Op-Ed: African giants to stumble due to Covid-19 pandemic

NKC African Economics expects the coronavirus-related knock to economic growth in Africa’s three largest economies alone to shave off 1 ppt from the continent’s GDP growth this year, from 3.8% to 2.8%.

Preliminary estimates point towards the weakest continental growth since the early 1990s.

The continent’s three largest economies, South Africa, Nigeria and Egypt – together accounting for just under 60% of African GDP – will see a significant weakening in economic growth this year.

This slowdown in economic activity will permeate through the continent as these countries are salient drivers behind economic growth in their respective regions. 

In addition to the indirect effects stemming from weakness in the largest economies, other African nations will also have to deal with a much more volatile external economic environment.

The collapse in tourism will weigh on economic growth in many countries (particularly the island nations, Morocco, Egypt, and Tunisia), while a reduction in both export demand and commodity prices will weaken fundamentals in Africa’s more export-oriented economies (most notably the oil producing nations). 

The escalation in the Covid-19 outbreak in Africa implies there is a lot more at stake than foregone economic production.

Most African countries will not be able to effectively implement the severe restrictions on movement that we have seen globally. The impracticality of implementing widespread self-quarantine in shantytowns or informal settlements means that this will not be an option. Mismanagement of the situation could lead to human costs far exceeding economic losses.

Tourism is a key forex generator and employment creator across the continent. Severe travel restrictions, border closures and lockdowns in key source markets will result in a collapse in tourism during the first half of the year, at least.

Domestic and intra-Africa tourism have been key drivers behind growth in overall tourism in recent years, but as more Covid-19 cases are confirmed on the continent we will see an increase in domestic travel restrictions and regional border closures.

The island nations will be hardest hit, but the mainland will feel the effects in the North (particularly in Tunisia, Morocco and Egypt), South (Namibia, Botswana), East (Tanzania, Rwanda, Kenya) and West (Côte d’Ivoire, The Gambia, Cameroon).

Low barriers to entry have led to tourism becoming a key source of employment. The island nations in particular are dependent on tourism to generate employment, most notably the Seychelles (where tourism accounts for around 44% of formal employment), Cape Verde (39%) and Mauritius (19%).

Tourism has also become a salient job creator on the African mainland, and a slump in the sector could result in rapid job losses given the prevalence of micro- and small-sized enterprises operating in the sector. 

The slowdown in global economic activity will translate into a reduction in demand, while lower commodity prices will compound this negative effect on exports.

Africa’s energy exporters will struggle to come to terms with a much more hostile external environment. Countries such as Nigeria, Angola and Gabon are highly dependent on oil exports not only to generate forex but also to fund government spending.

Countries including Namibia, Zambia, Botswana and Mozambique are dependent on mineral exports for the same reasons.

Generally speaking, countries that have a GDP structure orientated towards exports will feel the pain of a weaker external environment.

Lower international energy prices will have a detrimental impact on the continent’s oil exporters, but many other countries stand to benefit.

A reduction in the oil imports bill will have a favourable impact on external balances while also containing consumer price inflation. Lower inflation will support consumer spending at a time when a weak external environment increases the importance of domestic consumption in driving overall economic growth. 

The South African economy had already entered 2020 on a very fragile footing before the dramatic external developments related to the Covid-19 pandemic. NKC forecasts a 5% real GDP contraction this year. Domestic policy uncertainty and supply-side constraints have now been accompanied by a deterioration in global business sentiment and a drop in demand for South African goods, all weighing on the country’s economic recovery prospects.

In addition, the three-week long nationwide lockdown, which commenced on March 27, will result in a collapse in consumer spending. The outlook could deteriorate further if the lockdown is extended. 

The coronavirus has not as yet, as far as we know, taken significant hold in Nigeria. However, the weaker external environment and more specifically, the recent collapse in international oil prices, will have a marked impact on the economy’s performance this year.

Lower oil prices will result in tighter FX liquidity, rising inflation, falling investment, lower fiscal expenditure and easing consumption growth.

As a result, NKC has revised its growth projection sharply lower to 1.2% this year, with risks still firmly stacked to the downside.

A more severe domestic outbreak of Covid-19 would cause significant disruption to daily economic activity, particularly when considering the population density in the country’s biggest cities.

Despite the Egyptian government’s efforts, the number of confirmed Covid-19 cases continues to rise considerably.

The president has urged all citizens to stay at home for a two-week period and a night-time curfew has been declared, while the possibility of a formal lockdown in some regions is also circulating in local media.

The fiscal deficit is set to widen significantly over fiscal year (FY) 2019/20 and FY 2020/21 following the announcement of a stimulus and bail-out package to the value of approximately E£100bn.

Government revenues already came in far below budget during the first half of FY 2019/20 and will take a massive knock during the second half of the fiscal year, which ends in June.

Lower economic growth reflects weaker consumption, investment, and exports.

The recently announced fiscal stimulus measures, however, should prevent a collapse in domestic demand.

The economic impact of the coronavirus epidemic will be considerable, but the human costs will be higher yet.

As of end March South Africa remains the hardest-hit African country from a confirmed-case perspective and the expected economic hardship reflects this.

However, South Africa is also arguably the best-placed country on the continent to deal with the pandemic. While it does have a large immuno-compromised population due to its struggles with HIV, the country might be able to leverage its sophisticated private healthcare sector to supplement inadequate public services.

Most other African nations will not have this benefit.

Confirmed Covid-19 cases will undoubtedly increase across the continent in coming weeks, and timely and effective government responses will be required to ensure that this does not become another African tragedy.

