/ 21 October 2011

Global slump may retard Africa’s growth

As the economic clouds darken over Europe and the United States, there are concerns a double-dip recession in the West could cast a shadow over Africa, especially if there is another collapse in commodity prices.

Economists have warned that despite the robust economic performance by many African countries in the past 18 months, the continent remains vulnerable to what is looking increasingly like a new global slowdown.

Shantayanan Devarajan, the World Bank’s chief economist for Africa, told the Mail & Guardian: “If there is a real crisis in Europe, if the banking and debt crisis translates into another major global recession, then that could have some profound implications for Africa.”

In 2008-2009 the crisis was initially confined to the banking and financial sector and Africa escaped relatively unscathed because of its minimal integration with global financial markets. But when the crisis turned into a real economic one and commodity prices starting falling, Africa was “very badly hit”.

The danger now is if the eurozone growth, currently at 1.7%, falls to 0.7%, Africa’s growth will likely drop by up to one percentage point.

African countries that rely heavily on southern Europe in terms of trade, such as Cape Verde, Guinea and Mauritania, are likely to feel the pinch first, said Devarajan.

“The other thing is if there is a crisis in both Europe and the US, then it’s very likely that commodity prices will crash and oil exporters like Angola will face problems, as they did last time, as will some of the other highly dependent mineral economies, like Botswana,” he said.

He also warned that African countries were not well placed to buffer a recession, having used up large tranches of their “fiscal space” during the previous crisis. Countries such as Kenya now have a debt-to-GDP ratio of about 50%, which is higher than it was three or four years ago. “That leaves less room to manoeuvre should there be another global crisis,” said Devarajan.

Yvonne Mhango, an economist at Renaissance Capital, shares these concerns about weakened reserves.

Renaissance Capital rates sub-Saharan Africa as one of the “strongest” regions globally at the moment. “But we can see that the buffers are weaker this time around in terms of fiscal balances, current account balances and forex positions,” said Mhango. “We can see that in countries like Nigeria and Angola, whose economies are oil-driven and who felt the impact of the commodity shock last time.”

Angola, for example, is highly vulnerable to oil price shocks because not only do 95% of its export earnings come from oil, but nearly 50% of its total GDP is generated by that sector.

So a fall in commodity prices, which will impact on resource-based economies, could spell a drop in food prices, which would in turn lower inflation.

“Another upside is that a lot of the growth is internally driven — and that’s why we see this region still as one of the strongest, despite this recession environment,” she said. However, it was still at risk from continued high food prices (if not lowered by falling commodity values) and climate change-related natural disasters.