By Shruti Menon Seeboo
When it comes to the global economic growth in 2023, Mrs. Razia Khan, Chief Economist and Head of Research, Middle East & Africa, Standard Chartered Bank, shared her views from Standard Chartered Bank’s Research – on the African Economic outlook, how the global scenario is likely to be influencing Africa’s economic prospects.
Razia shared her insights through a virtual intervention at the Africa Partnership Conference 2023 hosted in Mauritius on October 2. She started off by saying that, “Once we know this has been a difficult time for Africa, the succession of different economic shocks outlook. It isn’t exactly a time where there’s a great deal of optimism regarding the global economic outlook.”
Global growth to moderate in the coming months: Asia continues to outperform
It should be noted that while the US economic growth continues to be resilient labour markets in the US are still reasonably tight. And this is a key factor driving market expectations that higher US interest rates are probably here to stay for longer.
Razia said, “There is understandably an expectation that given the extensive developed market tightening that we’ve seen so far, it’s only a matter of time before softer economic data does creep through. So as much as some of us might be celebrating the fact that the global economy has to a large extent being resilient at the end of 2022. There were lots of expectations of both slower global growth, and that hasn’t actually been born out by the evidence. Nonetheless, there is still this expectation that in this interest rate normalisation environment, with many different central banks, indicating that interest rates are likely to stay at elevated levels for some time – do not expect any quick easing. There is an expectation that this will start to weigh on economic activity.”
She went onto say that, “We know that monetary policy has had a very lagged effect that the usual mechanism for the transmission of monetary policy may have changed quite meaningfully in some economies. And it could take a while for that slowdown to show through. Why is any of this relevant for Africa? I will go on to show you the issues that these that this tighter global monetary environment is causing for many African economies still complicating that economic recovery from COVID.” There’s also another key point that needs to be focused on – and this is China. A lot of debate about China’s economic growth trajectory in the recent past we’ve certainly seen many more measures from China’s policymakers trying to stimulate growth and the expectation is that in the very near term, this will have some impact.
Fourth quarter growth in China may certainly be better than we’re likely to see in the third quarter. Razia said that as we see some of these policy measures having some impact, but that’s a bigger uncertainty that the global economy faces and for China, the world’s second largest economy, the outlook is unclear.
She says, “Structurally, China will need to rebalance its growth model as it faces an ageing population. China’s growth model has been very much dependent on high levels of investment as a percentage of GDP. This was in the 40 percents already low 40s. And the question going forward is – Can China rebalance comfortably and adopt a growth model that’s much more driven by consumption rather than this high level of reliance on investment and with it the increased debt burden that comes along with that model, and cannot do so smoothly? Well, this is going to be pretty key for the global economic outlook longer term.”
So, the message Razia wanted to put into the minds of the audience today was setting out the global economic outlook and how it impacts Africa – there are a few things to focus on the impact of the tighter environment that has been seen, especially with developed markets and the monetary tightening now in place, unlikely to fade anytime soon.
And second, Razia notes that the considerable uncertainty, especially that attached to growth prospects for many developing and emerging economies, given the unknown about what kind of growth rate we’re likely to see from China, trends, growth rates are being revised down. “This is always likely to be the case as an economy becomes much bigger, it becomes that much more difficult to grow it high in low double digits, or even high single digits. But is there something more worrying going on?,” said Razia.
Headwinds – high inflation
Coming to the recent inflation shock, this continues to have an impact across Sub Saharan Africa. The Chief Economist notes that what essentially happened was, we came out of the COVID crisis in some respects with growth in developed markets, a lot more buoyant demand holding up a lot more strongly than many had anticipated that many firms would have anticipated, and they were caught by surprise by the extent and the duration of that demand shock that these economies had seen.
Razia said, “We also know that during COVID, we had seen significant supply disruption. The combination of all of that meant that developed economies emerge from the crisis with inflation rates that were higher than they had seen in decades. And this precipitated initially it was slow, but it soon became clear that inflation was not going to be transitory. This precipitated a very rapid tightening. Now the charts that you see before you now show how inflation spiked that is global inflation having spiked on both supply and demand issues. The good news is the worst of that inflation shock seems to be behind us. In Europe last week, we saw inflation headline inflation decelerating quite meaningfully. And this has already fed market expectations that that may mean that the ECB is now done with its tightening.”
