Beyond the commodity boom - is this the end of Africa rising?

Beyond the commodity boom - is this the end of Africa rising?

By MORRIS ARON

The World Bank Group forecasts that economic growth for African countries will slow in 2015 to 4.0% from 4.5% in 2014 due to the sharp fall of global prices of oil and other headline commodities. This is in comparison to Africa’s peak growth rates of 6.4% in 2002-08—at the height of the commodity boom.

With a barrel of crude oil going at $39, the more than 50% fall in oil prices since June 2014 will worsen terms of trade for many countries. World Bank statistics give a pointer that prices of another 36 other commodities – among them, gas, gold, iron ore, coffee, cocoa, and rubber – that will follow the tumbling oil price trends in the short to medium term.



As a result, thirty-eight of Sub-Saharan Africa’s 49 countries, home to 90% of the continent’s population and accounting for 90% of the region’s growth domestic product (GDP), are expected to post negative trade balances.



So is this the end of Africa Rising? Most analysts agree on a strong no.



The end of the commodity boom signals the beginning of a more challenging era of growth driven by several other factors that have been at work even as the commodity boom magnified ‘Africa Rising’ phenomenon.



The key reasons behind Africa’s growth in the last decade included government action to end armed conflicts, improved macroeconomic and microeconomic management and reforms to create a better business climate. In addition, Africa has deliberately chosen smart policy, opted for sounder balance sheets, and spurred consumer spending as the middleclass grows.



Africa is now politically stable—a condition necessary for economic growth. In a recent report by Economic Intelligence Unit, the overall country risk of Senegal, Ghana, and Mozambique is lower than those of other emerging markets generally considered more stable, such as Argentina, Ukraine and the Philippines, and of the 17 recent elections in Africa, a majority were free and fair. Democracy and economic growth go together.



The decision by many African economies to forge Public Private Partnerships, a concept that emphasizes collaboration between public sector and private actors, has opened up investment opportunities that would otherwise be unfeasible or unattractive by increasing risk sharing, technology transfer and sustainability.



This has made it possible for the advent of China to ‘assist Africa undertake a major 'catch up need' in infrastructure—especially in transportation infrastructure and energy provision. The wide-ranging Africa-wide enlargements and improvements are indispensable in order to make the economic upturn faster and sustainable.



The US has followed suit as per the recent Global Entrepreneurship Summit.  Other non-Western countries, from Brazil and Turkey to Malaysia and India, are also making inroads into Africa. Africa could break into the global market for light manufacturing and services in Business Process Outsourcing. Cross-border commerce, long suppressed by political rivalry, is growing, as tariffs fall and barriers to trade are largely dismantled.



Population trends could enhance these promising developments. A bulge of better-educated young people of working age is entering the job market as birth rates are beginning to decline across the globe. In Africa it is just starting. As the proportion of working-age people to dependents rises, growth should get a boost.



Africa has also embraced technology for her own economic gain. Africa now has over 500 million mobile subscribers (up from 15 million in 2000). By the end of 2015, Africa will have the highest mobile subscription rate in the world. African companies have also pioneered integrative technologies, such as mobile banking. Africa has ‘leapfrogged’ other nations in terms of technology especially mobile technology as a catalyst to economic growth.



Telecommunications, banking, and retailing are flourishing. Construction is booming. Private-investment inflows are surging. The above reforms combined with rapid increase in consumer potential thanks to the rising middle class will see Africa continue on a growth trajectory even as the commodity boom comes to an end.

In the end, there will be losers and winners from the sharp, structural decline in prices that took place over the second half of 2014. As regards the losers, a number of oil-exporting countries including Angola and Nigeria will face a painful adjustment characterized by a sharp economic slowdown and a severe deterioration of fiscal and current account balances.  Mining output is set to rise significantly in Congo-Brazzaville (iron ore), the DRC (gold and copper), Mozambique (coal) and Zambia (copper) over the coming years despite depressed commodity prices. Africa will continue to reap from the burgeoning consumer market boosting domestic demand as private consumption rises across Africa. Governments across Africa are also expected to continue playing a critical role as a key driver of growth, especially via a state-led push to upgrade physical infrastructure.

But even with the positive developments, economies in Africa have structural macroeconomic weaknesses that leave them vulnerable to shocks. Current account and fiscal deficits are par for the course, as are rising debt levels. These precarious macroeconomic fundamentals mean shocks will manifest themselves in extreme currency weakness and emergency funding from multilateral institutions

From now into the foreseeable future, the region will grapple with lower commodity prices, the slowdown in China, economic fragility in Europe, and continuing currency depreciation. Exports will diminish as a driver of growth, meaning that other growth drivers such as private consumption and investment (both public and private) will become proportionally more important. However, they will not pick up the slack from exports, and growth will be generally weaker over the coming five years than it has been over the past five years.