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Economic Update: Africa

The ICAEW Economic Update: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.

The impact of fluctuating commodity prices: Q3 summary

  • Fears over a global economic slowdown are growing
  • A distinct risk-off scenario has manifested itself in H2 2019
  • As a global trade war rages, Africa fears contagion from volatile commodity prices

Focus: Africa

With the midway mark for 2019 behind us, perceptions over the global economy are mixed and uncertainty remains high. Developments over the past month or so have provided further grounds for unease about the near-term global economic outlook, highlighted by broad-based monetary policy easing, heightened China-US political tensions and weak data releases for major advanced economies. This was also evident in the large risk-off element to trading in financial markets during August, which illustrated that financial markets and the global economy are caught in the crossfire of the intensifying trade battle between China and the US. 

Trade tensions are affecting more countries, which holds mixed implications for dollar-denominated commodity prices. By allowing the yuan to slide past ¥7 to the US dollar in August (effectively taking some of the sting out of recent US tariffs), Chinese policymakers have increased the risk of the dispute escalating. The yuan’s fall may also trigger other struggling exporters to attempt to weaken their currencies, leading to a wider ‘currency war’. In such an environment renewed US dollar strength could further dampen trade growth. As a general rule of thumb, a firmer greenback does not bode well for commodity-exporting nations, and industrial commodity prices are hampered by the prospects of a full-blown global trade war. Conversely, precious metals such as gold have profited from the global risk-off sentiment.

Beyond the short term, global trade weakness looks set to continue. We forecast world trade growth of just 1.2% this year – markedly weaker than the 2018 rise of 4.9% – and a slow recovery to 2.6% in 2020, almost 1 percentage point below the average growth rate over the 2014−18 period. 

Commodity-dependent African economies have no choice but to contend with volatile price movements of commodities over which they have very little influence.

Regional growth rates in Africa

North Africa’s real GDP growth rate is forecast to slow to 2.8% in 2019, due to oil production disruptions in Libya which compounded the effect on the region’s other economies of weak eurozone demand. Regional GDP growth for Central & West Africa is forecast at 3.4% in 2019 and incorporates the impact of the Nigerian economy’s slow start to the year, as pipeline damage curtailed oil production. Our growth forecast for the Franc zone this year is 4.7%, due to a structurally low international oil price environment, which continues to weigh on growth in the region’s oil exporters. While still expected to remain the strongest growing region on the continent, East Africa is projected to record a slightly lower real GDP growth rate of 6.3% this year compared to 2018. Lastly, Southern Africa is forecast to keep struggling (+1.3% in 2019) as the region’s economic anchor, South Africa, is expected to show nearly-flat growth because of policy uncertainty, concerns over debt-landed parastatals and high unemployment. In the region’s other countries growth has been slowed by supply-side challenges, notably adverse weather conditions in the wake of two cyclones, a regional moisture deficit and power rationing. 

Focus: Commodities

Iron ore (62% Fe) prices have risen throughout the year, reaching a five-year peak of US$120 per tonne in July. This was mainly due to the steep fall in Chinese port stocks, which highlighted supply shortages. However, the rise in prices was overdone as fundamentals weakened. A change in sentiment saw a substantial price reversal in a relatively short period of time: more than 20% from the July peak to mid-August. 

The latest economic signals from China are soft. GDP growth eased to 6.2% in Q2, an unsettling prospect for base metals. In the first month of H2, zinc prices led the way down with a 4.8% drop between the start of January and end of July, closely followed by aluminium (-3.1%). Copper was unchanged for the first seven months, while nickel bucked the trend: the price was up by 17.6% in the year to July. Fundamentals in both copper and aluminium promise rising prices as demand looks set to strengthen: we expect Chinese copper demand to grow by about 3% this year, spurred by construction and infrastructure projects.

The gold price has seen a tremendous increase over the past two and a half months. The looser monetary policy stance by the US Federal Reserve has put pressure on the greenback, and this, together with uncertainty over the health of the global economy and lingering trade tensions, boosted demand for gold as a safe haven investment, pushing the price to its highest level in six years ($1,523/oz). Platinum prices have also risen steadily at a rate of 4.6% during the first seven months of 2019, but remain far below historical levels.

Performance of commodity prices

Recent figures from the International Energy Agency (IEA) show that global oil production growth fell to just 0.2% y-o-y in June – its lowest since November 2017 – as the effects of cutbacks by the Organisation of the Petroleum Exporting Countries (OPEC) began to bite. After a volatile few weeks in June, Brent oil prices briefly returned to an upward track at the start of H2 2019, but this was undone as risk appetite weighed again in August. 

Noteworthy developments in the energy sector in Africa include the completion of a deal to develop a liquefied natural gas (LNG) field off the coast of Mozambique and the first oil exports from Kenya. The $25bn Mozambique LNG project was finalised in June and is the largest single LNG project approved in Africa to date. The project, in Area 1 of the Rovuma Basin, will have a production capacity of 12.88m tonnes per year, which will make it one of the largest LNG facilities ever developed. According to local authorities, the project will create 5,000 direct jobs and 45,000 indirect jobs. In late August a cargo of 200,000 barrels of oil from Turkana was shipped from Mombasa, Kenya’s first exports of crude, which sees the East African nation join the ranks of oil exporters. 

