Global reflation is boosting Africa’s economies

Global reflation in early 2017 is boosting Africa’s economies as increasing imports from the two largest economies, the US and China, result in both volume and commodity price increases.

US imports grew by 8.3% year-on-year (y/y) in January 2017 to $240.6 billion, while Chinese imports surged by 38.1% y/y in February to US$129.23 billion after rising by 16.7% y/y in January. The February import surge was the fastest y/y increase since early 2012, driven by strong demand for commodities. Trade in January and February can be distorted by the week-long Lunar New Year holidays, with business slowing down weeks ahead of time and companies scaling back operations. This year, the holiday fell on January 28th.

China’s crude oil imports rose to the second-highest level on record in February, as strong demand from independent refiners continued to drive growth. February’s imports came to 31.78 million tonnes or 8.286 million barrels per day (bpd), up 3.5% y/y. Daily shipments were only behind December’s record 8.57 million bpd, but up on 8.01 million bpd in January. Apart from the volume effect, the OPEC reference price is up 91.5% y/y in the first two months of 2017 compared with the first two months of 2016.

China’s coal imports in the first two months of 2017, which smooths out the impact of the Lunar New Year holiday falling at different times, totaled 42.61 million tonnes, up a massive 48.5% y/y. China imported 255 million tonnes of coal in 2016.

Total iron ore imports for the first two months of the year rose by 12.6% y/y to 175.3 million tonnes, a record for the first two months of the year.

These high import volumes were reflected in the bulk export volume data from South Africa, which showed a 18.6% y/y surge to 14.9 million tonnes (Mt) following a 2.8% drop in 2016 to 163.3 million tons (Mt), according to data from the Transnet National Ports Authority (TNPA).

Bulk exports out of Richards Bay, which are mostly coal, rose by 17.6% y/y to 7.4 Mt in February after falling by 2.8% in 2016 to 90.4 Mt. Bulk exports out of Saldanha, which are mostly iron ore, jumped by 19.5% y/y in February to 6.3 Mt following a 5.6% decline in 2016 to 59.8 Mt.

Policy uncertainty and logistics constraints meant that South Africa lost out on the 2003 to 2008 commodity price boom with annual bulk exports increasing by a mere 2.8 Mt between those two years. Since then there has been a marked turnaround due to better policy co-ordination between mining companies and state-owned Transnet, so that volumes have improved by 45% or 52.3 Mt between 2008 and 2015. Low commodity prices in 2016 however constrained supply, but South Africa is determined that it will not lose out on the current commodity boom and bulk export volumes are up 5.2% y/y in the first two months of 2017.

The Organisation for Economic Cooperation and Development (OECD) said in early March that global economic activity is projected to pick up modestly to around 3.5% in 2018, from just under 3% in 2016, due to the reflation fiscal initiatives in the major economies. This is already reflected in the leading indicators and consumer and business confidence indices.

These indices are also reflected in the gains in global equity markets with US equity markets in particular hitting a series of record highs in 2017. The Dow Jones Industrial Average index crossed 19,000 on November 22 2016 and continued to gain as expectations that the Donald Trump administration would boost materials-intensive infrastructure spending would make America great again.

This euphoria continued in 2017 with the Dow Jones index closing above 20,000 on January 25 2017 for the first time and above 21,000 on March 1 2017.

The investor euphoria found its mirror image in the recovery in African economies with the Nigerian Purchasing Managers’ Index (PMI) above the breakeven 50 level in the first two months of 2017 for the first time since January 2016. Respondents said the improvement was driven primarily by a stronger expansion of output as increased export revenues eased the foreign exchange shortage that has hampered Nigerian industry in 2016.

The foreign trade surplus in Nigeria increased to NGN 227 billion in December 2016, as exports rocketed by 72.2% to NGN 986 billion. The main export partners were India (16% of total exports), Netherlands (11.2%), the US (10.7%) and Spain (9.6%).

Even in Mozambique, which has been severely impacted by the withdrawal of donor funds after the government failed to disclose some foreign loans in 2016, there has been a revival in business confidence as the coal prices have recovered. Business confidence in Mozambique increased to 92.6 in January from 91.0 in December and 90.2 in November.

As more data becomes available from other African countries in coming months, so the “Africa Rising” narrative will regain its former prominence in the media.