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Coronavirus: Africa braces for economic shock

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As UNECA slashes its predictions for African GDP growth, Dr Desné Masie assesses the damage the pandemic is likely to cause to Africa’s economies

At the time of writing in mid-March, Africa seems to have so far been spared the worst human impact of the coronavirus pandemic, but was already beginning to suffer the destructive economic impact of a potential global slide to recession.

Medical experts are not sure yet why Africa has been slower to experience the infection rates seen elsewhere – and limited testing may obscure the true number of cases – but if the pandemic begins to escalate exponentially across the continent, the risk to the urban poor could be significant given cramped living conditions, limited access to sanitation and the continent’s meagre public health services.

Given such fears for its vulnerable population, South Africa, which by mid-March had experienced several dozen cases, declared a national disaster on 15 March, banning all travel from major affected countries, including China, the UK, Italy and the US. Other African governments are expected to join South Africa in prioritising the preservation of human life over the economic impact of such measures by introducing a range of restrictive and exclusionary policies.

Such painful decisions will compound the destructive impact of the pandemic, which has already upended Africa’s economic relationship with China by cutting the Asian country’s usually voracious demand for oil, mining products and other raw materials from the continent as Chinese factories react to slowing global demand.

The United Nations Economic Commission for Africa (UNECA) has revised Africa’s growth downwards by more than a third, from 3.2% to 1.8%, and the Organisation for Economic Co-operation and Development (OECD) has revised global growth figures down from 2.9% to 1.5%. Yet given increasing social isolation measures and enforced city and country lockdowns, many are now projecting a global recession. Mohamed El-Erian, chief economic advisor to Allianz, asserted in mid-March that the world is going into a “sudden and deep recession.”

Stock markets have shed trillions since the pandemic took hold and look set to fall still further as the full scale of the economic impact is better understood. On 16 March, losses on major indices represented the worst day for the markets since 1987.

Key sectors of the African economy sensitive to slowing global demand including tourism, agriculture, oil, and mining. Disruption to supply chains, plummeting commodity prices and a shutdown of the aviation sector are assured. If countries are swiftly able to control the rate of infection, Africa may yet be spared the worst economic impacts. But if countries are not able to replicate the success of China and South Korea in slowing the rate of infection and fatalities, widespread social unrest has the potential to further destabilise the global economy.

Oil economies take a battering

Restrictions on travel – compounded by the Russia-Saudi Arabia oil price war – have lowered the oil price to less than $30 a barrel. Major oil exporters such as Nigeria, Algeria and Angola – where oil represents 92%, 96%, 97% of their total exports respectively – will immediately feel the pain. UNECA estimates that total losses for oil exporters will be around $65bn at current levels.

Oil companies operating in Africa have been particularly hard hit, with Tullow Oil losing 31% or £1.7bn ($2.1bn) of its share price on 12 March. The UK-based, East Africa focused firm has already announced it will lay off at least a third of its workforce. The outlook for the oil price is set to worsen further as travel bans and social distancing kick in world wide.

With Nigeria having made its budget assumptions for 2020 at an oil price of $57, it is not difficult to see how the fiscal situation of many oil-dependent countries, many of them already highly indebted, will spiral out into the broader economy. Countries such as Ghana, Uganda and Kenya, where an oil bonanza was priced in to support spending on infrastructure and debt repayment, will have to reset their course.

Meanwhile, the fiscal pressures on the three largest economies, Nigeria, South Africa and Egypt, are already intense: Egypt and South Africa have budget shortfalls of 5.9% and 8% respectively. An international capital flight to safe havens could make it costly for African countries to raise capital on the Eurobond markets. Yields are climbing for sub-Saharan sovereign bonds as the market prices in risk, placing indebted poorer countries such as Zambia and Mozambique at risk of sovereign default.

The sharply depreciating exchange rate for major currencies such as the Nigerian naira, the Kenyan shilling, the South African rand and the Egyptian pound relative to the US dollar will negatively impact import-dependent economies and the balance of payments for many African countries. Forex reserves will also come under pressure from declining tourism, remittances and capital flight.

Aviation shutdown

The aviation sector faces its worst crisis since the 9/11 attacks in 2001. Well-run carriers such as Ethiopian Airlines, the continent’s most profitable carrier, have not been spared the fallout.

Ethiopian’s CEO Tewolde Gebremariam said in early March – even before the sector largely ground to a halt under a wave of international travel bans – that demand had already slowed by over 20% given its exposure to Chinese markets.

It remains to be seen if African countries will be able to weather the storm or have the reserves to bail out their national carriers if need be. By contrast, the pandemic has shown the importance of having a national airline, as countries have been able to rescue stranded citizens in affected areas.

The lower oil price does offer some relief for oil-importing countries, and cash-strapped airlines like South African Airways (SAA). Debt-laden SAA, which is currently undergoing crucial refinancing, says it will be helped along by lower fuel and jet leasing prices.

Bleak horizons

More danger could arise from a global shift to medical protectionism. The US offered billions of dollars for a German vaccine producer, and India, the world’s largest producer of medicines and generics, could stockpile supply for its own citizens. Given Africa’s already precarious position in the global medical market, future shortages could affect the continent’s ability to fight the pandemic.

With markets bracing for the worst crisis since the 2008 global financial crisis, the short to medium term looks unavoidably bleak for African economies. It seems inevitable that many governments will be forced to go to the International Monetary Fund (IMF) for help. The continent will require support in co-ordinating a policy response to shore up health systems, medicine and food reserves, so that devastating economic losses are not accompanied by an even more devastating loss of human life.

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