Op-Ed: African giants to stumble due to Covid-19 pandemic

Thursday, March, 26, 2020 by CNBC Africa

Op-Ed: African giants to stumble due to Covid-19 pandemic

Thursday, March, 26, 2020 by CNBC Africa

NKC African Economics expects the coronavirus-related knock to economic growth in Africa’s three largest economies alone to shave off 1 ppt from the continent’s GDP growth this year, from 3.8% to 2.8%.

Preliminary estimates point towards the weakest continental growth since the early 1990s.

The continent’s three largest economies, South Africa, Nigeria and Egypt – together accounting for just under 60% of African GDP – will see a significant weakening in economic growth this year.

This slowdown in economic activity will permeate through the continent as these countries are salient drivers behind economic growth in their respective regions. 

In addition to the indirect effects stemming from weakness in the largest economies, other African nations will also have to deal with a much more volatile external economic environment.

The collapse in tourism will weigh on economic growth in many countries (particularly the island nations, Morocco, Egypt, and Tunisia), while a reduction in both export demand and commodity prices will weaken fundamentals in Africa’s more export-oriented economies (most notably the oil producing nations). 

The escalation in the Covid-19 outbreak in Africa implies there is a lot more at stake than foregone economic production.

Most African countries will not be able to effectively implement the severe restrictions on movement that we have seen globally. The impracticality of implementing widespread self-quarantine in shantytowns or informal settlements means that this will not be an option. Mismanagement of the situation could lead to human costs far exceeding economic losses.

Tourism is a key forex generator and employment creator across the continent. Severe travel restrictions, border closures and lockdowns in key source markets will result in a collapse in tourism during the first half of the year, at least.

Domestic and intra-Africa tourism have been key drivers behind growth in overall tourism in recent years, but as more Covid-19 cases are confirmed on the continent we will see an increase in domestic travel restrictions and regional border closures.

The island nations will be hardest hit, but the mainland will feel the effects in the North (particularly in Tunisia, Morocco and Egypt), South (Namibia, Botswana), East (Tanzania, Rwanda, Kenya) and West (Côte d’Ivoire, The Gambia, Cameroon).

Low barriers to entry have led to tourism becoming a key source of employment. The island nations in particular are dependent on tourism to generate employment, most notably the Seychelles (where tourism accounts for around 44% of formal employment), Cape Verde (39%) and Mauritius (19%).

Tourism has also become a salient job creator on the African mainland, and a slump in the sector could result in rapid job losses given the prevalence of micro- and small-sized enterprises operating in the sector. 

The slowdown in global economic activity will translate into a reduction in demand, while lower commodity prices will compound this negative effect on exports.

Africa’s energy exporters will struggle to come to terms with a much more hostile external environment. Countries such as Nigeria, Angola and Gabon are highly dependent on oil exports not only to generate forex but also to fund government spending.

Countries including Namibia, Zambia, Botswana and Mozambique are dependent on mineral exports for the same reasons.

Generally speaking, countries that have a GDP structure orientated towards exports will feel the pain of a weaker external environment.

Lower international energy prices will have a detrimental impact on the continent’s oil exporters, but many other countries stand to benefit.

A reduction in the oil imports bill will have a favourable impact on external balances while also containing consumer price inflation. Lower inflation will support consumer spending at a time when a weak external environment increases the importance of domestic consumption in driving overall economic growth. 

The South African economy had already entered 2020 on a very fragile footing before the dramatic external developments related to the Covid-19 pandemic. NKC forecasts a 5% real GDP contraction this year. Domestic policy uncertainty and supply-side constraints have now been accompanied by a deterioration in global business sentiment and a drop in demand for South African goods, all weighing on the country’s economic recovery prospects.

In addition, the three-week long nationwide lockdown, which commenced on March 27, will result in a collapse in consumer spending. The outlook could deteriorate further if the lockdown is extended. 

The coronavirus has not as yet, as far as we know, taken significant hold in Nigeria. However, the weaker external environment and more specifically, the recent collapse in international oil prices, will have a marked impact on the economy’s performance this year.

Lower oil prices will result in tighter FX liquidity, rising inflation, falling investment, lower fiscal expenditure and easing consumption growth.

As a result, NKC has revised its growth projection sharply lower to 1.2% this year, with risks still firmly stacked to the downside.

A more severe domestic outbreak of Covid-19 would cause significant disruption to daily economic activity, particularly when considering the population density in the country’s biggest cities.

Despite the Egyptian government’s efforts, the number of confirmed Covid-19 cases continues to rise considerably.

The president has urged all citizens to stay at home for a two-week period and a night-time curfew has been declared, while the possibility of a formal lockdown in some regions is also circulating in local media.

The fiscal deficit is set to widen significantly over fiscal year (FY) 2019/20 and FY 2020/21 following the announcement of a stimulus and bail-out package to the value of approximately E£100bn.

Government revenues already came in far below budget during the first half of FY 2019/20 and will take a massive knock during the second half of the fiscal year, which ends in June.

Lower economic growth reflects weaker consumption, investment, and exports.

The recently announced fiscal stimulus measures, however, should prevent a collapse in domestic demand.

The economic impact of the coronavirus epidemic will be considerable, but the human costs will be higher yet.

As of end March South Africa remains the hardest-hit African country from a confirmed-case perspective and the expected economic hardship reflects this.

However, South Africa is also arguably the best-placed country on the continent to deal with the pandemic. While it does have a large immuno-compromised population due to its struggles with HIV, the country might be able to leverage its sophisticated private healthcare sector to supplement inadequate public services.

Most other African nations will not have this benefit.

Confirmed Covid-19 cases will undoubtedly increase across the continent in coming weeks, and timely and effective government responses will be required to ensure that this does not become another African tragedy.

Jacques Nel – Head of Africa Macro

Article published by CNBC Africa

Get our latest updates straight to your inbox!

Recent Posts

ICSB Giving Tuesday to Support Scholarship Drive for students. Students are crucial to innovation, and we must invest in them. Join us at https://lnkd.in/dwbKbSBn

ICSB enthusiastically supported Argentina's Global Entrepreneurship Week, led by Argentina's Ministry of Economy under the Undersecretary of Entrepreneurial Development. Natalia C. Del Cogliano. Focus on Building an ecosystem that promotes Digitization, Social, and Environment.


Load More