Africa’s Overlooked Lined Pockets

As official agencies routinely repeat, Covid-19’s impact on trade, tourism and remittances is battering much of the sub-Sahara. The World Trade Organization expects global trade to fall at least 13% this year, while the World Bank predicts remittances to Africa will sink 23%. International travel has largely stopped. The UN estimates that for every USD 1 million lost in international tourism revenue, national income could drop by 3-times as much on feeder sector unemployment spikes. In Africa the global downturn in most commodity prices has hit exporters, and country-specific black-swan events compound headline misery.

The maritime disaster in Mauritius comes as the eastern region battles “biblical” swarms of locusts. Food insecurity is rising across the continent as the IMF predicts the region’s economy will contract 3.2% this year while the African Development Bank forecast is even gloomier, between 4.9% and 6.6%. Stock markets throughout the sub-Sahara are on average down just over 20% in USD terms so far this year, with tourism-dependent Mauritius underperforming peers with a 40% loss. Cote D’Ivoire, where the economy grew an average 8% in recent years, has lost only 1.3% into an election cycle.

As the world locked down for the pandemic, the G-20 nations offered bilateral debt repayment relief though end-year for the poorest nations, many in Africa, and program extension is likely. The private sector was encouraged to offer a similar standstill, but the Washington-based Institute for International Finance as designated investor body claimed last month that its private financial institution members had not received any formal requests. In Africa of the 25 countries eligible for debt relief, only 4 with commercial bonds so far have requested assistance: Cameroon, Cote d’Ivoire, Ethiopia, and Senegal. (?).

Kenya, where the worst locust swarms in decades are destroying food crops, has refused debt repayment relief. While accessing IMF rapid funding for the virus, it signaled a debt payment moratorium with official creditors would breach the terms of its outstanding Eurobonds and cut it off from the international market. Last year the country raised USD 2.1 billion in a massively over-subscribed offering in its third foray into the international markets in 5 years. Tourism, remittances and exports account for more than one-quarter of GDP. Ratings agencies have lowered the sovereign outlook to negative, noting the IMF expects the economy to contract 0.3% this year.

The continent’s two biggest markets, Nigeria and South Africa, tapped IMF emergency facilities to help finance their pandemic response. The IMF projects the commodity-exporting giants will see GDP slump 5.4% and more than 7%, respectively, this year. The OECD warns if South Africa is hit by a second wave the economy could contract 8.2%. Exports account for 30% of GDP and tourism nearly 9%, one-third business travelers unlikely to return soon. Last year South Africa’s sovereign rating was downgraded to junk by the major agencies, and the rand has been battered on portfolio outflows forcing the government to tap a USD 4 billion IMF loan. When the pandemic hit it was already in recession and suffering from rolling blackouts due to its debt-laden state-owned power company, with its downturn spilling over to immediate neighbors Botswana and Namibia. Meanwhile Zambia is struggling to restructure external debt and cannot participate in the G-20 debt suspension program because it does not satisfy the IMF’s advance sustainability criteria.

For Nigeria, the price of oil is critical and the Covid-induced price collapse highlighted continued failure of economic diversification efforts. Oil accounts for 90% of FX receipts and 60% of total revenue, while remittances account for 6% of GDP. Debt servicing takes some 50% of the annual budget. Nigeria has pledged to unify its multiple exchange rate systems to secure a World Bank loan while the official rate has been devalued twice this year, making debt servicing more expensive.

Also in West Africa, political protests continue to plague Mali. The IMF has provided debt service relief and USD 200 million in pandemic aid. Despite the social chaos and downturn in the price of its key export cotton, as a net oil importer the Fund expects the economy to grow 1.5% this year. Senegal, where remittances account for over 10% and exports over 20% of GDP, embraced the G-20’s debt relief offer. Raters reacted in part with a revision to negative on its sovereign rating outlook despite expected economic expansion this year. Neighboring Cote d’Ivoire carries a “positive” outlook on its sovereign rating from Fitch. However, the agency noted political instability could threaten economic prospects: with only one exception, every presidential election since 1994 has resulted in violence, twice resulting in external debt defaults. Cote d’Ivoire’s economy is slated to grow slightly this year, largely due to comparative domestic demand strength. Ghana too is expected to record slight expansion this year as it prepares to vote for president in December. While the cedi continues to depreciate, Ghana successfully sold an international bond a month before locking down. Ghanaian exports account for 35% of GDP, one-third oil/fuels, while tourism and remittances together are another 10%.

Recovery across the continent will be uneven. The IMF projects Africa will grow 3.4% next year. The start of the African Continental Free Trade Agreement in January, delayed from this year due to the pandemic, will boost economies as trade rebounds. Tourism dependent countries will remain under pressure well into 2021 absent a global vaccine. Travel and tourism account for more than 10% of GDP in Mauritius, Namibia, and Botswana, and across Africa contributed USD 168 billion to economies in 2019, according to the World Travel and Tourism Council. Countries in French-speaking West Africa slated to expand this year could rapidly recover. For example, Cote d’Ivoire, where GDP grew 6.9% in 2019 will see surge 8% or more next year (source). Giants South Africa and Nigeria, with pre-existing conditions including structural, fiscal and debt issues, will lag smaller neighbors, but bleakness will give way to relative bright spots.

Posted in