Standard Chartered Global Focus | 06 July 2010

Charts of the year – Africa

Chart 1: CPI trends allow for easy monetary policy Chart 2: Global outlook still matters
‘Frontier’ Africa inflation, by region, % y/y World growth vs. African export volumes, %

30 15 6
10 5
25
4
20 5 3
15 0 2
-5 1
10
0
5 -10 -1
0 -15 -2
2007 2008 2009 2010 1980 1984 1988 1992 1996 2000 2004 2008

Southern Africa East Africa

Africa export volume World GDP growth (RHS)
West Africa

Sources: Datastream, Standard Chartered Research Sources: IMF, Standard Chartered Research

Chart 3: Africa’s hopes lie in increased South-South Chart 4: Rapid urbanisation should spur productivity
and intra-regional trade growth
Destinations of Africa’s exports, % of total exports Rural-urban population mix

50 100

40 80

30
60
20
40
10
20
0
0
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

SSA World LDCs China India

EU Asia US Emerging markets Urban % Rural %

Sources: IMF DoTS (Jan-Oct 09), Standard Chartered Research Sources: Standard Chartered Research United Nations, data
estimates for 2010

Chart 5: Return on infrastructure rises with Chart 6: Still-elusive Green Revolution could be a
economies of agglomeration and city growth game-changer
Number of cities with more than 1mn people Top 10 African countries in terms of potential arable land
No. of cities with
180,000
population >1mn 160,000
Sub Saharan Africa 140,000
51
Thousand Ha

(SSA) 120,000
100,000
80,000
China 107 60,000
40,000
India 51 20,000
0
Centraf.
Congo

Angola

Sudan

Tanzania

Mozambique

Ethiopia

Cameroun
Nigeria

Zambia

Rep.

Western Europe 18

Middle East
19
(Western Asia)
Sources: Standard Chartered Research ,UN World Urbanisation Sources: FAO, Standard Chartered Research
Prospects, 2007

41
Standard Chartered Global Focus | 06 July 2010

Africa
Razia Khan, Global Head of Macroeconomic Research
Standard Chartered Bank, United Kingdom
+44 20 7885 6914, Razia.Khan@sc.com

 Africa’s more rapid growth recovery relative to

Resources for growth
previous crises is rooted in several factors: (1) the
unprecedented counter-cyclical policy response to
Economic outlook the crisis; (2) unexpectedly large aid and
 Fears that the global economic crisis would result concessional flows, especially from the
in a structural setback for Sub-Saharan Africa international financial institutions (IFIs); (3) China’s
have largely dissipated. Real GDP growth has healthy growth and the resulting support to
recovered from the weak but mostly positive levels commodity prices, which has helped to stem the
recorded in 2009, with rising expectations that deterioration in FDI inflows; and (4) the resurgence
2011 may see a return to trend growth across of risk appetite, which is partly responsible for the
most Sub-Saharan African economies. This stands post-crisis stabilisation in African FX rates. Along
in contrast to earlier economic slowdowns in with lower food and fuel prices, this also fed more
Africa, when weakness in the global economy moderate inflation, helping to create an
(Chart 1) had a marked lagged effect on African environment more conducive to monetary easing.
economies. African economies entered this
downturn with strong growth momentum. Perhaps  There are risks, however. An initial global
as a result of this, the recovery from the crisis also consensus on the urgent need for counter-cyclical
appears to have been more rapid. policy has given way to a greater divergence of
opinion, as evidenced by the outcome of the latest
 Nonetheless, headwinds associated with G20 meeting in June 2010. Following the euro-
continuing global uncertainty persist. Africa is not area sovereign crisis, even frontier African
immune to the slowdown. With intra-regional trade economies are being assessed in a different light,
estimated to account for as little as 11% of total with the market focus now shifting to the
trade (poor infrastructure is largely to blame), sustainability of fiscal stimulus plans. Prior to the
Africa’s export growth remains highly correlated depths of the financial-market crisis in Q4-2008,
with world growth (see ‘Charts of the Year – African frontier markets, unlike more established
Africa’, Chart 2, ‘Global outlook still matters’). emerging markets, had been largely insulated from
Rising South-South trade (‘Charts of the year – global contagion when risk aversion peaked. This
Africa’, Chart 3) has cushioned African economies has now changed. Recent market volatility
from the brunt of the global slowdown. However, associated with the European crisis has made its
more subdued growth in Asia and other emerging mark on smaller African frontier markets as well,
regions would pose risks to the African outlook. with most African currencies weakening in
response. Despite the fact that Africa’s trade with
Europe is dominated by the core economies rather
Table 1: Standard Chartered Research forecasts: than the peripheral ones, the market reaction
Sub-Saharan Africa*
reflects the view that Africa will be negatively
2009 2010 2011 2012 impacted by any renewed downturn in euro-area
GDP (real % y/y) 1.2% 5.2% 6.0% 5.8% growth prospects. This would be the case
IMF 4.8% 5.9% 5.5% especially if other developing regions, with which
CPI (% y/y) 10.5% 8.8% 7.2% 7.6% Africa’s trade is increasing, were to slow as well –
IMF 8.7% 7.2% 6.6% with a knock-on impact on commodity prices.
Africa’s ambitious plans for eurobond issuance in
Current account
-2.5% -0.2% 1.0% 1.7%
balance (% GDP) 2010 may also need to be scaled back. Despite
IMF 0.9% 0.1% 0.3% generally favourable public debt ratios, most
frontier African economies are sub-investment
* 2009 USD GDP, weighted total
Sources: IMF, Standard Chartered Research

