30 April 2020
By Ridle Markus, SSA Macroeconomist, Absa Group
Sub-Saharan Africa (SSA) is now bracing for a sharp downturn in economic activity as a result of the COVID-19 outbreak which has further exposed the vulnerabilities of many countries in the region to unexpected structural and natural shocks. The impact of COVID-19 is on such an unprecedented level that the International Monetary Fund (IMF) says it will cause the worst global recession since the Great Depression.
Following a tentative economic recovery in 2019, we had anticipated an improved performance for our SSA coverage region on aggregate in 2020. Our conviction for this recovery to gather further steam was premised in part on improved weather conditions, signs of rising demand for commodities, an increase in the pace of infrastructure outlays and accommodative monetary policies in key markets.
All that has changed as evidenced by the economic disruption that COVID-19 has brought to many countries, who have and continue to respond with varying levels of fiscal and monetary interventions to manage the fallout and prepare for an eventual recovery. The unprecedented nature of the current global crisis suggests elevated downside risks to the SSA region’s economies, with particularly poorly diversified commodity exporters most vulnerable.
SSA’s recovery was rather sluggish in 2019 as US/China trade tensions, Brexit uncertainties, geopolitical concerns, insecurity, adverse weather conditions, elections and fiscal constraints weighed on the region’s economic growth. Primary sector activity remained weak in many markets, while the services sector also performed poorly. This lacklustre performance was largely led by SSA’s three largest economies, with Nigeria’s economic growth again falling well short of the government’s target of 3%, South Africa’s growth barely in positive territory and Angola’s economy failing to exit a three-year long recession.
As COVID-19 spreads throughout the continent, the region’s health vulnerabilities have become a major point of discussion and concern. With around 26 million people being HIV positive in SSA, 240 million considered malnourished, millions suffering from tuberculosis and other diseases/chronic illnesses and over 400 million living in poor conditions with little sanitation facilities and access to clean water, the realistic fear is that the region is very susceptible to the virus.
This is further compounded by weak health systems, poor infrastructure, insecurity and poor governance in parts of the region, which does not bode well as it can result in a humanitarian crisis, and, ultimately, an economic crisis that could have a lasting impact.
While substantial actions are being undertaken to avert a humanitarian and economic crisis, the region’s structural vulnerabilities, constrained public finances and already high debt burden suggest that 2020 could be a very difficult year for all SSA’s economies. On the policy front, in line with major global markets, many SSA central banks have cut monetary policy rates and reduced cash reserve requirements for banks to make funding available to the private sector.
In some instances, authorities have also put relief funds together for key sectors, including manufacturing and health sectors of the economy. The inflation outlook has deteriorated on the back of a sharp depreciation in local exchange rates against the US dollar. While we expect inflation to increase, it will likely be offset by dampened consumer demand and improved food security on better weather conditions.
However, inflation is unlikely to be the primary driver of monetary policy during this crisis period, with the 2020 focus rather being on supporting economic growth. The regional outlook appears challenging, with many economies likely to contract this year.
In West Africa, we believe Ghana may escape a recession, although Nigeria’s economy is expected to contract as a result of the significantly weaker oil prices. East Africa’s economic growth is likely to remain in positive territory, although agriculture exports and remittances inflows are likely to decline sharply, while the fiscal impact is likely to be large. In southern Africa, only Mozambique’s economy may avoid a contraction, albeit barely. We expect all major economies in this southern African region to slip into recession.
While the situation is complex and the near-term outlook gloomy, we remain hopeful that conditions will begin to stabilise in the second half of 2020 on the back of efforts to contain the virus and economic stimulus programmes announced by both large global economies and domestic markets. Still, a possible economic recovery deep into the year may not be enough to prevent some of the economies in SSA from contracting this year.
It is also evident that many countries in the region have had no choice but to turn to multi-lateral funding organisations because of inadequate or limited fiscal policy space to deal with the pandemic. The response packages announced in recent weeks by some countries highlights the limited policy space they have to cushion the impact of the virus.
So far, most of the measures have been announced by monetary policy authorities with a few governments coming out with meaningful support packages. Support announced so far largely involves special relief packages through commercial banks, including extended repayment terms and a moratorium on repayments; funding to critical economic sectors, including the health sector; a reduction of policy rates and interest such as rates on debt repayment; and a reduction in cash reserve ratios to assist businesses accessing credit.
Outside of South Africa, Nigeria’s pledge to provide support of up to $2.7 billion appears to be the largest funding package so far in the region, even though that appears rather small given the overall size of the economy. With oil prices at less than half of their 2019 peaks, oil producers’ options are limited. Kenya’s government is focused largely on tax relief measures and providing comprehensive relief for individuals and companies under financial distress from the impact of the virus.
SSA markets will likely have little choice other than to look towards multilaterals and traditional development partners for additional assistance. Countries will likely tap into International Monetary Fund (IMF), World Bank and development bank packages. For example, the IMF is making available about $50bn for low-income and emerging market countries ($10bn available at zero interest for poorer members that can be accessed without a full-fledged IMF programme). The African Development Bank has made a USD10bn Rapid Response facility available to assist regional members fighting the pandemic.
The World Bank and the International Finance Corporation (IFC) have a $14bn package of fast-track financing, aimed at strengthening health preparedness and supporting the private sector. The IMF has also indicated that it has access to about $1 trillion in overall lending capacity, with low-income countries having access to the rapid disbursing emergency financing. The support from the IMF and World Bank is, however, largely in the form of hard currency and will still need to be paid back, adding to an already rising debt burden across the continent.
It remains to be seen whether current stimulus measures, which include lower policy rates and tax relief, will reverse the decline in demand as business and consumer confidence levels decrease, with sectors such as tourism, manufacturing and transport particularly at risk.
What is clear therefore is that notwithstanding the response by the region to the COVID-19 pandemic, including the promised support from multilateral funders, it is going to be a long and difficult road to eventual recovery for the region. One can only hope that countries will be able to flatten the curve of COVID-19 infections sooner rather than later, that will enable a managed return to normality, which is crucial if economies are to begin to recover from the current slump.