For the first time in 25 years, growth in Sub-Saharan Africa (SSA) could fall to -5.1 per cent this year due to the Covid-19 which will cost the region anywhere from US$37 billion to US$79 billion in lost output.
This is a sharp drop from last year’s figure of 2.4 per cent showing that SSA is now facing its first recession in two and a half decades. Politically unstable countries are the most adversely impacted with those dependent on the export of commodities such as oil and metals, as well as the tourism sector coming in second.
An analysis by the Global Trade Review (GTR) shows that the risk of sovereign default is growing across Africa because of higher debt levels and currency risk.
In addition, reduced demand and lower commodity prices have affected oil and metals export pushing some African countries which are particularly reliant on these commodities into deep recessions. Noteworthy is that financial pressure has increased due to lower financial inflows since investors have postponed their spending. Again, official development aid is limited.
Countries in the SSA region are hurting economically since the pandemic has led to the contraction of regional GDP by 3.3 per cent expected this year. Data from the International Monetary Fund (IMF) shows that in 2019, the region’s GDP grew by 2.9 per cent. Many countries in the region have registered some of the fastest growth in the world in recent years.
The economic decline will manifest in reduced exports and employment losses. In Kenya, for instance, the unemployment rate is 4.7 per cent as of the second quarter of 2019.
A report released in October by Dutch export credit agency (ECA) Atradius notes that metal exporters like South Africa, Botswana and Zambia have seen a sharp decline in export revenues.
Atradius notes that the shock is hardest felt by oil exporting countries such as the Democratic Republic of the Congo and Angola. In these two countries, oil accounts for more than 90 per cent of export revenues.
SSA countries facing drop in financial inflows
While the Covid-19 pandemic has led to the attrition of the region’s economic standing, another circumstance which could be a death knell is that many other SSA countries are having to contend with a drop in financial inflows. These inflows are in the form of remittances, foreign direct investments (FDI), and overseas development aid (ODA) and portfolio investments. With the decline in FDI and ODA, the region will experience aggravated vulnerabilities.
While it seems all is doom and gloom, there is a silver lining in the form of the African Continental Free Trade Area (AfCFTA) which if implemented will lift Africa out of the current economic downturn. African trade experts agree that the agreement could turn things around for the continent if swiftly executed.
Projections show that implementing the AfCFTA will boost intra-African trade by US$35 billion. This will increase value-chain development across several sectors which in turn will inject much-needed revenues to grow the continent’s economy.
The report by Atradius titled Covid-19 aggravates Sub-Saharan African Debt Problems, notes that FDI decline is due to investors postponing or divesting their spending amid the pandemic.
On the other hand, overseas development aid could be limited as developed economies spend their resources to combat the crisis at home.
With increased public spending in a bid to contain the virus, fiscal deficits in the countries overwhelmed by other debts have gone up meaning that public debt is rising. This is raising concerns over debt sustainability by African countries.
The report notes, “Even before the Covid-19 crisis, the elevated debt levels of some countries were worrisome. Furthermore, the changing debt structure is making the situation riskier.”
Debt in SSA has moved away from multilateral financial institutions and official bilateral creditors leaning more towards commercial and foreign currency denominated debt. There are other bilateral creditors replacing traditional lenders.
Debt and defaults by SSA countries
Risky debt in the SSA could see some countries defaulting with the Republic of the Congo, Chad and Zambia being very high risk.
Experts note that East Africa’s investment hub, Kenya, is most likely to default in 2021. Robert Besseling, the executive director at the specialist intelligence company, EXX Africa, says: “That’s mostly because of the Chinese railway debt that has developed over the past few years, and which was unaffordable even pre-pandemic. So, a restructuring was on the cards anyway.”
The East African nation saw the Standard Gauge Railway (SGR) begin operations in 2017 having borrowed more than US$3 billion from the Chinese to build the railway from Mombasa to Nairobi. To ameliorate the situation, the Ministry of Transport in Kenya urged the renegotiation of the deal as the effects of the pandemic continued to bite. A report sent to parliament noted that the government should initiate the renegotiation process due to the current economic distress occasioned by the pandemic.
Besseling notes that any sovereign defaults in Africa are dependent on the renewal, expansion or extension of the Debt Service Suspension Initiative (DSSI). The success of such moves would be reliant on commercial and Chinese creditors jumping on board as well.
The DSSI was approved by the G20 in April running until June 2021.
China is however unlikely to fully commit to the DSSI as it is yet to be transparent over the deals it makes.