Focus: Uganda

Uganda’s mining sector remains small and underdeveloped, accounting for only 1.3% of GDP last year. Because of its small size, the sector’s growth rates have been very volatile, driven by global mineral prices and production decisions by large mining companies. The mining sector expanded by 29.9% last year, much faster than its 5.9% growth rate in 2017. Still, the East African nation has considerable mining potential and its key mining commodities include limestone, pozzolana, kaolin and tin, while the most important mining-related exports are base metals and, more recently, gold. 
Receipts from gold exports have increased markedly in recent years. In fact, gold overtook coffee as Uganda’s top foreign exchange earner in 2018. This marked increase in gold exports can partly be explained by an improvement in gold processing in Uganda as the government continues to encourage value-addition in the mining sector, including the waiving of taxes on gold exports in 2014 and granting gold smelters 10-year tax holidays if the yellow metal is refined domestically before being exported. However, the surge in gold exports has raised concerns, with critics suggesting that some of this gold is smuggled from the war-torn east of the Democratic Republic of Congo (DRC), as Uganda is exporting more gold than it mines. A December 2018 report by the UN Security Council highlighted that Uganda could be indirectly funding terrorism as some of the gold it processes comes from areas controlled by armed militias who usually extort money from artisanal miners.

Selected metal and coffee exports, 2008−18

Since oil was discovered in the Lake Albert region in 2006, authorities have envisioned Uganda becoming an exciting new player on the global hydrocarbons stage – the country currently boasts between 1.4 and 1.7bn barrels of commercially-viable oil reserves as well as an estimated 500bn cubic feet natural gas reserves. However, progress in the development of the oil and gas industry has been slow due to disagreements on various taxes and recoverable costs between oil companies and the government. Final investment decisions are now expected in Q4 2019 against the initial deadline of Q4 2017 and first oil is expected to be extracted in 2022. Despite these delays, the government recently announced its second round of licences for the exploration of five additional blocks in order to keep foreign investors engaged.

Uganda’s oil production and global oil price forecasts, 2018−24

The government is also engaged in infrastructure development to support the nascent hydrocarbons industry. In April 2018, the country awarded a General Electric-led consortium a contract to build a 60,000 barrels-per-day oil refinery. In addition, Uganda, in partnership with Tanzania, plans to build the East African Crude Oil Pipeline (EACOP). This $3.5bn pipeline will transport crude oil from Kabaale (Uganda) to the Tanga port (Tanzania) from where it will be exported to the global market.

Uganda’s favourable economic outlook hinges on the development of its hydrocarbons sector – GDP growth is forecast above 6% p.a. over the medium term. However, extended delays in oil exploration and the widening twin deficits (due to an increase in public debt and increasing capital goods imports to support the nascent hydrocarbons sector) pose significant downside risk. 

Focus: Zimbabwe

Zimbabwe has tried to fire up the mining sector ever since former president Robert Mugabe was removed from office through a military-assisted transition in 2017. Mining offers enormous untapped potential and exports are seen as an essential source of foreign exchange. The country aims to attract new investment into the industry by abolishing stringent foreign investment principles that were previously based on race and nationality. However, so far President Emmerson Mnangagwa’s administration has not succeeded in luring new foreign investors, as weaknesses in the operating environment have marred the country’s promise for investors: policy uncertainty, severe forex shortages and widespread power outages.

Mining is arguably one of the most promising channels for investment inflows, thanks to Zimbabwe’s impressive variety of mineral deposits comprising more than 60 minerals and metals – which has largely been closed off to the outside world. The country is among the leading producers of platinum group metals (PGMs) and diamonds globally. According to the Chamber of Mines of Zimbabwe, the country’s nearly 800 mines have the potential to earn $18bn per year, but are only currently turning out around $2bn per year. Clearly Zimbabwe presents incredible investment opportunities, but strict regulations and tremendous uncertainty have kept investors at bay. 

Finance Minister Mthuli Ncube delivered his 2019 mid-year budget speech in August, in which he announced that the Indigenisation and Economic Empowerment Act will be repealed. Indigenisation laws were adopted in 2008 under Robert Mugabe and forced foreign-owned businesses to cede at least 51% ownership of their local operations to black Zimbabweans. A decade later, President Mnangagwa scrapped these requirements for all companies except miners in the diamond and platinum sectors, stating that these were strategically important industries. These requirements have now also been scrapped in the diamond and platinum sectors. 

Looking at the sectoral performance, a regional drought has severely impacted Zimbabwe’s hydropower production, weighing on the private sector and disrupting daily economic activity. The mining industry in particular is expected to suffer from these problems. This is concerning because high power-consuming industries such as mining are seen as the main engines for growth – accounting, as they do, for nearly two-thirds of the country’s total exports.

Zimbabwe’s mineral production

Industries such as mining, which generate inflows of foreign exchange, are politically favoured. Perceptions among locals of more lucrative prospects in the sector have led to an uptick in artisanal mining. Artisanal and small-scale miners (ASM) account for more than half of Zimbabwe’s gold production and have become such a vital part of the economy and source of fiscal revenue that the government has turned a blind eye. Deteriorating economic conditions and policy gaps see illegal mining operations conducted in extremely hazardous conditions. What’s more, this sector has also become susceptible to banditry and extortion. Minerals sourced from illegal mining operations are often traded on the black market and smuggled out of Zimbabwe to neighbouring states. Considerable government revenue is lost in this process and instead ends up in the informal market system. 

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.