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LAGOS (Capital Markets in Africa) – At the start of 2017, the year ahead looks uncertain. This paper constitutes a brief look at NKC African Economics’ top five predictions for Africa for 2017.
1. President Trump will have a negligible impact
The word that appears, to sum up Donald Trump’s effect on the international economy, and other areas like security, is ‘uncertainty’. However, there has been some consistency in his views expressed during the campaign and those held for decades preceding it. His most salient recurrent views are: isolationism, mercantilism, and a disquieting admiration for authoritarian leadership.
Looking at the implications of these first two factors on Africa, worries arise that the favourable policies put in place by bipartisan support in Congress over the past three administrations to boost African development may be rolled back. The US is the world’s biggest source of aid flows to Africa – in 2013 it provided $9.3bn, more than twice as much as the next biggest aid funder (Britain). We think these programmes will fall under Mr. Trump’s radar or that he will deem that they are not worth the fight on Capitol Hill to scrap.
The bigger worry for Africans, however, is the future of the African Growth and Opportunity Act (Agoa), which, by removing import tariffs on qualifying countries’ exports to the US, boosts those countries’ exports and helps their local industries grow. While scrapping the act would require Congress’s approval, the US president chooses which countries are eligible to benefit from it and reviews beneficiaries on an annual basis. Mr. Trump’s antipathy towards such deals could mean that fewer countries qualify. Agoa risks being lumped together with all the other international trade agreements as counter US interests. As can be seen in the accompanying graph, exports to the US from non-oil exporting countries that benefit from Agoa access have increased steadily since 2000. However, oil exporters have seen a significant decline since 2011 due to the falling oil price and increase in domestic oil production in the US.
The final factor, a tolerance of authoritarian leaders, is epitomised by Mr. Trump’s admiration for Russian President Vladimir Putin and was also evidenced by comments he made in 1990 after Chinese security forces massacred protestors in Tiananmen Square. Africa has its unfair share of authoritarian leaders, and they may look forward to a more lenient approach from Mr. Trump. Sudan, under sanctions since 1997, springs to mind as a possible example of where this factor could have an effect. The US has been warming to Khartoum already, and, despite ongoing conflict, 2017 could be the year that economic sanctions are lifted.
2. Incumbents will win re-election in East Africa, and the hydrocarbons sector will disappoint many
Rwanda and Kenya both head to the polls in August this year. Both presidential races have clear favourites: in Rwanda President Paul Kagame is standing virtually unopposed, while President Uhuru Kenyatta in Kenya will have stiffer competition but should return for a final term. Predictability in elections is ordinarily a support to investment and thus a boon for economic development. Ongoing political stability and the strong development momentum that has characterised the region in recent years are expected to allow East Africa to maintain its title as the fastest growing region on the continent in 2017. That being said, one aspect of progress that is expected to disappoint this year, relative to official expectations, is the development of the region’s hydrocarbons sector.
The sector’s development made progress last year with the decision in April that Uganda’s oil export pipeline would extend from oil fields in Hoima and pass through Tanzania, while the Ugandan government also issued eight oil production licences at the end of August. According to official projections, between 200,000 and 230,000 barrels of crude will be produced daily by 2021, with up to 60,000 barrels of that oil refined within Uganda. However, we predict that this year will see further extensions of these production timelines as the technical and economic hurdles associated with the development of the sector come to the fore.
The government has more to lose than oil companies from delayed oil production because it plans to finance a lot of its planned infrastructure investment from revenues raised from the oil sector. By contrast, energy companies are in no rush as a more measured approach to regional investment will allow them to better assess their own balance sheets as energy prices slowly increase over the medium term. Total and Tullow Oil are expected to make final investment decisions this year, but making an investment decision should not be confused with a decision to commence investment. The multitude of projects increases the chances of development bottlenecks, where some projects cannot start before the completion of others. Mismanagement – which has become commonplace in Ugandan public investment – will extend completion dates considerably, while the complexities of cross-border infrastructure development will strain capacity.
3. Zimbabwe’s bond notes will be inflationary
On 28 November 2016, the Reserve Bank of Zimbabwe (RBZ) introduced bond notes into the market. Zimbabweans are sceptical: they fear that the notes, like the increasingly ridiculous denominations of notes in ‘Zim dollars’ that the RBZ printed in the 2000s, will lead to rampant inflation. It does not help expectations that the new bond notes seem to have been printed on the plates previously used for Zimbabwean dollars, with the same image of the Chiremba balancing rocks.
Our prediction is that the bond notes will have exactly that effect. Officially, the notes are backed by a $200m facility backed by the African Export-Import Bank (Afreximbank), and fully redeemable in dollars. There are signals, however, that the government and senior government officials are trying to pay in bond notes to hang on to hard currency, and these perceptions of manipulation have speeded up the inexorable working of Gresham’s Law – the rule that ‘bad money drives out good’. Expectations of a cash crunch led the government to offer incentives for the use of bond notes ahead of their introduction. Later measures were more aggressive, with government resorting to threatening the use of force to artificially preserve the notes’ value.
