa's 3 largest economies at risk of GDP reversal


June 26 – July 03, 2012 / By DaMina Advisors

Africa’s surprise mid-year reversal with GDP growth set to slow as 3 largest economies undertake major domestic policy changes:-


1.    -EGYPT: Islamist President-elect Mursi’s push for Sharia will radically upturn local banking sector, spike deficits and curb tourism.

2.    -NIGERIA: Security policy change to see major military crackdown against Boko Haram, with violence imperiling northern economy.

3.    -SOUTH AFRICA: ANC party in major policy shift to re-nationalize key economic sectors, create new state-owned companies and impose confiscatory taxes on wealth.

With Europe fast descending into a recession catalyzed by a financial and currency crisis, dark economic clouds are also surprisingly gathering over Africa’s three largest economies - Egypt, Nigeria and South Africa. Each is independently on the verge of adopting drastic major domestic policy changes that will in the short-to-medium term curb GDP growth, scare away foreign investment and significantly decelerate the overall GDP growth of the rest of Sub-Saharan Africa due to the increased economic linkages between the countries of the region. These changes afoot in Egypt, Nigeria and South Africa may appear subtle and merely political, but each will have serious economic consequences.




With a total population of nearly 90million and a GDP of over $500bn (in purchasing parity terms), the country will on 1 July swear in Mohammad Mursi (a leading member of the Muslim Brotherhood), as its first freely democratically elected president in over five decades.


While most analysis on Mursi’s ascendancy have focused on his impact on Egypt’s foreign policy, particularly the security of Israel, a closer examination of the genesis of the Muslim Brotherhood reveals that their actual casus belli or raison d’etre is the reform of the Egyptian domestic socio-economic sphere based on Sharia principles, rather than dabbling in the nuances of foreign policy. With the Egyptian army’s intent on keeping its monopoly over defense and foreign policy issues, Mursi and the Islamist legislature (that will eventually govern with him), will have a wide berth to focus solely on revamping Egypt’s socio-economic laws to bring them in line with Islamic Sharia law. Mursi’s promise to appoint a Christian Copt and a woman vice president, will not by any means, sway him and his ‘Brothers’ from the singular historic task of re-orienting Egypt in an Islamist direction. While Kemal Ataturk in Turkey and Habib Bourguiba in Tunisia both took power to reverse the historic Islamization of their countries, Mursi is taking power to precisely do the opposite – re-Islamize Egypt!

Mursi will be under enormous historical pressure to fulfill the 1928 hopes of the founder of the Muslim Brotherhood, Hassan Al-Banna, to re-create Egypt into an Islamist compliant modern state. While Mursi may not push to directly impose Sharia law on Egypt, he and the Islamist legislature will nevertheless endeavor to bring all current Egyptian socio-economic laws into conformity with Sharia principles. The Islamization of Egypt will naturally scare most foreign investors, wealthy and liberal coastal Egyptians and keep European tourists away. Thus, Mursi’s reforms will in the medium term decelerate GDP growth and lead to a shortfall in government tax revenues. Egypt is forecasted by the IMF to grow at 1.5% in 2012 and 3.3% in 2013. Egypt is more likely to witness sub1% to negative growth in 2012 and a similar figure in 2013. Inflation is expected by the IMF to grow from 9.5% in 2012 to 12.1% in 2013, the actual number is likely to be larger as the withdrawal of foreign investments and forex receipt increases the price of imports and lead to shortages of essential commodities.

The two largest economic sectors which will very likely to be significantly affected negatively by Mursi’s rise, will be the banking and tourism sectors. Sharia law (Riba) forbids the continuation of the current interest-based banking sector in Egypt. Under Mursi, Egypt’s current banking laws will very likely be changed to forbid interest and the entire current Egyptian financial system may be upended. Egypt’s largest banks such as: National Bank of Egypt, Banque Misr, Banque du Caire, Commercial International Bank and Bank of Alexandria will all have to make radical changes to their operations or they will lose their licenses when Mursi and the legislature get around to revamping the country’s banking laws.

Arabian Gulf Islamic compliant banking houses are likely to be the biggest beneficiary of any major revamp of the Egyptian banking system along Sharia principles. The Egyptian treasury itself will come under assault. Interest-bearing Egyptian bonds and treasury bills will be phased out as new Islamic compliant sukuk bonds are issued. The law governing the central bank of Egypt will itself be revamped to bring the monetary policy process into compliance with Islamic law. In the process of making these changes, many of Egypt’s traditional banking families and finance houses will very likely, initially oppose Mursi and the legislature and use every bureaucratic stratagem to stall the changes. In the confusion, most international fixed income foreign investors in Egypt will flee the market, which will have the perverse effect of dramatically raising domestic interest rates and making capital scarce. Foreign currency and commodity trading and speculation by Egyptian banks and hedge funds, are also likely to be forbidden by any new Sharia-compliant banking reform laws, which forbid financial speculation.

Egypt’s critically important multibillion-dollar tourism sector, with its ancillary tentacles to hoteliers, restaurants, food processors and beverage manufacturers will also likely stagnate significantly under Mursi. Sharia law forbids casinos, gambling, alcohol consumption, dance halls, discos, excessive male-female mixing and many of the other amusements that have become standard with major tourist hotels. Tourism related businesses in hot spots such as Alexandra and Sharm El-Shaik are likely to suffer major losses of revenues as European tourists stay away. Empty hotels will increase youth unemployment, which is already pegged by some at 50%. Empty hotels and tourist chalets will also curb the real estate boom in the coastal areas of Egypt. Indeed, as Mursi and the Islamists commence the reformation of Egypt’s laws to make them Sharia-compliant, millions of other Egyptian’s who voted against Mursi may begin to move their financial and other liquid assets abroad – depriving the country’s banks of the much needed deposits to support credit to the private sector.

