FROM THE ECONOMIST INTELLIGENCE UNIT
Source : ViewsWire
Sub-Saharan Africa economy: Key issues in 2012
Sub-Saharan Africa (SSA) was the fastest-growing region in the world last year, and is expected to stay at the head of the pack in 2012. However, as Christine Lagarde, head of the IMF, warned in late December, many individual Sub-Saharan states are less prepared to deal with an economic shock now than was the case during the 2008 food and fuel crisis, and the global financial turbulence that followed. The impact of global economic trends on Sub-Saharan prospects is likely to dominate the regional headlines in 2012, underscoring questions about whether economic downturn might provoke a belated “African spring”.
* Market contagion. The ongoing debt crisis in Europe and the weakness in the US has significantly raised the risk of a global recession, to the extent that the Economist Intelligence Unit attaches a probability of more than 40% to a global slump in the next two years. This would dent Africa’s performance, hurting commodity prices and terms of trade (together the US and Europe account for around 50% of Africa’s exports). Specific risk factors include a drying-up of trade credit, declining commodity prices and contracting demand for the region’s exports—as well as falling remittances, aid, foreign direct investment (FDI) and tourist receipts.
That said, a major shift in SSA’s trade links promises to provide at least some partial insulation against falling demand in developed-country markets. Around two-thirds of the region’s export growth in 2005-10 is explained by an expansion in exports to emerging markets. Consequently, around half of Sub-Saharan Africa’s trade is now conducted with emerging economies, compared with negligible amounts in the 1990s. China, India and Brazil, which together account for more than one-quarter of the region’s trade flows, are of particular importance. By the same token, this means that any significant slowdown in the pace of expansion in those three—and China in particular—would be of great concern.
* A crucial poll in South Africa. In December the African National Congress (ANC) will choose its candidate for the next presidential poll—and given the ANC’s electoral dominance, that candidate is highly likely to become president of the region’s dominant economy. The position of the incumbent, Jacob Zuma, is not entirely secure: he could fall victim to factional battles and become a one-term rather than a two-term ruler. Mr Zuma’s direct involvement in policymaking is minimal (for better or worse); his main strength is that of being a unifier and a facilitator. However, he has broadly backed economic policy continuity and centrists such as the minister of finance, Pravin Gordhan (while also offering some concessions to the left). Any serious challenger to the president would in all likelihood seek to capitalise on discontent with the country’s moderate economic policies—a stance that gained Julius Malema considerable public popularity, before he was suspended from the party for misconduct. Pressure on the government to adopt more populist policies is therefore likely to intensify over the next 12 months.
* Currency concerns. African currencies are likely to come under increasing pressure: many of them are now overvalued because of the commodities boom and above-average inflows of both FDI and workers’ remittances. The economic downturn in developed countries—particularly the US and EU states, where most of the Sub-Saharan diaspora live—is also likely to have a negative impact on remittances. Meanwhile the European debt crisis has created uncertainty over the future of the CFA franc, which is pegged to the euro at a rate of CFAfr655.96:€1 and used by 14 countries in west and central Africa. Pressures are set to intensify in 2012, particularly if Greece should default on its sovereign debt. Even if this does not lead to Greece’s exit from EMU—which is itself not guaranteed—such a default is likely to lead to significant short-term volatility in the value of the euro and, therefore, the CFA franc. Greece’s departure from EMU could turn market sentiment towards other heavily indebted euro-zone members fatally negative, prompting their subsequent exit. In this scenario, a currency union of the remaining stronger euro-zone economies could lead to significant appreciation of the euro—and, by extension, the CFA franc. This would be bad news for Franc Zone exporters, which are already globally uncompetitive on price, meaning that pressure would build for a one-off devaluation of the CFA franc’s peg to the euro.
Alternatively, an EMU break-up could prompt one or more Franc Zone economies to withdraw unilaterally from the monetary union. The oil exporters of Central Africa, especially Equatorial Guinea, might have the most incentive to go it alone, perhaps pegging their new currencies to the US dollar, in which most oil and gas contracts are priced.
* An emerging gas giant? In late 2011 it was announced that Italy’s ENI had discovered estimated gas reserves of 22trn cu ft in Mozambique’s offshore Rovuma basin in Cabo Delgado province, while Anadarko has discovered 10trn cu ft of gas nearby. To put these finds in context, Africa as a whole—excluding the leading continental producers of Nigeria, Algeria, Egypt and Libya—had proven reserves of 41.4trn cu ft at end-2010, according to a statistical review published by UK-based BP. This suggests that Mozambique has the potential to join the top flight of African producers.
* A belated African spring? One of the defining characteristics of 2011 was the fall of regimes in the Middle East and North Africa that had previously been considered very well-entrenched. States south of the Sahara have not been affected, despite the existence of numerous geriatric presidents, highly repressive states, and populations facing high unemployment and with long-standing (but bottled-up) resentment. However, the risk of popular social unrest, fuelled by mounting frustration with widening income inequalities, rising food prices, high unemployment and poor social conditions, represents a threat to governability in a number of African countries. For instance, there is a chance of instability in Senegal, because of Abdoulaye Wade’s apparent determination to run for a third presidential term in February polls. A two-term limit on the presidency was passed one year into his now 11‑year tenure, and Mr Wade’s assertion that this does not apply retroactively to his first term is rejected by much of Senegal’s civil society and some constitutional scholars. A victory for Mr Wade in the face of urban resentment and the questionable legality of a third term could well jeopardise Senegal’s stability. Other potential flashpoints include Madagascar, where presidential polls may finally be held, some three years after the overthrow of the constitutionally elected president, Marc Ravalomanana, and Kenya, whose last polls, in 2007, were followed by large-scale civil unrest and violence. The formation of a grand coalition government quelled that crisis, but settlement of long-term grievances over land and other rights is a prerequisite of future stability. However, a North African-style domino effect, with the ousting of one regime leading to waves of unrest, and subsequent governmental overthrows, in neighbouring states, still seems unlikely.
13113
