Sub-Saharan Africa: building back in 2021

Sub-Saharan Africa (SSA) is likely to see a technical recovery in 2021, with year-on-year growth rebounding from a weak base.

In 2021, sub-Saharan Africa (SSA) is likely to see a technical recovery, with year-on-year growth rebounding from a weak base. While the public health impact of the pandemic was not as severe as initially feared, the economic ramifications will be long-lasting. Per capita incomes, for instance, have fallen and the development gains of at least a decade have been reversed in some economies.

For Africa, the promise of vaccines is diluted due to the funding and logistical issues around the rollout, suggesting that it will not make an immediate difference to the region’s domestic recovery prospects.

On a positive note, the boost provided by the vaccine to global risk sentiment and commodity prices will be good for SSA. Oil producers such as Nigeria and Angola should benefit from higher oil prices in 2021. However, their output levels will be constrained by OPEC+ quotas. For more nascent hydrocarbon producers, the investment environment continues to be uncertain.

Other growth-positive developments are underway but will likely take longer to manifest. Africa’s Continental Free Trade Agreement, aimed at promoting intraregional trade via the dismantling of 90% of internal tariff barriers, took effect on 1 January 2021. Given that member countries have five years to achieve tariff reduction targets, immediate growth gains are unlikely. There are currently few trade complementarities between regional economies and infrastructure is an additional hurdle. Overall, progress in boosting intraregional trade is likely to be gradual, with eventual gains in the medium term.

Higher public debt is the main post-COVID concern

COVID-19 resulted in a weakening of revenue in SSA, leading to wider fiscal deficits and higher public debt ratios. If a weaker growth trend continues, economies in the region run the risk of much lower debt-carrying capacity as they emerge from the pandemic. The G20’s Debt Service Suspension Initiative (DSSI) will bring much needed near-term relief for beneficiary countries. However, middle-income economies are excluded, and not all eligible economies have sought a suspension of payments.  Additionally, private sector participation in the debt service suspension initiative remains unresolved.

The G20 DSSI scheme is essentially a deferral of the debt payments that fall due from adoption until June 2021. It is not a debt cancellation. With many SSA economies facing a concentration of external debt payments between 2022-24, largely reflecting maturing Eurobonds, a difficult external amortisation period still lies ahead. Maintaining market confidence for the comfortable refinancing of obligations will be crucial.

USD weakness in 2021 is likely to drive new yield-seeking inflows to SSA. Economies such as Ghana and South Africa, that avoided significant bottlenecks to the functioning of FX markets, are most likely to benefit from a weaker USD. We expect that economies that are struggling with FX market reforms, including Nigeria, will be slower to benefit from renewed portfolio investor interest.

Policy implications

Given their predicament, SSA countries are likely to seek more multilateral support, which comes with policy implications. Where International Financial Institutions deem debt to be unsustainable, they are likely to advise upfront restructuring of debt obligations in order to free up more resources for the economic recovery. Economies seeking IMF support may be actively encouraged to participate in the G20 DSSI. Second, increased multilateral borrowing will also have implications for other areas of policy. Where crisis-specific monetary and fiscal policy support was put in place, the IMF has encouraged a gradual unwinding of crisis measures in a way that still supports demand. Permanent measures are discouraged.

Policy implications are already visible in Kenya: it is currently negotiating a new funded programme with the IMF; effective 1 January 2021, Kenya reversed tax cuts that had been implemented just prior to the COVID crisis.

On the monetary policy front, SSA central banks are near the end of the easing cycle. While a number of SSA central banks have bought government bonds or played an active role in the financing of fiscal deficits amid the COVID crisis in 2020, we expect such activity to be phased out in 2021. Across the region, we expect monetary policy to remain accommodative, with policy rates mostly remaining at or near crisis lows in 2021. A normalisation of activity in 2021 should help to bring down temporarily elevated inflation. However, the re-emergence of FX pressures may make some SSA central banks wary of easing further.

Looking ahead

A number of elections and political risk events in the region could have a significant impact on economic prospects. Ethiopia had seemed a likely destination for increased FDI given its economic liberalisation plans, but the conflict in its Tigray region and elections in 2021 create uncertainty for near-term investment prospects.

In Uganda, the holding of peaceful elections in January is seen as a potentially important influence on the Final Investment Decision (FID) on oil, due later in 2021. A positive FID would see Uganda emerge as an oil producer in the medium term.

General elections in Zambia and a potential constitutional referendum in Kenya will take place alongside IMF programme negotiations, adding to the uncertainty in these markets.

Outlook 2021 – The road to redemption

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