As the founder of the Muslim Brotherhood, Hassan al-Banna and other acolytes like Sayyid Qutb argued in numerous tracts and books that unless the moral and religious fabric of the Egyptian state was reformed and made Sharia-compliant, no other external reforms (especially on foreign policy), were possible. For Mursi and his newly empowered ‘brotherly’ Islamist colleagues, the arc of history has finally turned towards them and they will not spare the chance to see their youthful Islamist dreams come true.








Unlike Egypt, Nigeria is on the verge of making a major change in its internal security policy. President Goodluck Jonathan has finally agreed to robustly tackle the threat from Islamist terrorist group, Boko Haram. Over the past week, he dismissed his Christian national security advisor and laggard defense minister. Jonathan has picked a replacement for the national security post (a scion of the Sokoto Caliphate and an excellent former military intelligence officer who served under former head of state General Ibrahim Babangida), Col. (rtd) Dasuki.

In addition, Jonathan has gotten the American government to finally impose sanctions on the known leaders of Boko Haram. A move that has effectively internationalized the conflict, compelling the US to became engaged in the war against Boko Haram. Jonathan is yet however to name a substantive defense minister. Nigeria’s new defense team is likely to argue for and get permission from Jonathan to launch a more aggressive war against Boko Haram. The ensuing military actions will naturally provoke counter reactions.

With the shadowy group dispersed over a wide area of northern Nigeria, from the eastern borders with Chad to the central states of Kano and Kaduna, the military operations that will be launched against Boko Haram in coming weeks and months, will inevitably bring normal economic activities in those geographic zones to a standstill as new counter-terrorism tactics are used to ferret out the members of the group. Boko Haram is likely to meet the oncoming military assault with its own counter attacks, potentially targeting even more high profile structures in Abuja and elsewhere in the vast country causing significant economic damage.

The resulting large scale military operations against Boko Haram in northern Nigeria will imperil transportation links and commerce. The vast northern agricultural sector may witness serious economic losses as food crops pile up without trucks to carry it to markets in the south.

The IMF estimates 2012 Nigerian GDP growth to be 7.1% and 2013 growth to fall to 6.6%. Both are now likely to be lower than forecasted. Food inflation will rise as north-south transportation links are imperiled by any major military assault. IMF expectations of 2012 inflation at 11.2% and 2013 inflation at 9.7% are likely also too optimistic. While it is not clear whether or not the new military strategy against Boko Haram will succeed, the economic costs of a major military assault on several northern states and cities is incontrovertible. 




Like Egypt, and unlike Nigeria, South Africa is facing a major socio-economic and ideological crisis. 18 years after the end of Apartheid and the election of the black-led African National Congress (ANC) to power, the vast majority of black South Africans remain mired in poverty, joblessness and economic despair.

The 18 years of political freedom did not bring with it a broad-based socio-economic transformation of South Africa. Indeed, while the Black Economic Empowerment (BEE) scheme has made many well-connected black South Africans rich, the vast majority of South Africans may today live under socio-economic circumstances approximating those under Apartheid. With the ANC’s party’s December Mangaung conference expected to ratify a major shift in the socio-economic thinking of the party and re-affirm its support for President Jacob Zuma to lead the party into the 2015 polls, nonetheless, the shift that Mangaung is expected to ratify will have serious short, medium and long term effects on the economy of South Africa.

While earlier this year the government dismissed the possibility of nationalizing some of the country’s mines, with no money to purchase large stakes in the country’s mining sector, or create new well capitalized state owned mining firms, nationalization is likely to become the tool of choice for the Zuma administration in gaining a foothold in the sector. Other partially state owned entities such as Eskom, SA Telekom, Transnet, Denel and PetroSA are all likely to be re-nationalized and used as tools in the government’s fight to reduce unemployment. With outright privatization foreclosed, and a renewed BEE bid round opposed by many within the party, such as Deputy President Kaglema Motlanthe, for its corrupting effects on the membership of the party and the public treasury unable to sustain any major market priced purchases of shares in major companies or white owned lands, nationalization may be the only option left to the ANC.

Both President Zuma and his deputy, Motlanthe, have signaled in recent speeches that the government is on the precipice of adopting structurally significant new socio-economic policies to will seek to reverse the very low socio-economic status of especially Black South Africans and curb high unemployment. The new policy changes will scare foreign investors and reduce the already anemic FDI inflows. Wealthy South Africans will have to bear the initial cost of the socio-economic restructuring by paying higher taxes, surrendering their farms without adequate market competition and equity shares in companies that may be nationalized.

South Africa’s 2012 and 2013 IMF projected GDP growth rate of 2.7% and 3.4% and inflation rates for the same period, 5.7% and 5.3% are all unlikely to be met as investors pull back from South Africa and sit on the sidelines to await the government’s new socio-economic policies. Read Zuma’s speech here -
And Motlanthe’s here - 


For the rest of Sub-Saharan Africa, these events in Egypt, Nigeria and South Africa will be wholly negative as the structural linkages between the major African economies have become stronger, just as the historic linkages with the US and Europe and even (in recent months), those with China have grown weaker. As the figures in the table above indicate the correlation and covariances between GDP growth rates in the major African economies have become more positively related, while their linkages to the US and Europe in particular have turned negative.

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