Advertisement

Falling commodity prices hurt Africa’s growth prospects

Thursday November 05 2015

A slowdown in the Chinese economy, the expected hike in the US interest rate and falling export commodity prices have changed sub-Saharan Africa’s economic fortunes, damaging some economies to a meltdown.

Last week, the International Monetary Fund revised the region’s growth forecast from 4.5 per cent to 3.75 per cent.

The IMF had already downgraded the 2015 growth forecast of South Africa, Zimbabwe, Angola, Malawi, South Sudan, Nigeria, Ghana, Burkina Faso and Uganda. These countries had the biggest downgrade margin, as they rely mostly on commodities for their export earnings.

Citibank Africa chief economist David Cowan said that the Chinese economic slowdown has exerted pressure on these economies resulting in a mismatch between inflows and outflows.

“Some of these economies didn’t expect the Chinese slowdown. It has send their fiscal deficits soaring as they seek to borrow to bridge the shortfall,” said Mr Cowan.
Zambia has been the hardest hit, with its main export earner, copper, now facing a bleak future because of a price slump. This has sent the kwanza tumbling 47.36 per cent against the dollar, with an 8 per cent drop in September alone.

In September, global mining giant Glencore, which Zambia relies on to produce a quarter of its copper output, announced that it will be shutting down two mines. Copper production accounts for more than two-thirds of Zambia’s export earnings.

Advertisement

The drop in prices is as a result of the Chinese economic slowdown, which sent its production to near six-year lows. Tax revenues from mining have now fallen from 16.8 per cent of total revenues in 2012 to 12.8 per cent.

Rating agency Moody’s said in September that Zambia’s heavy debt and public spending shortfalls are unlikely to reverse over the course of the 3-to-5-year rating horizon.

“Zambia’s growth, which averaged more than 7 per cent per year over the past decade, is now at risk of falling to the sub-Saharan Africa median,” Moody’s said.
Finance Minister Alexander Chikwanda in his October 2015 budget, reduced the country’s 2015 real GDP growth forecast by 2.2 per cent, from the 7.2 per cent growth expectation.

Kenya is also bearing the brunt of the slowdown. Last week, the World Bank said it had revised the country’s growth forecast for this year to 5.4 per cent, down from 6 per cent.

“Kenya’s economy is facing headwinds from currency volatility and tighter monetary policy. Our estimates have taken into account the recent data on exchange rate, inflation, fiscal consolidation and balance of payments pressures,” said the World Bank.

The Kenyan shilling has lost 14 per cent against the dollar this year and interest rates have climbed by 300 basis points.

Jeff Gable, Barclays head of Africa macroeconomic and strategy research said that China’s slump heightens global risk aversion and has knocked the price of many commodities lower still. 

“Looking beyond the next few quarters, the weaker China’s economic growth gets, the more likely it is that commodity prices will remain at these low levels for longer,” said Mr Gable.

Last year, most African economies also went to the international market, floating Eurobonds whose yields are now rising.

For example, yields on Zambia’s first Eurobond which was to mature in 2024 has risen by 2.94 per cent to 11.94 per cent. Another bond set to mature in 2027 has risen by 0.76 per cent.

The yields on Ghana’s $1 billion Eurobond due in August 2023, climbed 38 basis points to 10.6 per cent, while the rates on Nigeria’s $500 million debt due in July 2023 spiked 92.20 basis points to 8.83 per cent.

Rating agency Standard & Poor’s has given an investment grade on creditworthiness only to South Africa and Namibia. Other African economies like Ghana, Nigeria, Zambia and Kenya are six steps below investment grade. Nigeria and Kenya are rated at B+, while Zambia was last month downgraded from B2 to B1.

According to Angus Downie, Ecobank’s head of economic research, the expected rise in the interest rates in the US markets, coupled with falling commodity prices and low export revenues, have destabilised African economies, explaining the slowdown.

“What we are seeing is the burden of servicing the Eurobonds issued by sub-Saharan Africa economies. This has made it difficult for some of these countries to go back to the international markets because the costs are now high,” said Mr Downie.

Advertisement