She added, “Increasingly the belief is because these inflation shocks recede and we can see them receding in emerging markets as well. In emerging markets, many central banks were much more proactive than then developed market counterparts enacting early to counter the inflation threat. But the uncertainty about whether we truly returned to a lower inflation environment globally, given geopolitical tensions, given the likelihood stalled for some supply disruptions on the back of that, given that if we’re not seeing global trade volumes expanding, we may not see the productivity growth that led to those years of good developing country growth earlier on.”
Balance-sheet adjustments by major central banks has been sharp
The bottom line is there is still a lot of uncertainty facing economists and the impact for African economies becomes most meaningful. Razia notes, “We have gotten used to being in a world of plentiful availability of foreign exchange inflows into developing countries. This was a consequence, a direct consequence of the amount of monetary easing that we had seen. The amount of central bank balance sheet expansion, this meant that interest rates were kept at very low levels, investors were looking to put on risk we’re looking to invest in the fastest growing parts of the global economy. And now we’re in a meaningfully different environment. What we’re seeing is actual tightening in place. What we’re seeing is an end to that significant balance sheet expansion across all developed economies. And understandably, this will have an impact on the global outlook.”
Africa: tighter global financial conditions have a negative impact
The Chief Economist lauded the optimism around Africa’s Continental Free Trade Agreement, the measures that are being put in place, the steps that are finally being put in place to realise the benefits of greater inter intra regional trade, but she stated that there’s a long way to go still towards dismantling those trade barriers to meet the initial ambition of the Africa continental free trade agreement.
Also, from a growth perspective, there has never been a more necessary time. The good news she says is to look at these other potential drivers of trade that’s of economic activity. However, the bad news is that isn’t going to be easy, given global headwinds given the uncertainty regarding the outlook. Razia says, “Both for developed economies should we see more of a slick cyclical slowdown in growth, the uncertainty regarding China’s outlook where the expectation is that we could be seeing a multi year structural slowdown in growth and no one is entirely certain that the tools available are up to the task of sustaining growth. It’s against these great headwinds that African economies are going to have to still find the space to find the space to make themselves more attractive to international capital flows which are increasingly more scarce given this tighter environment. And we know that the need for this investment in Africa remains as strong as ever.”
She went onto add that, “When we stopped to consider the impact of the Africa continental Free Trade Agreement and that worthwhile ambition of dismantling tariff barriers between countries to enable intra-regional trade, we know that one of the key drawbacks that we’ve always seen in place towards greater intra-regional trade in Africa has been the absence of the enabling infrastructure. Now, in some senses, a common payments platform that’s starting to be addressed. But in terms of the physical infrastructure, the question that needs to be asked is, in this small capital, scarce global environment, how are African economies going to be attracting the flows that they need?.”
Reform momentum will play key role in SSA’s growth outlook
Explaining the research insights, Razia continued to highlight that the experiences in the recent past have African growth compared with global growth. This tells a pretty easy to understand story, one is that despite all of the fanfare around Africa, the rising that was seen pre-global financial crisis, the trend growth in Sub Saharan Africa that’s had been underperforming for some time even before the COVID crisis.
Unfortunately, the emerging markets slow down is something that changed meaningfully in the global economy, African economies, despite the fact that they were borrowing more over that time. Razia said, “Not really able to sustain the six to 7% type growth rates that we had seen just before the global financial crisis. Partly this is also a reflection of how the region’s biggest economies were doing. countries like South Africa and Nigeria by virtue of their scale. Have a disproportionate impact on average Sub-Saharan African growth when we think of that in GDP weighted terms, but the story that this tells this sobering even prior to COVID, there had been this trend slowed down in Africa, then the COVID shock hit, it hit the global economy in a pretty sustained way. And you can see those African economies, it was a slightly later recovery, but there was a sharp enough recovery following the COVID crisis. And now the expectation that growth will still be very difficult to achieve. What this tells us is that the adoption of reform, how quickly countries can counteract this new more difficult environment by saying we’re going to be focused on reform we’re going to be focused on the drivers of long-term growth. This suddenly becomes all important to the compensation greater into regionalization is one aspect of that a business friendly environment. Yes, still, but it’s tough. In country after country, we are seeing governments having to adopt a far more rapid fiscal consolidation than might have been intended.”