In the first week of January, just over five weeks after the first notes were introduced, the RBZ announced that $73m in bond notes was in circulation. The rapid growth in the supply of the notes, against the $200m facility supposed to guarantee them, makes us expect that the supply of notes will surpass the size of the guarantee in short order. Then there will be nothing to back the notes except public confidence in the RBZ, which is no higher now than it was in 2007. We think measures to force people to use the notes will fail and that traders (who need hard currency to pay their suppliers) will charge ever-increasing premiums to buyers who want to pay in bond notes, resulting in the notes’ depreciation against the dollar. The government, which is short of hard currency owing to corruption and the shrinking of the tax base, will be led to keep issuing more notes, accelerating the process. The resulting impact on living standards, on top of deep existing discontent, will probably play a role in hastening political change in Zimbabwe.
4. Oil producers will still be plagued by forex shortages
The Nigerian naira depreciated sharply after the implementation of the flexible exchange rate regime in mid-June 2016, falling from NGN198/US$ to roughly NGN320/US$ by end-July. It has stabilised around the NGN305/US$ level in recent months. This does however not signal that the foreign exchange market has reached equilibrium. Forex liquidity conditions remain extremely tight as evidenced by the weak parallel market exchange rate – the naira traded at roughly NGN480/US$ on the black market early in December.
We predict a more liberal stance on the naira this year once inflationary pressures start to ease. We do however not expect the CBN to allow the currency to depreciate sufficiently to bring the forex market back to equilibrium. Tight forex liquidity conditions will thus continue to act as a drag on GDP growth, but less so than was the case last year.
In Africa’s other main oil producer, the Bank of Angola has kept the kwanza pegged at roughly AOA165/US$ since April last year, and through 2016 forex liquidity conditions continued to tighten, evidenced by the currency changing hands at AOA570/US$ on the black market during mid-2016. Despite the BNA sticking to this strategy, forex supply has improved slightly in recent months in line with higher oil prices: the black market exchange rate has reportedly appreciated to AOA485/US$ in January 2017.
Regardless, a substantial forex market imbalance remains, and we predict further kwanza devaluations this year. Once inflationary pressures start to dissipate, the central bank might turn its attentions to supporting GDP growth through adjusting the value of the local unit to ease tight forex liquidity conditions. A more liberal stance on the currency will also support Luanda’s efforts in raising external debt. Should the central bank indeed revert to a periodic devaluation strategy, we do not foresee a particularly aggressive approach as the BNA will remain cognisant of the impact of a weaker kwanza on inflation. As such, forex liquidity conditions will remain tight.
5. Sporadic violence will be felt in the DRC, posing a regional stability risk
There is a risk of conflict igniting in the Democratic Republic of Congo (DRC) in 2017. The risk flows from President Joseph Kabila’s determination to remain in power, although his final term in office is supposed to have ended. There is opposition to the plan by rival politicians, civil society and a large swathe of the Congolese population. This opposition has already resulted in violence and some deaths, most lately in September 2016, when as many as 50 people died when police cracked down on demonstrations. After that, Mr. Kabila made some concessions to the opposition in two separate rounds of negotiation, and as of December 31, the deal was that he would name a prime minister and a head of the National Transition Council from the opposition and that presidential, parliamentary and provincial elections would be held by December 2017.
Our expectation is that the deal will be broken, that will prompt protests and a violent response, and that political violence may begin to overlap with the paramilitary violence that has plagued the DRC since the end of the Mobutu era. The way in which Mr. Kabila has pushed back elections, making sporadic concessions to calm the situation when necessary, but always avoiding personally making any promises, and the lucrative economic interests he, his family and friends have in the DRC, make us think that the latest deal he has made with the opposition is a stalling tactic. We think he bought some time in the hope that Donald Trump and the new French president (we expect the Gaullist François Fillon to win) will be less interventionist abroad than their predecessors. At some point, we think, the president’s scheming will become explicit, an opposition figure will call for protests, and the situation will again begin to deteriorate.
Once the violence begins, it could escalate rapidly. There is a deep reservoir of resentment against the president in the DRC, and many opposition members who are ready to draw on it. The constant, low-level conflict in the east of the country between militias from the Tutsi, Hutu and Nande ethnic groups will tend to be exacerbated if the army becomes more involved in politics. More intense conflict in the east would be risk-negative for the situation in Burundi, and the potential for involvement by other countries, especially Rwanda and Angola (by far the region’s biggest military power), is there.
This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.
Oxford Economics and NKC Africa Economics together provides a comprehensive view of national and city economies with event-driven commentary on economic and political events, that will benefits organisations monitoring risks or opportunities to their investments or operations in Africa.