42
Standard Chartered Global Focus | 06 July 2010
Africa (cont)
grade. A further deterioration in global risk appetite
may negatively impact the cost of borrowing for
maiden issuers.
 With Africa’s development partners now forced to
undergo more rapid fiscal consolidation, markets
are wary of the prospect of further cuts in foreign
aid budgets. The recent round of East African
budgets in June 2010 already showed signs of
reduced donor support to Tanzania and Uganda,
although in both cases, the causes have more to
do with the pace of reform in recipient economies
than fiscal rebalancing in donor countries.
Nonetheless, with increasing talk that the previous
Gleneagles commitments on foreign assistance
may be de-emphasised as a consequence of the
global crisis, reductions in official development
assistance (ODA) are a threat to Africa’s medium-
term outlook. For now, IFI and multilateral
development bank lending to Africa continue to be
scaled up, led by the African Development Bank.
 Commodity price trends will remain an important
determinant of the availability of private external
financing for Africa (whether FDI or portfolio flows),
although the importance of resources in driving
actual economic growth in Sub-Saharan Africa has
traditionally been overplayed. A number of factors
suggest that commodities have played a limited
role in the outperformance of African economies
since 2001. (1) A breakdown of African growth into
Chart 1: Global and Sub-Saharan African GDP
growth (%)
10
8 1.6
6
4
2
0 1.0
-2
1980 1985 1990 1995 2000 2005 2010
World SSA
Sources:IMF WEO April 2010, Standard Chartered Research
its components shows that the increase in growth
stemmed mostly from rising private consumption.
Especially during the oil boom years, net exports
made a negative contribution to overall Sub-
Saharan growth, although commodities were an
important contributor to fiscal resources in
resource-rich countries. (2) While there is evidence
that African oil exporters achieved higher growth
rates than oil importers, it is difficult to find a strong
correlation between terms-of-trade developments
and trend GDP growth in a region-wide context.
Commodities may have been important, but other
factors have been bigger drivers of African growth.
(3) There is evidence that in absolute terms,
political change and a gradual move towards
greater political accountability – often via the
establishment of regular multi-party elections –
have had a greater impact on African growth than
rising commodity prices. The democracy dividend,
with consumption booms accompanying political
transitions in both South Africa and Nigeria (albeit
at different paces), has been clear. Together, the
two economies account for over half of Sub-
Saharan African GDP. Although each economy is
resource-rich, the democratic transition appears to
have had a greater impact on GDP growth. (4)
Recent research has highlighted the success of
poverty alleviation efforts in Africa, demonstrating
that poverty rates may have fallen faster than
previously thought. For most African economies,
and for the region as a whole, charts showing
Chart 2: African currencies succumb to global risk
aversion (versus USD, rebased)
1.8
1.4
1.2
0.8
2006 2007 2008 2009 2010
NGN UGX ZMK GHS
Sources: Reuters, Standard Chartered Research
43
Standard Chartered Global Focus | 06 July 2010
Africa (cont)
rising per-capita GDP growth over time are almost
the mirror image of falling poverty rates (‘African
poverty is falling… Much faster than you think!’,
Sala-i-Martin and Pinkovskiy, 2010). Falling
poverty levels are typically not associated with
commodity-driven growth. Resource-sector gains
tend not to be widespread and are frequently
subject to rents; as a result, a limited number of
people benefit the most. Conventional thinking
casts doubt on whether resource-fuelled growth
can reduce African poverty levels, so the recent
success of poverty alleviation (and GDP growth)
must be attributed to other factors.
 What does all this mean in the context of the
pressures African economies face today? While
the recent global crisis may have stalled the
reduction in poverty levels, growth is back, and the
impact of the crisis appears to have been more
cyclical than structural. Although there are
important threats to the external outlook for African
economies, much of Africa’s growth in recent
years appears to have been internally generated.
Even faced with external headwinds, Africa’s
growth recovery should continue – although the
health of the global economy may well determine
the pace of that recovery.
 The picture of a gradual improvement in GDP
growth is consistent with trends in most of Africa’s
economies. Two of the economies under our
Chart 3: Private-sector credit growth in South Africa
and Nigeria (% y/y)
120
100
80
60
40
20
0 0
-20
2007 2008 2009 2010
Nigeria South Africa (RHS)
Sources: SARB, CBN, Standard Chartered Research
44
coverage – Botswana and South Africa –
experienced outright GDP contractions in 2009.
Botswana was hit particularly hard because of its
narrow economic base and the four-month closure
of its diamond mines in 2008-09. Even so, its
recovery from the crisis has not been dramatic. In
South Africa, positive growth is back following a
contraction of 1.8% last year. But the recovery is
mainly led by the external sectors of the economy,
and is already waning in the case of manufacturing
as restocking momentum subsides. Domestic
demand, the key driver of the pre-crisis upswing, is
off its lows but still subdued.
 Elsewhere, a more mixed picture emerges.
Ethiopia, which is not resource-rich, has managed
to deliver near double-digit growth as reforms
continue. Kenyan growth had been negatively
impacted by both the global crisis and the post-
election political fallout, which has marred recovery
prospects. Nonetheless, leading indicators are
now improving, and Kenya is a key beneficiary of
more robust regional growth. Nigerian growth had
been encumbered by reduced oil earnings and a
domestic banking crisis, but is expected to post a
strong recovery thanks to pre-election spending
(the FY10 budget currently envisages a 48% y/y
spending increase). However, Ghana and Uganda
are expected to be the real emerging stars over
the medium term, with a step-change in GDP
growth expected in both economies as they
become oil producers for the first time. In other
countries, more gradual improvement is expected.
While post-crisis headline growth rates will still be
healthy, the increased casualisation of the formal-
30 sector labour force in mining economies such as
Zambia is a concern. Africa’s informal sector has
25
also been hit hard by the crisis, and it may be
20
some time before domestic demand recovers fully.
15
10
Financial issues
5
 Although Nigeria was the only major African
economy to experience a banking crisis, credit
-5 growth remains subdued region-wide. The reasons
vary. Rising NPLs associated with public-sector
arrears have taken their toll on banks in Ghana,
despite the injection of increased capital, in line
Standard Chartered Global Focus | 06 July 2010