The space to go slowly in terms of closing the deficits just isn’t there. In a world where global interest rates where US Treasury yields have fundamentally repriced, everyone is having to prove that they can go a little bit faster, not just on broad based economic reform, but also in terms of reassuring that their fiscal balances can be kept in check that they’re not going to run into bigger problems with debt. Razia notes, “Everyone has to try harder, given this greater uncertainty out there. And this means that unless we see the broad based adoption of economic reform, longer term structural economic reforms, it’s very difficult to see what is going to be able to sustain African growth in this environment. How about the question of how much China has been lending to the Africa region? Well, here is a sobering thought. If you look at the second chart on this slide, China’s lending to African economies, we know that if we include the numbers to Angola, China’s lending to the region has actually peaked in 2016.”
She goes onto add, “And if you strip out Angola that peak had come a whole 10 years earlier than where we are now. So even those easiest sources of capital or what was perceived to be an easiest source of capital, it has not necessarily been sustained, those inflows have not been sustained into the region. This really drives home the point that had been made by several speakers over the course of this morning. The need to mobilise more effectively domestic savings, domestic revenue mobilisation, this will have to be important this will have to take centre stage because in a world of greater capital scarcity or capital being priced differently, African economies are going to have to lot more of the heavy lifting on their own.”
Now, one thing stands that out quite easily despite the solutions that the global community had come up with an – SDR allocation in 2021. A nice injection potentially into the reserves of all countries that chose to draw down on that SDR allocation from the IMF. Razia explain that the African foreign exchange reserves have been under pressure. She says, “Part of the problem has been constrained market access in the past if a country needed to reassure on how its foreign exchange reserves were holding up and could borrow big in international capital markets. It has been more expensive to do so many different African sovereigns, especially at the weaker end of the credit scale are locked out of international capital markets. And this means that foreign exchange reserves almost across the board have come under pressure.”
Pressure on FX reserves and food inflation are a common feature in SSA
The continent has been in a strong dollar environment, but investors are going to be looking very carefully at how different sovereigns decide to deal with these challenges. The unfortunate aspect of this is that in many countries, foreign exchange regimes have become far less functional than they used to be. It may not necessarily be reflected in significant FX market volatility, but just the ability to source the dollar supply that is needed has become so much more difficult.
Razia explains, “Think of this as a constraint on doing business in the region. It’s an additional cost for any business that’s trying to operate in a region where there has been USD $1 scarcity. Will all the moves towards a common payments platform for African countries being able to trade more with each other in African currencies, having less reliance on USD $1 on the US dollar so that this shortage of dollar liquidity has less impact on trade? Will that have any impact over time maybe, but in the very near term, where different companies have to source the dollars that they need from markets for debt servicing, where it’s still very difficult to do anything in the absence of that easy availability of dollar liquidity? This is a real constraint on the business environment in the region. It’s a real constraint on growth.”
Moreover, Africa has not in any way been spared meaningfully the inflation shock of the recent past. Take food inflation following Russia’s invasion of Ukraine, there was rightly an emphasis on who was exposed in terms of their food consumption, their food import bills and how this fed through into the local economy.
“The dependence on imported wheat in the region is still very great. And now we’ve got to throw into the mix the likely impact of El Nino on domestic harvests. For some countries, rising global food prices, sugar prices being at particularly elevated levels, and that food tends to make up at least 40% of the consumption baskets of different African economies. In some countries, it’s an even more pronounced component of the inflation baskets in countries like Angola, Ethiopia, Zambia, Nigeria, food being more than 50% of the CPI Basket. Well, the fact that you had seen this tighter, more constrained FX liquidity environment, very difficult to get the FX that was needed food imports had become more expensive. This has stalled transmitting through into the outlook for many different African economies,” says Razia.
