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Ronak Gopaldas Correspondent
THE current macro-economic environment has cast a long shadow over the African continent with many questioning whether the “Africa rising” narrative is still relevant.

Changing external dynamics as well as a host of domestic issues are combining to put pressure on Africa’s growth prospects.

The massive plunge in global oil prices, coupled with a strong US dollar, softer Chinese growth and a subdued euro zone outlook, have again highlighted the continent’s susceptibility to commodity cycle “boom-bust” scenarios.

Consequently, sentiment towards the continent has dimmed in recent months, with many countries across Africa facing major currency weakness, severe strains on their balance sheets, weaker prospects for foreign investment, ratings downgrades and an overall up-tick in political volatility and uncertainty.

With limited policy flexibility, and security issues also featuring more prominently, many are now questioning whether their optimism needs revisiting.

External dynamics

This change in outlook has largely been driven by external dynamics.

Europe, Africa’s largest trading partner, continues to struggle with limp growth and output.

As a key market for African exports, as well as a key supplier of donor aid, upon which many sovereigns are heavily reliant, Europe’s lacklustre outlook has stoked investor fears about the sustainability of this source of finance.

At the same time, the US economy continues to display stronger growth and positive data, which has raised the prospects of a normalisation of the interest rate cycle and a return to positive real rates before the end of the year.

Such a move has the potential to fan emerging market risk aversion which will see African sovereigns with weak balance sheets suffer from capital flight and experience stress in their external and fiscal positions.

Furthermore, an appreciating dollar threatens to put added strain on African currencies, thereby increasing the debt servicing costs of many sovereigns.

In addition, with China’s growth rates at multi-year lows, concerns are being raised around the prospects of a hard landing for the Chinese economy.

Given the Asian country’s voracious appetite for African resources, any demand side shocks will place further strain on commodity prices and potentially exacerbate revenue pressures from key exports.

As importantly, the precipitous decline in the global oil price from triple digit highs of the past few years has caught many sovereigns off guard. Authorities in oil producers Nigeria, Angola, Gabon and Ghana failed to build adequate savings and reduce the reliance on oil earnings to fund their budgets when crude prices soared, putting their economies at risk.

Currency shortages

Cash-strapped governments now have no option but to cut expenditure in the absence of a strong foreign exchange reserves position to support them in this period.

This has massive implications for their economies both on a macro level, as well as on a sectoral level. For countries like Nigeria and Angola, the primary method of contagion will be via the government’s balance sheets.

Nigeria will battle to preserve the value of its currency at current levels, whilst in Angola investors should expect hard currency shortages and delays in payments to government contractors.

The unsettling prospect for these oil producers is that irrespective of the monetary policy response, their economies will be subject to painful adjustments and slower growth, reinforcing the need to diversify the country’s export base and fiscal revenues.

In the same vein, countries such as Mozambique, Tanzania and Uganda, which are pinning their hopes on recent oil and gas finds, could be disappointed because of these recent structural changes in the oil market.

While in theory, the East Africa region, as net importers of oil, should benefit from such a boon, particularly in terms of their trade balance and inflation metrics, this is not inevitable.

The current climate has created uncertainty around the effect that a sustained low oil price will have on the development, profitability and sustainability of the oil and gas sectors in the region.

Uncertainty relating to domestic political and security issues such as tightly contested elections, succession related issues and the continued terrorist threat across the east and west of the continent have further dampened investor sentiment.

With nine presidential elections across Africa in 2015, political dynamics will feature strongly at the forefront of investors’ minds.

A number of countries across the continent are dominated by personality politics, characterised by weak institutions and limited adherence to constitutional processes.

Along with political concerns, security dynamics have come sharply into focus. A cocktail of poverty, corruption and political alienation has contributed to the spread of terrorism in Africa.

Terrorism

From al-Shabaab in the Horn of Africa, to the al-Qaeda in the Islamic Maghreb in the Sahel, and Boko Haram in Nigeria, both the eastern and western wings of Africa have experienced a rise in violent terrorist activity.

The Islamist insurgencies in continental powerhouses Nigeria and Kenya are most concerning to investors.

Nigeria and Kenya, the most important economies in West and East Africa respectively, have the largest and most easily accessible markets for foreigners.

The economic cost of terrorism remains high — both direct financial and economic costs, as well as indirect, psychological costs.

Lastly, Eurobonds have become a hot topic in Africa in recent years.

The African borrowing binge, which began in 2007 and which has been driven by investors’ hunger for yield in the post-crisis economy, was unlikely to end until interest rates and investment returns in the rest of the world start to normalise — with the prospect imminent, warning flags are now being raised.

Essentially, government borrowings are massive bets on the continuation of the Africa growth story.

But investors have become jittery about the heavy reliance on commodities by many African economies, and their vulnerability in the case of another commodity price plunge, as is currently being experienced.

With a strong dollar adding around $10.8 billion (R129bn) in extra currency costs to new issuances, this has the potential to compound already stressed financial and liquidity positions.

Debt

Furthermore, the continent’s reliance on debt as a source of revenue is concerning.

If debt servicing costs spike to unsustainable levels, sovereigns will become heavily indebted to private financial institutions and not to the World Bank or International Monetary Fund this time.

This would make it more difficult to renegotiate their sovereign bond debt.

With undiversified revenue streams, narrow tax bases and structurally constrained economies which are vulnerable to commodity shocks, the magnitude of the problem could be significant if not approached with prudence.

The African continent is currently grappling with more questions than answers and will need to adapt to stay attractive in the eyes of investors.

Policymakers will need to adopt measures to make sure that the continent’s growth trajectory and positive momentum is not permanently punctured. — IOL.