IFR - Thu October 3, 2013

Leaders and laggards

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Sub-Saharan Africa has always been a region comprising tortoises and hares – strongly performing economies boosted by stable politics versus poorly managed economies virtually going backwards – with the roles often changing. The challenge for today’s hares is to ensure roles do not reset once again due to a lack of project investment.

First came the Asian Tigers, engorged by the go-go 1990s. Western funds roared in, dazzled by the returns on offer in Indonesia and Malaysia, departing as the Asian Financial Crisis unfolded.

In the 2000s it was India’s turn, as investors scrambled to buy Mumbai-listed securities. Many departed (though lots remain) as India’s palpable shortcomings – slowing growth exacerbated by corruption, throttling red tape and antipathy toward foreign investors – emerged.

In recent years, investors seeking frontier-market levels of risk and reward found a new haunt: Sub-Saharan Africa. Once a pariah region dotted with a precious few success stories (South Africa, Ghana, Nigeria), its fortunes waxed in the years just prior to, and more notably since, the collapse of Lehman Brothers.

The broad reasons for this success story are well known. Resource-hungry Chinese corporates surged into the region, building infrastructure and snapping up commodities (energy, minerals, foodstuffs) to fuel the country’s home fires. Japanese, Korean, Indian and South-East Asian corporates followed in its wake. Global investors and merchant banks then piled in behind, snapping up growth-oriented securities.

All good things come to an end. Recent months have been tough on SSA states and frontier-market investors alike. Fed chair Ben Bernanke started the rot on May 22, signalling the beginning of the end of quantitative easing. We aren’t quite there yet: The Federal Open Market Committee opted in its September 19 meeting to delay tapering, likely until December, in the face of a fragile US housing market and tepid growth forecasts.

Bernanke’s May speech was enough to convince many global fund managers, at least in the short term, to dump emerging market holdings, causing African stocks to crater and bond yields to spike. Economists rushed to reverse previously positive prognoses. Sagging Chinese growth figures through the first two quarters of 2013, likely to hit export-focused African nations hardest, have not helped.

But is this the full story? Sub-Saharan Africa is not the utter shambles it once was. Barring a few, genuinely failing states, economic predictors remain broadly upbeat. Shilan Shah, Africa economist at Capital Economics in London, said that the regional growth story – “high growth, rising employment, a positive long-term outlook” – remains firmly in place.

Economic optimism

Moreover, confidence, vital but often imperceptible, continues to suffuse the region. Africa remains a staggeringly cheery place. Nine of the world’s 10 most economically optimistic countries are found here, led by the likes of Guinea and Rwanda, an August 2013 Gallup poll found. (Grounds for economic pessimism was most commonly found in Europe and, rather surprisingly, Singapore.)

What appears to be happening is that Sub-Saharan Africa is again reverting to being a multi-speed continent, only this time with different and sometimes surprising countries playing the diverging roles of hare and tortoise, leader and laggard.

Higher-growth economies will be mostly found on the Indian Ocean seaboard. GDP in Ethiopia is tipped to pass 10% this year, boosted by rising agricultural output. East Africa’s second largest economy, Tanzania, set to become a major gas producer in the near future, is likely to post GDP of around 7% in 2013. Uganda, on the fast track to becoming a major oil exporter, is set to grow by 7%. Capital Economics’ Shah tips Mozambique, set to post growth of 7% this year and 8.5% in 2014, to be one of the region’s outperformers in the coming years, as foreign capital floods into the country to fund the development of new offshore gas fields.

Kenya has been perhaps the biggest surprise on the upside this year. March’s presidential election went ahead with remarkable serenity, given the terrible events of 2007 still fresh in the minds of many. Investors have taken notice. Razia Khan, head of regional research at Standard Chartered, said the private sector was “encouraged by a new, technocrat-dominated cabinet” led by President Uhuru Kenyatta, and noted that GDP had “surprised positively” even in the election-dominated first quarter, growing by 5.2% year-on-year thanks to rising agricultural output.

The tortoises

Then there are the tortoises. Most economists tip the worst regional performers over the next few years to fall into one of two categories. Pot one contains countries running hefty current account deficits, notably those vulnerable to a tightening in global monetary conditions. In pot two are commodities producers vulnerable to a China slowdown.

China is by far the harder factor to measure. For sure, notes StanChart’s Khan, Beijing has “almost singlehandedly helped to reverse the long-standing undervaluation of African assets” in recent years. Yet most growth momentum in Sub-Saharan Africa remains largely domestic. And a slowing China simply means a deceleration in the growth of demand for African resources, rather than an actual fall in trade flows.

Probably the most vulnerable nation is Zambia, a major exporter of copper to China which, said Capital Economics’ Shah, is “heading for a period of weaker growth”. Other SSA nations heavily dependent on Chinese earnings include Gambia (which ships 58% of its exported produce to the People’s Republic), Angola (46%) and the DRC (55%).

Deficits are a more structural issue. Even the region’s more viable economies are struggling to cut spending. Kenya’s deficit was 8% in 2012, while Ghana’s topped 10%. Both economies are in good shape, particularly Ghana’s, benefiting from a new oil boom and tipped to grow at 8% a year in the three years to end-2015. But both need to get their budgets under control and, in Ghana’s case, to curb inflation, which reached a three-year high of 11.2% in June.

Then there is the big wounded beast, South Africa, a nation once the region’s unalloyed leader, now demoted to the role of laggard due to rising political uncertainty, widening deficits, union-led industrial disruption, and deep structural problems. Standard Chartered in July cut its growth forecast for the country to 2.2% from 2.7%. The South African rand, usually so stable, has been unusually volatile in recent months, slumping in value against the dollar over the summer, before spiking following the September FOMC meeting.

Finally there are the meta-concerns affecting all or most Sub-Saharan African states. High on this list is the region’s inability to co-ordinate over issues that undermine domestic and intra-regional trade. “There are key limiting constraints on the region’s economic upside given how fragmented it is,” said Peter Attard Montalto, chief emerging markets economist at Nomura. “[SSA nations] need to work far harder on co-ordinating their approach to infrastructure, and getting rid of non-tariff trade barriers.”

And while the world’s attention is fixed on commodity prices, few are looking at perhaps a bigger underlying problem: the lack of new projects coming on-stream. “Many of the big resource projects that were supposed to bolster Africa’s economic position are being pushed to the back burner or are coming in late,” said Christopher Palmer, head of global emerging markets at Gartmore Investment Management in London.

This worrying trend, which affects most resource-rich African states, has three underlying causes: China’s slowdown; a period of project-rationalisation at the world’s mining giants; and an increasingly perceptible shift in global energy demand away from oil and toward new sources of energy such as US shale gas. “A lot of the deep-sea African oil projects are proving less economically viable than previously expected,” Palmer said.

But if a resource-rich region dependent on selling commodities to cash-rich or energy-hungry nations isn’t bringing enough new projects on-stream, that’s a concern the entire region should share.

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