Financial volatility and falling commodity prices distress sub-Saharan Africa’s growth

Financial volatility and falling commodity prices distress sub-Saharan Africa’s growth

Following the massive slow down from the high growth expectation of 7%, Sub-Saharan

Africa region is expected to remain  weak throughout this year. Falling commodity prices, rising fiscal constraints and turbulence in the financial and foreign-exchange markets are likely to negatively impact the region’s economic performance.

Commodity-export-driven nations will feel the brunt of the pain as low prices for raw materials are exacerbating pressures on their budgets and current accounts. Moreover, increasing the scarcity of hard currency in the region is also another factor that is contributing to the instability in the financial markets and adds further pressure on many currencies.

With an already challenging outlook for this year, the devaluation of the Chinese yuan observed in mid-August has the potential to represent yet another blow to Sub-Saharan Africa’s economy. The devaluation, coupled with a slowing Chinese economy, is likely to further reduce exports—particularly of commodities—to the world’s second-largest economy.

In addition, this situation could increase volatility in the financial markets, sending regional currencies lower and threaten local manufacturers. On the upside, most diversified economies such as Ethiopia and Kenya could benefit from a weaker yuan, as it will make Chinese goods cheaper.

Angola and Nigeria experience stable growth

After the cut to the forecast tallied in the previous period, the outlook for Sub-Saharan Africa is currently stable. Analysts still maintain their growth projections for the region to be at about 4.2%.

If this is established until the close of the year, this will represent Sub-Saharan Africa’s weakest economic performance since the height of the global financial crisis in 2009. The deceleration expected for 2015 in the Sub-Saharan Africa region mostly reflects poorer economic dynamics in commodity-reliant nations.

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Economic Analysts suggest that there shall be stable economic growth in five countries including Angola and Nigeria but cut growth expectations for Cote d’Ivoire, Ghana, Kenya, Mozambique, South Africa, Uganda, and Zambia. Tanzania was the sole country for which analysts upgraded their view of the economy. The region is expected to recover gradually in 2016, with a projected GDP growth rate of 4.9%, which is down 0.1 percentage points from the previous estimate.

Cote d’Ivoire, the Democratic Republic of the Congo (DRC) and Ethiopia and are anticipated to be the best performers in 2015, with growth rates above 7.5%. Among the major economies, Kenya and Nigeria will grow the fastest, with a projected expansion of 6.0% and 4.3%, respectively. At the other end of the spectrum, South Africa is likely to be the worst performer, followed by Angola and Ghana.

Scarcity of U.S. dollar threatens Nigeria’s growth

Although the economy has been severely hit by low oil prices and the violence of Boko Haram in the northeast of the country, recent indicators suggest that overall business confidence remains robust. The Standard Chartered MNI Business Sentiment Indicator climbed to a seven-month high in July. With that said, tight FX regulation introduced by the Central Bank in order to shore up the naira and halt currency speculation has caused a scarcity of U.S. dollars.

This shortage is hurting economic activity, as Nigeria imports most of the goods that it utilizes. In the political arena, President Muhammadu reaffirmed his intention to finally appoint cabinet members in September, including the all-important finance minister, although uncertainty about the progress of much-needed economic reforms remains.

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Low oil prices and security threats continue to dampen the country’s economic outlook. However, healthy dynamics in the non-oil sector should sustain growth going forward. Analysts expect the country to grow 4.3% to the end of this year, which is unchanged from the previous forecast. For 2016, analysts suggest the behemoth economy shall accelerate and expand to 5.2%.

Power issues continue to impact manufacturing production in SOUTH AFRICA

South Africa’s energy crisis is weighing heavily on economic activity. Recent data shows that the economy is struggling to rebound considering the contraction of the manufacturing production sector. Also, the rand depreciating trend, which has been in place for over three years, continues to stunt its growth. Falling commodity prices coupled with a slowdown in China and concerns about an upcoming interest rate hike by the Fed are putting pressure on the currency.

Meanwhile, cash-strapped utility company Eskom has asked the country’s energy regulator to raise electricity tariffs. Eskom, which has already increased tariffs once this year, is struggling to meet demand due to delays in building new power stations as existing plants suffer breakdowns. While a gradual increase in external demand will support the economy, the electricity supply constraint will hamper growth both by interrupting production and by discouraging investment.

Adding to that, the risk of a strike in mining companies remains high due to unsettled wage negotiations. Analysts foresee the economy growing 1.9% this year, which is down 0.1 percentage points from the previous estimate. Panelists expect economic growth to pick up speed to a 2.3% expansion in 2016.

Falling oil prices threaten ANGOLA’s economic performance

Angola is struggling to prop up its economy as the drop in oil prices that began last year is sapping U.S dollar inflows, pressuring the local currency and weakening government revenues.

Currently, the government has passed new legislation that requires foreign companies investing in strategic non-oil sectors of the economy such as electricity, construction, and technology to give a local partner at least 35% share in the business.

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The legislation is introduced in an effort to limit foreign currency outflows. The currency has depreciated further, after a 7.0% devaluation of the kwanza in June, following the devaluation of the Chinese yuan. China’s demand for Angolan oil fueled a steep increase in the country’s trade in recent years, helping Angola boost its economy but also leaving the country considerably vulnerable to policy shifts in Beijing.

Looking forward, the slump in oil prices represents a challenge for Angola as oil accounts for half of the country’s GDP. Analysts expect GDP to increase by 3.2% in 2015, which is unchanged from the previous forecast. For 2016, the panel projects that GDP will grow 4.5%.

KENYA’s Business conditions remain strong at the outset of Q3

A slowdown in Kenya’s large agricultural sector, which was caused by dry weather conditions as well as a decline in tourism due to security concerns, led to slower economic growth last year. At the beginning of the year, the Kenyan economy continued to moderate, dragged down by another contraction in tourism, which more than offset a recovery in agricultural output.

Nevertheless, growth was fairly robust in the first quarter at a 4.9% annual expansion, and recent data from the Statistical Institute suggest a slight pickup in tea exports and tourism in June, while the composite PMI continued to point to expansionary conditions in July.

Expansionary fiscal policy, strong public infrastructure investment, particularly in the standard gauge railway project, and robust private consumption are expected to boost the economy this year and next. Nevertheless, persistently-weak institutions, large fiscal and current account deficits, and security risks remain challenges to be addressed.

Analysts see GDP expanding 6.0% this year, which is down 0.1 percentage points from the previous forecast. In 2016, the panel sees the economy growing by 6.4%.

The upward trend in inflation remains intact in July

According to preliminary data, inflation in Sub-Saharan Africa rose from June’s 7.5% to 7.7% in July—the highest reading in two years. A strong U.S. dollar against most of the currencies in the region and high food prices are pushing inflation upward.

With that said, weak global growth and low commodity prices are partially offsetting the rise in inflation. Analysts expect regional inflation to average 7.4% in 2015, which is down 0.1 percentage points from the previous estimate. In 2016, inflation is seen inching up to 7.7%.

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