Commodities on a slippery slope

As leaders of some African countries brace themselves for a rocky financial year, they might reflect ruefully on the words of Polish author Ryszard Kapuscinski: “Oil is a resource that anaesthetises thought, blurs vision, corrupts.”

As the wheels come off a decade-long commodities supercycle, Africa’s oil-producing and metal-rich giants face a dangerous mix of lower export revenues, depreciating currencies, declining financial flows from China, falling domestic demand and higher debt costs following last month’s United States interest rate rise.

For the continent’s oil importers, the story differs: lower prices mean more money for governments and possibly cheaper goods.

For those on both sides of the oil coin, the first year of the new global development agenda – introduced with much fanfare in September – is a challenging start to a 15-year project to enshrine sustainable development in national policies across the globe.

The question is: Have some African countries squandered their chance to invest in the building blocks of sustainable development, and is it now too late?

Since September 2014, the price of Brent Crude oil, the global benchmark, plummeted from about $100 a barrel to below $30 this week. Prices for other commodities, such as copper and zinc, have also fallen, mainly because of slowing demand in China, once hailed as the no-strings economic saviour for African countries tired of dealing with former colonial powers.

More than 80% of African exports are still linked to commodities, and particularly extractive industries.

Aly-Khan Satchu, an independent trader from Nairobi, said: “The commodities supercycle is dead in the water … It’s already sent some big African sub-Saharan economies into a tailspin. In Zambia, the currency has pretty much collapsed. If you put $100 in the Zambian market at the beginning of last year, at the end of the year, you would be taking out 14.”

But he remained bullish on East Africa, saying: “The sharply reduced oil prices have really improved the dynamics of the East African economies because we are still net oil importers … you are already seeing it improve the current account deficit in Tanzania and Kenya, and I think it’s going to provide some momentum to our economies.”

In early January, the World Bank warned a synchronised slowdown in the biggest emerging markets, the so-called Brics (Brazil, Russia, India, China and South Africa group), could be intensified by a fresh bout of economic turmoil.

In its annual global economic prospects, the bank said growth in developing countries reached a post-crisis low of 4.2% in 2015, down from 4.9% in 2014, and warned that 2016 could be another difficult year.

In sub-Saharan Africa, growth slowed to 3.4% last year, and was expected to rise to 4.2% this year. According to the International Monetary Fund, Africa’s real gross domestic product fell from 5% in 2014 to 3.7% in 2015 and is expected to climb to 4.3% this year.

Debt will be a problem. Some oil-producing African countries have accepted loans from China; some of these are collateralised by oil priced at a level that is now a fond memory. To add to their woes, the cost of their dollar-denominated debt is rising; the US Federal Reserve said December’s rate hike is just the start of a “gradual” tightening cycle.

Ibrahim Mayaki, the head of the New Partnership for Africa’s Development, said the sustainability of African debt is in question as repayment services – already a major portion of state budgets – look set to increase significantly.

“This will lead states to make tough choices, from the amputation of certain infrastructure investments to the postponement of social services,” Mayaki added. He hoped these cuts wouldn’t affect investments vital for development, such as infrastructure and education.

“African governments will therefore have to steel themselves to diversify their financial resources and to reclaim industrial development policies,” Mayaki said.

This gloomy economic outlook will weigh on efforts to implement the sustainable development goals. At a financing meeting in Ethiopia last year, there was consensus that domestic resource mobilisation, as well as traditional aid and private finance, would be needed to turn the paper goals into real policies – at a cost of “trillions not billions”.

But as growth slows, tax revenues are likely to fall, particularly in oil-producing countries. For some governments, the problems have already started.

Satchu said: “Those countries that were just making it now have tipped over the edge because they are going to find it very expensive to borrow international money. They are being squeezed, they don’t have enough of a productive economy and also taxes will slow down very, very dramatically.”

Africa’s top oil producer, Nigeria, has come under pressure to devalue the naira, despite unorthodox monetary policies aimed at restricting the supply of dollars. Satchu says a devaluation is inevitable, and the tough market conditions may force necessary policy changes.

“It’s an irony that Nigeria is sending any of its oil out to be refined only to import it back,” he said. “It’s definitely been a wake-up call. You find policymakers tend to make changes when their feet are held to the fire; this is the equivalent of having their feet held to the fire.”

Amadou Sy, director and senior fellow at the Brookings Institution’s Africa Growth Initiative, said African countries needed a two-pronged approach to accelerate growth: they need to implement macroeconomic policies to cope with external shocks, and to stay the course in bringing in medium- to long-term structural policies.

“As the continent takes its first steps in meeting the sustainable development goals, it is crucial that it achieves faster and better quality economic growth … and relies on more engines of growth, such as agriculture and manufacturing, than exports of oil and other commodities,” he wrote recently.

For Satchu, the hardest-hit African countries will be forced to call on the International Monetary Fund for help in raising money on international markets, as oil-producer Ghana has already been forced to do.

“It’s really unprecedented the kind of pressure that policymakers are under and quite a lot of these guys are making a lot of idiotic and schoolboy errors,” he said, citing as an example the Zambian president’s call for prayer rallies for the country’s embattled currency.

“The room for error is no longer there, and mistakes will be badly punished.” – © Guardian News & Media 2016

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