So, even though global food price inflation peak has been seen somewhat earlier, and in many other jurisdictions, lessening of these pressures is what is coming. The fact that the foreign exchange regimes have not operated as comfortably as they might have, has led to the persistence of this shock in Africa. But, everyone is also faced with a new source of potential volatility for all oil importing countries.
Razia says, “Despite these expectations, and the global slowdown, the fact that we are fundamentally seeing very tight oil markets means that oil prices are well supported at levels that are just uncomfortable for many importing countries. So, the bad news is this inflation shock isn’t necessarily going to go away very easily. It really will take a great deal of anti inflation credibility on the part of different central banks to be able to combat this shock properly. We’ve spoken about the monetary tightening globally and Africa has also seen significant monetary tightening, except that the nature of the inflation shock is such that outside of countries like Uganda already cutting interest rates, South Africa most likely able to pause for the foreseeable future. It’s not yet clear that other central banks other major central banks in the region unnecessarily done tightening. So just as we see this global environment of interest rates remaining in place for some time, in Africa, too, we’re likely to see an environment elevated interest rates with some central banks. Nigeria, potentially Kenya, perhaps this week still having to raise their policy rates further.”
Still-difficult external conditions
Underlying all of this is the question, when will we see restored international capital access for international capital market access for African economies? The Chief Economist says that they proxy this by looking at Euro bond yields where you can see they are to all intents and purposes, small, relatively elevated.
She said, “This means especially in the wake of the US Treasury market volatility that we saw last week, investors are asking the right questions -what kind of US Treasury yields we want to see going forward? Until we start seeing meaningfully softer economic data out of the US, it’s likely that Treasury yields will remain elevated, and this will make it very difficult for potential issuers from Africa to access international capital markets.”
Focus on FX availability persists
The Head of Research notes that one can’t assume necessarily that international capital market access becomes available very quickly.
“Even in the instance that we see softer US Treasury yields because of the expectation that maybe the US economy has started to slow. We’re not yet there with the September economic data we may start to see signs of that. Don’t expect necessarily that that opens up international market access for African issues either. And the main reason is if the perception is that the global economy is slowing, that key economies like the US and like China are seeing weaker growth prospects going forward, that it’s very difficult to try to instil the amount of investor risk appetite that might be needed for investors to say, let’s take a risk now in lending to what we perceive to be the more risky economies out there. It’s still a very difficult environment,” says Razia.
Africa- credit metrics have deteriorated
Talking about rating trends in the region, Razia pointed out that at times it looks as though rating agency treatments of different African sovereigns seems a little unfair.
She highlighted, “Is Nigeria the region’s largest economy really properly? A C-Rated economy with its low levels of external debt? The majority of it owed to the IFIs, probably not. But the one thing we have seen in the recent past is an across-the-board deterioration in the ratings of different African countries. And this will add to the growth challenges where different countries are trying to show that they can adopt reform, but they can do what’s needed to try to stimulate domestic growth. They still face the overall constraints of this being ratings environment where downgrades have been bad, much more frequent than upgrades.”
She added, “The reasons for these downgrades have been multiple, essentially what a rating agency tries to assess is, what is the likelihood of a private creditor being repaid if it lends to different entities. There have been a number of factors that have weakened that ability to repay the lack of adequate external buffers, how countries are unable to keep on borrowing to refinance their debt needs to try even harder or run-down foreign exchange reserves to be able to repay that debt, rising import prices, terms of trade deterioration for the key oil importing countries, for all exporting countries. The fact that they haven’t seen enough investment to be able to sustain their oil exports has also been a feature.”
The Chief Economist says that with the recency of the food inflation shock, which has elevated fiscal risks and socio-economic risks in many countries, when credit analysts are looking at this, there isn’t an expectation that governments are going to be able to adopt really rapid fiscal consolidation closing those deficits. The calculation is socio economic risks arising political risks arising and it’s going to be difficult. Razia says, “Altogether we have the perfect storm of this credit rating deterioration almost across the board.”
While SSA sovereigns can manage near term, pressure is likely to build
Now, as per the Standard Bank’s Research, one thing that has weighed significantly on sentiment is of course, this idea of debt free structure in which software is going to be forced into a situation where they need to restructure their debt.
