Oil and debt to define Africa’s winners and losers

The collapse of oil prices has had far-reaching effects on African economies. For commodity exporters, the implications are clear — weaker revenues have damped growth and it will take time for those economies to adjust to the new reality. Yet most African economies are not in that business and lower fuel costs have supported growth and living standards. In both cases, the influence of lower oil prices will fade, though fortunes are set to differ across the region in the next few years. The question is: what will these economies look like when the dust has eventually settled? A lot may depend on indebtedness.

Economic growth in sub-Saharan Africa has slowed materially following the drop in oil prices to 3.4 percent in 2015 from 5.2 percent on average over 2010-14. Growth is likely to be substantially weaker still in 2016, based on output data for the first half of the year. However, the slowdown in aggregate terms largely reflects weaker growth in oil-exporting Nigeria and Angola as well as South Africa — they accounted for about 60 percent of Sub-Saharan GDP in 2015, but less than 30 percent of the population. Net oil importers, such as Kenya, are expected to fare much better, as the chart illustrates.

oil

East African nations — of which only South Sudan is an oil and gas exporter — are likely to power ahead in the next few years. Ethiopia, Kenya and Tanzania have also invested in domestic power generation and better transport infrastructure — both should pay dividends. This could see the narrative change from “Africa Rising” to “Africa Tilting” as commodity exporters in West, Central and Southern Africa struggle to find new sources of growth. Still, over time, the commodity price shock will work its way through the system, and it will be other themes that grow in prominence.

A less reported trend in Sub-Saharan Africa is the increase in public indebtedness. External debt fell from close to 60 percent of the region’s GDP in the late 1990s to less than 12 percent in 2012, largely due to debt relief led by the International Monetary Fund and World Bank, but it has risen to 16.7 percent in 2015 and is likely to continue to climb. One reason for this development is Chinese financing of infrastructure projects. The other is the increased popularity of Eurobonds (international bonds often denominated in U.S. dollars), which facilitate access to a broader pool of finance. So long as the money has been spent wisely, that isn’t a big cause for concern.

And in some countries the money has been put to good use. Successful investments in power generation in Ethiopia and Kenya have already reduced dependence on imported oil and considerably larger-scale infrastructure investment projects are under way. More hydro power will come online in 2016 and 2017 in Ethiopia, and a new Standard Gauge Railway will boost transport links between the Kenyan port of Mombasa and Kigali in Rwanda, with branches into neighboring countries. While these projects will raise public indebtedness, they should boost output and debt-servicing capabilities over the longer term.

Other countries have been less careful. Borrowed funds have been used to expand the public sector and boost governments’ chances in hotly-contested elections. This looks to have been the case in Ghana and Zambia, while recent revelations of undisclosed loans have brought Mozambique to the brink of a sovereign default. These countries are likely to come under pressure to stabilize or reduce public debt that currently ranges from 60-100 percent of GDP. That will leave little room for spending on much-needed infrastructure upgrades that could otherwise have lifted output.

Once the adjustment to lower commodity prices is over, countries in Sub-Saharan Africa that have been careless with their finances will struggle to keep up with the growth of their more prudent peers.