Africa’s economic prospects in 2016: Looking for silver linings
2015 was a tough year for African economies.
But many of the problems of 2015 could get worse this year, from lack of demand for the continent’s commodities, to lack of rain, from falling currencies to political instability.
The editor of BBC Africa’s Business Report, Matthew Davies, takes a look at the prospects for African economies in 2016:
Prices for Africa’s commodities fell sharply in 2015 and are not expected to see much of a recovery this year. This has had widespread economic effects across the continent.
In Zambia, the country’s main export, copper, now sells for less than half than it did just three years ago.
Some mining companies have even halted production and laid off workers. It’s led to a plunge in the currency, the kwacha, and a rise in inflation which is expected to continue.
And several African countries, including the big oil producers like Nigeria and Angola, are in the same boat. Expect a few countries to call on the International Monetary Fund (IMF) for help this year.
Much of the fall in the prices of commodities is down to China. As its economy has slowed, demand for the metals and minerals in African soils has reduced dramatically.
The knock-on effect of this has translated not just into commodity price falls, but also to job losses and a fall in tax revenues gathered by some African governments.
If, as one would expect, things continue on this path, we can expect African governments to either cut public spending or increase taxes, or both.
The turmoil in Chinese markets since the beginning of the year is also a cause for concern. The more the giant Chinese economy stumbles around in search of a good footing and clear direction, the more African governments need to take measures to make sure that China’s economic problems don’t become their own.
China’s economic situation and the resultant fall in commodity prices has also led to a collapse of the values in many African currencies.
From Cape Town to Cairo, Dakar to Mombasa, many currencies have seen significant falls in value.
In Zambia, a national day of prayer was even devoted to the struggling kwacha.
The build-up and eventual decision of the US Federal Reserve to raise interest rates hit emerging market currencies as well.
That was of particular significance for the South African rand, which wasn’t helped by the debacle of switching finance ministers not once, but twice in December.
In Nigeria last year, the central bank introduced foreign exchange controls to try and support the naira, creating a de facto peg for the naira against the US dollar.
The risk is that analysts believe the level of that peg is too high, which could mean another devaluation of the naira if low oil prices persist throughout 2016.
Africa’s other big oil exporter, Angola, also has similar issues with its currency.
In 2016, central banks throughout Africa will need to finely balance the need to increase interest rates with the need to support economic growth however they can.
This could be the sleeping lion. And if it’s rudely awakened, Africa could get a serious fright.
A few years ago, many African governments started issuing Eurobonds (bonds issued in a foreign currency) as a way to raise money.
Nigeria, Zambia and Kenya are just a few to have tested their money-raising luck on global markets.
Interest payments on some of these Eurobonds are due this year – and those payments have to be paid in US dollars.
That’s not great if your local currency has lost up to half of its value against the dollar.
As investors have become increasingly worried about the ability of some African governments to repay their Eurobonds, the credit ratings of many countries have been sliding to near-junk and junk status.
That in itself pushes up borrowing costs to levels that governments hadn’t predicted when they all merrily jumped on the Eurobond wagon just a few years ago.
For example, Zambia issued its first Eurobond in 2012 at 5.4%. Falling copper prices, a power crisis and a credit rating downgrade meant that investors felt lending money to Zambia in 2015 was more risky than it was in 2012.
Hence, when the country issued its third Eurobond last year, the rate was 8.5%. Zambia now has to make those dramatically increased interest payments from declining tax revenues.
Drought and Food Security
This could be the biggest crisis to hit African economies for some time, especially in eastern and southern Africa.
Just looking at the numbers should set alarm bells ringing: Almost two-thirds of the world’s arable land is in Africa.
A similar proportion of the African labour force is involved in agriculture and, according to the World Bank, at least 32% of Africa’s GDP is based on farming in one way or another.
The El Nino weather phenomenon is causing widespread high temperatures and low rainfall.
The United Nations says 29 million people in southern Africa do not have a reliable food supply and 10 million in east Africa will need food aid this year.
In South Africa, for example, the outlook is bleak.
The window for planting is rapidly closing and precious little rain has fallen on soil baked by soaring temperatures.
The 2016 harvest in many southern African countries could be a fraction of what it was just a few years ago and spending to import grain will have to be on several government budgets.
Maize prices are already approaching record levels, with much food price inflation set to follow.
Generally, 2016 seems set to be the toughest year for African economies for some time. And that’s not as if 2015 wasn’t hard enough for many.
But there are always some winners amongst the losers; some silver linings to the darkest of clouds.
Anyone exporting manufactured good from Africa should benefit from the stronger US dollar, as long as most of their inputs are locally sourced.
In politics, many see a few of the leaders that have emerged in the past year as a reason to be hopeful for certain economies
People are taking notice of the efforts being made by Presidents Muhammadu Buhari of Nigeria, John Magufuli in Tanzania and Macky Sall in Senegal.
Their crackdowns on government excess and waste have provided some analysts with the hope that those economies, particularly Africa’s largest Nigeria, can find a more solid footing in what’s going to be a very uncertain 2016.
Also, the fact that Christine Lagarde, the head of the International Monetary Fund (IMF), kicked off her New Year with a visit to Africa could be seen as a positive sign that the large international financial organisations are at least aware of the challenges being faced by Africa and are ready to provide assistance quickly.
There’ll be no shortage of hope this year for African economies: Hope that China recovers somewhat; hope that commodity demand and prices pick up; hope that currencies stabilise; and hope that rain will fall.
What’s required of the continent’s governments are strategies that prepare for the worst.
If that means further radical economic reforms or funds from the likes of the IMF, then so be it.
The first duty of any government is the welfare of its citizens, all of it citizens. Making the right decisions to ensure the economic well-being of those citizens should be priority number one for 2016.