The Chief Economist notes that as early as 2020, they knew before the COVID crisis in 2017 and 2018, that countries like Zambia had built up probably an unsustainable amount of external debt. And if they didn’t have market access, which Zambia didn’t have prior to the COVID crisis, there were real questions around how comfortably, if at all, they could refinance their debt obligations.
“With that assumption of comfortable refinancing taken away, there was only the inevitability of default. We saw countries like Zambia tipped over, in part, but not wholly by the COVID crisis, announcing that they would seek a debt restructuring very early on. Ghana was another example, Ghana had been able to issue debt in international capital markets as late as 2021 but it had seen this significant fiscal expansion over the course of 2020. Even though the corrective action was put in place in 2021, it wasn’t sufficient to really restore confidence properly. The impact of those global shocks developed markets tightening so soon after the COVID shock, well, our debt load is unsustainable, and we will have to be forced into a debt restructuring. For country after country. The emphasis now is who’s going to be able to pull through and who is going to be able to manage better their external maturities simply because they’re not that concentrated, and they have access to other sources of financing,” says Razia.
The research’s overall view is that there are no obvious candidates for an external debt restructuring – countries like Egypt countries like Kenya tend to be spoken about.
Razia notes, “In Kenya’s case, so much of the external debt is owed to, that a common framework restructuring in which multilateral creditors don’t take part would deliver very little in the way of additional debt sustainability to Kenya. Ultimately, it just wouldn’t be worth the countries while to seek that debt restructuring. The other problem that we have here is that of the countries that have opted for the debt restructuring route, look at Zambia, in default in 2020, announced very early on that it was seeking a restructuring. Today, we are still waiting for the final conclusion of those debt restructuring negotiations. There isn’t a quick and easy way out of this impasse and this is why the pressures that we see on the Africa region stemming from the global environment are likely here to stay for some time”
She adds, “What it translates into is that individual governments are going to have to try even harder to show that they have the ability to somehow stimulate domestic growth. Maybe that can only be done with the introduction of sweeping structural reforms, because it’s certainly not going to the global environment doesn’t provide a way to spend one’s way out of this. There’s going to have to be a need to allow for greater foreign exchange liberalisation. The only way that you get inputs to essentially contracts to the extent that’s needed is if the signal of the exchange rate is in place. There are no easy answers.”
Commercial external financing is more difficult to obtain
In conclusion, speaking about what this means for Africa, the Standard Chartered Research insights know that in the absence of international financial institutions support, there are some economies that would be seen as more vulnerable than others.
Razia questions, where does the hope for the optimism that African countries can pull through all of this light? She says, “First of all, they issue of the global financial architecture – how much funding can the IFIs provide to African countries absolutely needs to be addressed. This needs to be front and centre of any conversation because we can avert a worsening decks deterioration if the support comes through from multilateral sources in time.”
Secondly, she says that there will be little ability of African economists to reassure on growth unless they put in place the reforms that are needed.
She said, “The Africa continental Free Trade Agreement is an excellent step in the right direction. All countries individually will really need to double down on growth enhancing economic reforms, because the global environment is going to be that much more difficult, and the bar will be set even higher to attract a global influence. We know in conclusion that it’s a very difficult environment for African countries. We also know that the longer-term potential of the African region is still very much in place, a demographic structure that lends itself easily to get your growth rate of urbanisation and with that the associated productivity gains that should still be seen faster in Africa than in many other regions. The ability to unlock all of that growth potential provided there is a concerted effort and economic reform.”
Now the good news is that despite the difficult environment and country after country, the research insights are actually surprised by the actual demonstration of faster economic growth rates than one might have expected.
In her concluding note, Razia explained, “In South Africa, with its significant load shedding everyone is still revising up their growth forecasts for the country. In Ghana, despite the economic crisis growth so far year to date has surprised positively. The message I want to leave you with is that there’s no need to sugarcoat the global backdrop. This is going to be difficult. This is going to be difficult for all African countries. The good news though, is that with the right emphasis on reforms, African countries can still build a sustainable path back to growth back to longer term economic transformation.”
