2015 has been a
challenging year for much of Africa. Average growth of African economies
weakened slightly in 2015 to 3.6% (down from annual 5% enjoyed since 2000). Total
financial flows have decreased 12.8% to USD 188.8 billion (using UNCTAD rather
than IMF estimates for FDI). Africa´s tax-GDP ratio tumbled to 17.9%, down from
18.7% in 2014. China´s slowdown produced rough headwinds for Africa where the
gravity of growth is shifting from the resource rich West to the East. [Today, on 23rd May 2016, the
African Economic Outlook (AEO) 2016 will be launched in Lusaka, Zambia. I have
been asked to contribute, joint with Robert Kappel and Birte Pfeiffer. This
post is a copy of one of our contributions. Please follow the launch event and
access the study on www.africaneconomicoutlook.org from 9h CET.]
The slowing of output
growth in major emerging economies has been associated with lower commodity
prices. Next to supply factors, the marked decline in investment and
(rebalanced) growth in China is depressing commodity prices, particularly in
metals and energy. Three key factors have underpinned Africa’s good economic
performance since the turn of the century: high commodity prices, high external
financial flows, and improved policies and institutions. Macroeconomic
headwinds for Africa’s net commodity exporters may imply that Africa’s second pillar
of past performance – external financial inflows – will suffer as well.
While lower commodity
prices are providing significant headwinds to Africa’s commodity exporters, the
rebalancing of China may also provide backwinds, albeit gradually. The
relocation of low-end manufacturing from China might reinforce positive income
effects of lower commodity prices in oil-importing countries. The backwinds can
be expected to stimulate FDI inflows into Africa. Benefits from reduced fiscal
pressures in countries with high fuel shares in imports (Egypt, Ethiopia,
Kenya, Mozambique and Tanzania) mirror significant challenges for energy exporters
(Angola, Chad, Congo, Gabon and Nigeria) and other commodity exporters (Ghana, South
Africa and Zambia) arising from depressed commodity prices.
Lower commodity
prices could shift Africa’s centre of economic gravity from west to east,
towards less commodity-dependent economies (Schaffnit-Chatterjee and Burgess,
2015). Investment finance could follow, reinforced by the peripheral outreach
of China’s One Belt One Road initiative (OBOR), which includes East Africa for
infrastructure finance. China’s new Silk Road Fund is targeting the economies
along Africa’s east coast. This suggests a shift away from a traditional focus
on securing natural resources towards a more exploratory focus on opportunities
for a manufacturing hub in the African region.
China’s slowdown could affect African
development finance through several channels:
• Growth linkage: the
slowdown lowers global growth in general and low-income country growth in
particular, especially for commodity exporters.
• Trade: the slowdown
translates into reduced African export earnings and lower corporate savings and
trade credits.
• Prices: the
negative income effect in commodity-exporting countries of lower terms of trade
associated with lower metal and mineral prices reduces household, corporate and
public savings.
• Liquidity supply:
lower official foreign-exchange reserves and sovereign-wealth fund assets may
translate into lower credit supply to Africa.
Figure 1: Contribution to global growth,
1991-2015, by areas (%)
China’s high growth
has boosted global growth in recent years (Figure 1). From 2011 to 2015, China’s
relative contribution to global growth was on a par with advanced countries,
despite stagnating at a high level for a decade. India’s contribution to global
growth has also risen since the early 2000s. However, China has contributed
almost 30% to global growth in recent years, approximately 20 percentage points
more than India. As India is more closed and still considerably poorer than
China, it cannot yet offset the impact of China’s slowdown on global growth and
trade.
A recent World Bank
(2015) study uses a general equilibrium model to quantify how lower and more
balanced growth in China might affect sub Saharan Africa’s (SSA) future growth
(Figure 2). The model simulated the
effects of a slowdown, a rebalancing and the combined effect of both. The
combined effect of China’s lower growth and its rebalancing on sub-Saharan
Africa is positive, as the positive effect from the more balanced growth
outweighs the negative effect from lower growth. According to the simulation,
by 2030, China’s transition will increase the level of GDP in sub-Saharan Africa
by 4.7% relative to the baseline. Countries best placed to export consumer
goods to China, including agricultural products, will benefit most from China’s
lower but more balanced growth. According to this analysis, Zambia, a main
copper exporter, is the only country that will not gain from China’s switch to
a more consumption-based growth model. However, this simulation does not
consider possible growth effects in Africa from additional Chinese direct
investment. To the extent that rising wages in China lead to higher unit labour
cost, China’s external competitiveness in low end manufactures will be eroded.
