Sub-Saharan Africa 2013 Outlook

Sub-Saharan Africa is expected to be the world's second fastest growing region after developing Asia in 2013, and a bright spot in an otherwise gloomy global economic environment.

23 December 2012
Sub-Saharan Africa is expected to be the world's second fastest growing region after developing Asia in 2013, and a bright spot in an otherwise gloomy global economic environment.

The region is set to collectively post growth of 5.2% in 2013 and an even better 5.3% a year later, according to Fitch Ratings.

The ratings agency's growth forecast for the region is lower than the International Monetary Fund's more robust 5.7% growth for the region in 2013.

The GDP growth is in contrast to global growth of a mere 3.6% forecast for next year, and slightly higher than the 5.6% expected collectively in emerging markets.

"Infrastructure spending, the development of mineral resources, and growing consumer demand will remain the engines of growth across the region, while financial deepening will support the development of the private sector," says Richard Fox, analyst at Fitch Ratings, in a note published December 18.

Primary engines of growth star Angola, which is expected to post an 8.2% growth in 2012 and 8% in the New Year - the best performance in the region.

Other SSA economies are also participating in this all-round expansion, with the notable exception of South Africa, which has been hampered by its strong linkages with Europe, as well as some countries in western Africa affected by drought and civil conflict.

Indeed, the region's largest economy is going to weigh down the rest of the region. Standard Bank, the country's largest financial institution, said South Africa's third quarter GDP grew 1.2% quarter-on-quarter, below consensus estimates.

"The lower-than-expected GDP number in Q3:12 has put our 2.5% GDP growth expectation for 2012 at risk," said Thabi Leoka, the bank's analyst. "We believe that the impact of the mining strikes will continue to be a drag on GDP growth in Q4:12. Also, weak global growth and domestic labour tensions remain an obstacle to growth. We have therefore revised down our GDP growth forecast for 2012 to 2.3% from 2.5%."


In contrast, Ghana will be another key growth driver in the region, its economy rising 7.7% next year, as democracy takes firmer root in the country, despite flawed elections in December.

Meanwhile, elections and reforms in other SSA countries could unlock more growth.

"Kenya and Nigeria have upward rating potential if current positive trends continue. Kenya's upcoming elections are a potentially important inflection point. Smooth elections that brought continued stability and a favourable impact on the investment climate would bolster creditworthiness," says Carmen Altenkirch, analyst at Fitch Ratings.

"In Nigeria, positive rating action will depend on further progress on key reforms, particularly in the electricity and hydrocarbons sector, and signs that the reinvigoration of structural reforms is boosting growth above its current 6%-7%."

The region will also continue to benefit from direct foreign investment while budding domestic capital markets will provide 'selective opportunities for international investors', says Fitch. Low global yields and growing appetite for African exposure may prompt more countries to issue USD750-million Eurobonds following Zambia's success - the latest in a string of debut African issuers.

Angola and Kenya also tapped international bond markets in private placements, perhaps as a precursor to issuance on the Eurobond market.

Indications are that Rwanda will look to tap the Eurobond market by the end of 2012, although this may prove too ambitious, while Fitch expects Kenya to issue a bond early in 2013. Ghana and Nigeria could look to issue second bonds, while other possible candidates include Angola and Tanzania, says Fitch.

By the end of October, African issuers excluding South Africa had raised USD5.5-billion from 18 deals this year, compared to USD5.4-billion in 19 deals during the same period last year.

"Export diversification has reduced exposure to weak demand from advanced economies, and high commodity prices have supported the region's commodity exporters and boosted investment in resource extraction," says the IMF.

The loose monetary policies of the U.S. Federal Reserve, the Eurozone and the Bank of Japan will ripple through the African economies as well.

In Africa, the flow of 'hot money' from the developed world is mainly reflected in volatility of and appreciation of local currencies rather than currency wars, says Mthuli Ncube, chief economist at the African Development Bank.

"African economies heavily dependent on commodity export revenues could substantially suffer from the volatility or the appreciation of local currencies as a result of volatility or depreciation in the US dollar triggered by QE actions.

Although the immediate impact of QE on African economies can be relatively low due to weak integration with the global financial system, more integrated countries such as South Africa, Nigeria, Egypt, and Kenya, may be adversely hit by volatility of exchange rates as evidenced during the 2008 financial crisis."

Exchange rate volatility could have disruptive effects on industry, trade and long-term investment flows in a region that desperately needs it.

It could also lead to inflationary pressures, in a region which has an average inflation rate of around 8% over the past three years.

Although inflation is expected to collectively ease in the SSA to 7.5% and below over the next two years, volatility in soft commodities and hydrocarbons could change that figure.

"Although inflation has dipped so far in 2012, it remains a significant threat to emerging and developing countries. This is particularly true in Africa for food items which represent a significant share of consumption basket," says Mr. Ncube.

For now, the flow of funds from other nations to SSA Africa is a positive for the region.

Foreign direct investment in the region rose 25% this year to date to around USD37-billion, compared to USD29.5-billion last year.

"Commodity-rich and middle-income countries continue to attract most FDI, but investors are increasingly looking to take advantage of new discoveries of oil and gas in east Africa," says Fox's Fitch. "For example, Mozambique's FDI increased from USD500 million in 2008 to just over USD2 billion in 2011, as investors seek to take advantage of large coal and gas reserves."

The region could use this momentum to generate even greater growth and attract foreign direct investment. But the challenges for the region remain huge: poverty, lack of infrastructure, and social and economic inequality plagues the continent, as does healthcare issues that does not allow many to participate in the region's growth.

© 2012


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