Risks to Sub-Saharan Africa’s long-term growth

Growth in Sub-Saharan Africa is projected to be 1.4% in 2016 according to the IMF’s latest World Economic Outlook. Global growth is projected to be 3.1%.

imf-global-growth

Growth in the region has painfully fallen as shown in the chart I made below with IMF data and projections. This has consequences for a region with a fast growing population and it is important that we understand why growth is slowing and what barriers to growth could be there in the long-term.

ssa-growth

The IMF’s outlook for Sub-Saharan Africa mentions risks to the region’s growth like the slump in commodity prices, drought, economic uncertainty in China, the normalization of US interest rates and terrorism. All these are valid risks. However, there are significant global and regional trends which I believe pose threats to the region’s long-term growth.

  1. Climate Change. I am convinced that this is the primary threat to sub-Saharan Africa’s long-term growth. According to the United Nations Environment Programme (UNEP) by 2020 75-250 million people in Africa will be exposed to increased water stress and the yield from rain-fed agricultural production will be down by 50%. Not only will the droughts and rising sea levels take lives and harm agricultural production but also they will feed into increasing conflict, political instability and terrorism.
  2.  Deindustrialization. Rising labour costs in China had made me optimistic that with the right infrastructure, Sub-Saharan Africa could draw low wage manufacturing jobs from Asia. However, the region may be set to miss out on this driver of growth due to automation. Jobs are already returning to Europe from Asia due to technological progress making it cheaper to produce with robots. This is a big threat to Africa’s dream of finding work for its expanding population.
  3.  Bear Super-cycle for Commodities. Are commodities in a long-term bear market due to excess supply? Analysts, including Wells Fargo, seem to think so. Judging by how much growth has been affected by the slump in commodity prices, a sustained period of low prices could have terrifying consequences for resource-dependent countries. Especially as industrialization as an alternative is gradually becoming more difficult.
  4.  Large External Debts. The voracious appetite for Eurobonds among African countries is dangerous, especially if growth prospects are to remain tame and their exchange rates will suffer from a normalization of US interest rates. African countries are projected to have to repay an average of $4 billion annually between 2021-2025 and if they do not find willing lenders to help them refinance the debt, they could be in real trouble. This also reduces the capacity for expansionary fiscal policies in the case of a prolonged growth slump.
  5. Terrorism. Boko Haram, Al-Qaeda in the Islamic Maghreb, Al Shabaab, Al-Tawhid Wal Jihad in West Africa and other terrorist groups pose a threat to the political stability and security of the region. With porous borders, high unemployment rates, financially weak governments and weak money laundering checks, the region is susceptible to terrorism and not fully prepared to tackle an escalation.
  6. The Rise of Nationalism in Europe and America. Brexit, Donald Trump, the far-right in Europe – are these short-term reactions to prolonged economic challenges or are these a long-term change in the attitude of advanced economies towards immigration? I hope it is the former. A return of the advanced economies to the growth they had before the Great Recession may harm African economies in the short-term but it will help in the long-term if that will turn the rising tide against immigration, globalization and trade. About 21.8 million people emigrated from the region in 2010 and $21.5 billion in remittances was received. If closed borders are the future for the West then that could close a route out of poverty for many Sub-Saharan Africa people and their families back home.
  7.  China Slowdown. Much of this point comes under point 3 – China’s slowing growth has been one of the reasons for the fall in commodity prices. However, if China is really headed for major trouble then this could significantly affect Chinese investment inflows into Sub-Saharan Africa and harm growth.
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Jerome Kuseh

Financial Analyst | Accountant | Private Investor
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