China could thus expand its current presence in Africa’s special economic
zones, or encourage the creation of new ones. Such positive growth effects from
foreign direct investment (FDI) would increase as African countries reduce
bottlenecks in infrastructure and energy supply.
Figure 2: Impact of China’s transition to lower
and more balanced growth on SSA growth
Trade linkages impact on financial flows via trade credits and indirectly via corporate profits.
China’s trade
engagement with Africa has risen markedly since 2000. China has crowded out other
trade partners in relative terms, except for India, which tripled in Africa’s
export share (Table 1). In absolute terms, the trade dynamic of emerging partners
was crucial in quadrupling African exports from USD 142.4 billion in 2000 to
USD 566.6 billion in 2014. As a bloc, the group of emerging partners now buys
more African exports than advanced countries. Only 15 years earlier, their
share represented one fifth of total African exports. In terms of trade
dynamics and trade shares, China and India now account for a sizeable portion
of Africa’s export earnings.
Table 1: Shares of selected trade partners in
Africa’s exports and imports, 2000 and 2014 (%)
The drop in commodity prices can undermine
Africa’s resource mobilisation. The price channel, by which the EME slowdown impacts Africa’s
financing, reinforces the effects of the trade channel. From the perspective of
finance, the impact of changes in commodity prices is unlikely to be symmetric
or a zero-sum game. The recycling of large surpluses in the current account of
oil exporters (including African) that has benefited African financing will not
be paralleled by corresponding surpluses of oil importers.
Tax revenues may also
be negatively affected in a number of ways. Many countries in Africa rely on
trade taxes (tariffs) to sustain government revenues, so collapsing commodity
exports will worsen fiscal positions. Unlike in non-resource-rich Africa,
resource rents accounted for more than 80% of total tax collection in 2013 and
20% of GDP in oil-rich Algeria, Angola, Congo, Equatorial Guinea and Libya
(AfDB/OECD/UNDP, 2015). Conversely, non-resource-rich countries broadened their
tax base and raised tax collection through direct and indirect taxes. A generalized
slump that affects consumption will lower tax revenues also in those countries.
Financial flows to Africa may be harmed by
depleted EME reserves. The liquidity-supply channel has turned markedly since mid-2014. From a
total of USD 1.8 trillion in 2000, global foreign exchange reserves reached a
peak of USD 12 trillion in mid-2014. The fast accumulation of global economic imbalances
over the 2000s brought about a significant shift in the world’s wealth in
favour of EMEs running surpluses (OECD,
2010). China alone stockpiled reserves from USD 170 billion in 2000 to USD 4
trillion in August 2014, in order to contain appreciation pressures. Since mid-2014,
both foreign exchange reserves and sovereign wealth fund (SWF) assets in
emerging economies have dropped as a result of lower commodity prices and lower
gross capital inflows. Net sales of foreign reserves by China, the Russian
Federation and Saudi Arabia accounted for most of the drop. From their peak,
these three countries alone have lowered foreign exchange reserves by USD 1.5
trillion. These countries have been prominent emerging investors in Africa in
the past (AfDB/OECD/UNDP, 2011).
References
AfDB/OECD/UNDP (2011), African
Economic Outlook 2011: Africa and its Emerging Partners, OECD Publishing, Paris,
http://dx.doi.org/10.1787/aeo-2011-en.
AfDB/OECD/UNDP (2015), African
Economic Outlook 2015: Regional Development and Spatial Inclusion, OECD
Publishing, Paris, http://dx.doi.org/10.1787/aeo-2015-en.
OECD (2010), Perspectives on Global
Development 2010: Shifting Wealth, OECD Publishing, Paris,
Schaffnit-Chatterjee, C. and R.
Burgess (2015), “African revival shifts east”, Deutsche Bank Research
Papers, Deutsche Bank, Frankfurt, http://tinyurl.com/jo7ow56.
World Bank (2015), Africa Pulse: An
Analysis of Issues Shaping Africa’s Economic Future, Vol. 12, World Bank Group,
Washington, DC, www.worldbank.org/en/region/afr/publication/africas-pulse-ananalysis-
issues-shaping-africas-economic-future-october-2015.
UN Comtrade (2015), UN Commodity
Trade Statistics Database, http://comtrade.un.org/db/.
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