Africa (con’d)

with new regulations. In South Africa, highly
leveraged households, continuing job insecurity,
and greater caution among lenders have resulted
in weak annual credit growth, despite aggressive
easing by the South African Reserve Bank. Given
the slow response of credit growth to monetary
easing in Africa, doubts about the transmission
mechanism persist. If anything, this is an argument
for policy to remain accommodative for longer.
Policy
 We expect a continuation of easy monetary policy.
Africa’s growth and inflation cycle are thought to
lag those of the rest of the world, and risks remain
tilted towards further easing rather than imminent
tightening. Fiscal policy will remain expansionary
amid efforts to widen the tax base and extract
more revenue from the resource sector.
Politics
 Political risk has taken a backseat to economic
factors in determining recent growth. However, the
economic crisis has in many cases exacerbated
pre-existing fault lines. Of particular interest in the
months ahead will be the 4 August referendum on
constitutional change in Kenya, seen as a key
litmus test for the holding of peaceful elections in
2012, and pre-election momentum in Nigeria.
Nigeria must hold elections in 2011, but the issue
of whether North-South rotation will be adhered to
within the ruling People’s Democratic Party
remains unresolved.

Table 2: Ranking of Sub-Saharan African economies by GDP

GDP (PPP)
GDP GDP (PPP) GDP GDP (PPP)
Economy (2009 estimates) GDP (PPP) per capita
USD bn per capita ranking ranking
ranking
South Africa 287.2 505.2 10,244 1 1 5
Nigeria 173.4 341.6 2,249 2 2 8
Angola 68.8 105.9 6,117 3 3 6
Kenya 32.7 62.1 1,730 4 5 11
Ethiopia 32.3 79.0 954 5 4 17
Côte d'Ivoire 22.5 35.8 1,674 6 10 12
Tanzania 22.3 57.4 1,416 7 6 15
Cameroon 22.2 42.8 2,147 8 7 9
Uganda 15.7 39.7 1,196 9 8 16
Ghana 15.5 35.8 1,551 10 9 13
Zambia 13.0 18.5 1,542 11 18 14
Senegal 12.7 22.3 1,743 12 13 10
Equatorial Guinea 12.2 23.7 18,600 13 12 1
Botswana 11.6 25.4 13,992 14 11 3
Democratic Republic of Congo 11.1 21.5 332 15 14 20
Gabon 11.0 21.1 14,318 16 15 2
Mozambique 9.8 19.8 934 17 16 18
Republic of Congo 9.5 15.6 4,146 18 20 7
Mauritius 8.8 16.1 12,527 19 19 4
Madagascar 8.6 19.4 932 20 17 19
Sources: Standard Chartered Research, IMF WEO April 2010

45