Is Africa staring into the Abyss? And Will China save it?
With the world’s youngest population, huge commodity reserves, and the top five fastest growing economies globally in 2019, sub-Saharan Africa has attracted growing international interest, not least from China, over the past two decades. Alongside its wealth of opportunity, however, it is also a region that continues to experience major challenges. 640 million people live without electricity, commodity-dependent economies are vulnerable to price volatility, the effects of climate change are extreme, and more than 416 million people live in extreme poverty. In recent years, growth has been accompanied by larger public debt, and governments’ ability to raise further debt to shore up their economies and tackle the pandemic has been dramatically curtailed. As a result, the COVID-19 pandemic is likely to affect sub-Saharan Africa significantly, accelerating processes of change, and accentuating existing challenges, with significant implications for populations, governments and investors.
A ‘Double Whammy’ Crisis
COVID-19 could not have come at a worse time for many parts of sub-Saharan Africa, particularly oil-dependent countries such as Nigeria and Angola that were only recently starting to recover from the effects of the fall in oil prices since 2014, too late to rebuild economic buffers before the pandemic. COVID-19 has therefore brought the dual shock of the biggest ever collapse in global oil demand, and a public health emergency. According to the World Bank, oil exporting countries could see growth fall by 7 percent in 2020, and metal exporters 8 percent, and the first recession in many countries for 25 years.
This will make it more difficult to service already high public debt levels, as well as raise new financing, leading to calls for debt relief and restructuring, and emergency financing from International Financial Institutions.
Like the rest of the world, corporations in sub-Saharan Africa have also been seeking government support given the enormous fall in trade resulting from the pandemic. However, if governments cannot borrow, they cannot provide the support that their economies require. Local corporations are particularly dependent on government financing to weather the crisis, whereas multinational corporations often have access to bank and other forms of financing, and government packages in the country in which they are headquartered. Multinationals are also more likely to have business activities across the region, including countries that are not reliant on oil revenues and therefore are likely to be less heavily impacted by the crisis.
Many governments in sub-Saharan Africa were already finding it difficult to attract foreign investment, such as to fund critical power and transport infrastructure projects on which economic growth relies. Although investors will have built in a risk premium, risks have been exacerbated by the pandemic and the collapse in government revenue. The growing risk that governments and public sector entities cannot service existing debt also raises questions around projects that are operational but where the debt has not yet been repaid.
Multilateral agencies, such as the World Bank, have moved very quickly to help cushion the debt shock in in Africa, while some governments, such as South Africa, have also mobilised fast with economic stimulus packages. However, the success of these initiatives will largely depend on how long the pandemic persists.
China’s Commitment to Africa
China has been a major player in Africa over the past two decades. Africa is a major import and export partner,
and Chinese investment in Africa totaled almost $305.6 billion between 2005-2019 , including as part of its Belt and Road investment program. Consequently, Africa’s growth has depended to a considerable degree on China.The looming debt crisis and radically changed short- to medium-term economic prospects in many parts of the continent could affect the level of future Chinese investment. These questions relate not just to the level of investment, but also the nature of China’s relationship with African governments and businesses.
China has been a major player in Africa over the past two decades
Many G20 countries have been proactive in calling for debt relief in Africa to help cushion already vulnerable populations. As China is part of the G20, it is part of the multilateral response to supporting sub-Saharan Africa, but with many Chinese investors state-owned, which therefore invest taxpayer money, there is likely to be more appetite for the extension of debt maturities rather than immediate forgiveness. A ‘bellwether’ is likely to be in Zambia, which has significant debt repayments due shortly, including major infrastructure financing. While the Zambia is in bilateral discussions with China, public opinion appears divided at present about what could happen if the countries cannot agree on a strategy.
Africa’s crisis response
One of the challenges for governments in sub-Saharan Africa will be their response to the pandemic and economic crisis, and whether it will be a catalyst for structural and strategic change. As in other regions, African countries have taken different approaches to tackling the pandemic, in part reflecting political structures.
From a public health perspective, though many have fragile health systems, many countries have already gained experience in managing health crises, such as HIV/AIDS, malaria and Ebola, with high levels of community involvement. In contrast, managing the economic impact is largely outside governments’ control. Authoritarian governments can respond quickly, but could face social unrest and risks to fragile power structures. Legitimate governments may need to take a more consultative approach,but are more likely to have the support of their citizens.
Likewise, Africa is experiencing the same tensions between protectionists and integrationists as in many other parts of the world. Some believe that the overall continental economic strategy of reliance on the rest of the world has failed, creating some impetus behind endeavors to boost intra-regional activities. For example, the region already has three major trade blocs covering east, west and southern regions, and is home to the world’s largest free trade zone. One response could be to reduce reliance on trade from outside the continent to build more stable prosperity. However, for these initiatives to flourish, the commodities and products that one country in the bloc wants to sell are those that their neighboring country wants to buy. This is not necessarily the case, particularly given that many countries are commodity-dependent. There have been some successes such as in East Africa, with Kenya’s neighbours accounting for roughly half of its trade; however, intra-regional trade is likely to be only one component of a wider economic strategy.
For many countries in sub-Saharan Africa, currency depreciation and further pressure on currency reserves are inevitable, and oil producing countries are likely to see significant economic strain for as long as global demand persists at low levels. Support from multilateral agencies, as well as G20 creditors, will be essential to help cushion the short-term impact and enable governments to tackle the pandemic.
At the same time, the fundamentals that have underpinned growth in many sub-Saharan countries in recent years, including a young, increasingly urban population, and growing productivity, will remain once the crisis has passed. Some countries have delayed structural reforms, which are now becoming essential, and more stable, legitimate governments are likely to move quickly to reform, with those making it easier to do business likely to fare better.
Investors in Africa need to take a long-term view, and the crisis may test – or reinforce – China’s long-term commitment. Throughout Standard Chartered’s 125 year history on the continent, there have been waves of economic peaks and troughs, and the next 125 years will be no different. 2020 will, no doubt, be a challenging year, and the 46 countries that comprise sub-Saharan Africa will have different experiences and outcomes during and beyond the crisis. But Africa is not staring at the abyss. Rather, governments and businesses will need international support, co-operation and an ambitious reform agenda to weather the crisis and create sustainable growth and prosperity that accrues at individual, community and national le.