Jacques Nel – Head of Africa Macro

For more coverage on COVID-19 visit: https://www.cnbcafrica.com/covid-19/

Related Content

COVID-19: Angola begins partial reopening of economy

Angola lifted its Covid-19 state of emergency last week and has reopened businesses at 50 per cent capacity, as the economy faces the economic fallout from the global pandemic. The Angolan government has injected around 200 billion kwanzas into the economy, mostly through quantitative easing and Rui Oliveira, CEO at BFA Asset Management joins CNBC Africa for more.

Coronavirus – African Union Member States (54) reporting COVID-19 cases (116,049) deaths (3,488), and recoveries (46,714)

African Union Member States (54) reporting COVID-19 cases (116,049) deaths (3,488), and recoveries (46,714) by region: Central (12,426 cases; 350 deaths; 3,281 recoveries): Burundi (42; 1; 20), Cameroon (5,044; 171; 1,917), Central African Republic (652; 1; 22), Chad (687; 61; 244), Congo (487; 16; 147), DRC (2,402; 68; 340), Equatorial Guinea (719; 7; 22), Gabon (2,135; 14; 562), Sao Tome & Principe (258; 11; 7). Eastern (12,983; 351; 3,438): Comoros (87; 1; 21), Djibouti (2,468; 14; 1,079

Coronavirus: African Union Member States reporting COVID-19 cases As of 26 May 2020, 9am EAT

Central (12,167 cases; 343 deaths; 3,226 recoveries): Burundi (42; 1; 20),Cameroon (4,890; 165; 1,865), Central African Republic (652; 1; 22), Chad (687; 61; 244), Congo (487; 16; 147), DRC (2,297; 67; 337), Equatorial Guinea (719; 7; 22), Gabon (2,135; 14; 562), Sao Tome & Principe (258; 11; 7) Eastern (12,809; 349; 3,409): Comoros (87; 1; 21), Djibouti (2,468; 14; 1,079), Eritrea (39; 0; 39), Ethiopia (655; 5; 159), Kenya (1,286; 52; 402), Madagascar (542; 2; 147), Mauritius (334; 10; 322),

BFA Asset Management on Lusophone Africa’s COVID-19 response plan

Rui Oliveira, CEO at BFA Asset Management joins CNBC Africa to unpack African Lusophone countries response to the Covid-19 pandemic as well as these countries monetary responses to aid the economy during the current social and financial crisis.

Subscribe to our newsletter

Sign up for free newsletters and get more CNBC AFRICA delivered to your inbox

More from CNBC Africa

Fitch expresses doubt over SA’s debt consolidation plans

Just last week finance minister Tito Mboweni outlined the emergency budget to nurse South Africa through the Covid-19 crisis. A big part of this budget was a plan for South Africa to get its debt under control within four years. Fitch Ratings, the agency that downgraded South Africa in April doubts whether South Africa can do this. CNBC Africa’s Chris Bishop spoke to Jan Friederich, Senior Director of Fitch Ratings for more.

Rwanda, USAID sign over $643.8 mn deal to support trans-formative development

Rwanda has signed a financing agreement with the USAID worth about $643.8 million to support Rwanda’s development efforts in the next five years. Moreover, Rwanda Convention Bureau announced the reopening of meetings and conferences. Edwin Ashimwe, Journalist with The New times joins CNBC Africa for more.

How COVID-19 is reshaping Kenya’s education system

On the continent, there has been an increased awareness of the impact of cultural practices on educational achievement that has challenged the education systems. In Kenya, the government is investing in all forms of education; however, experts have noted that for the rise of automation and technological advancements to be effective, an updated skill set is required. Ayub Odida, Researcher at ACAL Consulting joins CNBC Africa for more.

Old Mutual appoints new CEO

“We are delighted at Iain’s appointment. Over the last year, Iain has worked to steer Old Mutual through some significant leadership and operational challenges, demonstrating resilience and an acute sense of business acumen aligned to the Group’s values, purpose, and strategy. On behalf of the Board, we wish to thank him for his contribution during this time. We are confident that he will continue to galvanise the organisation around the delivery of its strategy and purpose and we look forward to working with him in this regard,” says Old Mutual Chairperson, Trevor Manuel.

Partner Content

Sanlam launches urgent job-preservation initiative in response to COVID-19

Sanlam Investments is responding to the COVID-19 pandemic through large-scale support of the recovery of South African companies, from small enterprises to...

Is Market Volatility Here For The Foreseeable Future?

Content provided by CompareForexBrokers Prior to understanding why market volatility might be here to stay for the foreseeable future,...

Trending Now

Zimbabwe’s Landela agrees to buy state-owned gold mines, seeks more assets

HARARE (Reuters) - Zimbabwe’s Landela Mining Venture has reached agreements to take over and revive four idle state-owned gold mines and is...

How Zimbabwe farmers will be trained how to farm with a scheme from Belarus with love

When the farm invasions were unleashed by the people in power in 2000, it led to bloodshed and random confiscation that reaped a bitter harvest of lost production and exports that persists until this day. That year with all of its fumbling fury fuelled with the idea that to get rich you merely had to own a farm, is always seen as a turning point for the industry. It created a large slice of the country’s GDP and as it fell, so did the fortunes of Zimbabwe.

South Africa’s National Treasury says “no further action” to bailout SAA airline

CAPE TOWN (Reuters) - South Africa’s National Treasury said on Friday there was “no further action” planned to bailout struggling national airline...

What Does The Future Of Air Travel Look Like?

Of all the industries the coronavirus pandemic has affected, the airline industry is among those that have been hit the hardest. According to the International Air Transport Association, airlines' passenger revenue is estimated to sink by over $300 b
- Advertisement -