The global economy faced more volatility at the start of the year, driven by signs of a slowdown in world GDP growth, marked dovish U-turns on the monetary front, uncertainty over the US-China trade spat and Brexit. But Africa’s short-term prospects in general remain encouraging, with West Africa in particular set to do well.
Southern Africa, however, continues to struggle, with the two largest economies in the region still performing poorly. South Africa is plagued by domestic issues related to policy uncertainty, credit rating risks associated with debt sustainability at the SOE level, power outages and labour unrest. Angola, meanwhile, is still grappling with lower oil prices, with the economy contracting for a third straight year in 2018. North Africa has again witnessed a flare-up in protest action, leading to regime changes in Algeria and Sudan, while fighting in Libya has escalated.
While Africa’s prospects remain broadly favourable, some economies are more exposed to global headwinds. A key transmission mechanism is Africa’s close ties with China, especially in terms of trade. African countries whose export growth is highly correlated to China’s import growth (those for which the coefficient is larger than 0.9) include Algeria, Angola, Gabon, Nigeria, South Africa and Zambia. The markedly dovish shifts by the Fed and the ECB, meanwhile, provide some reprieve, boosting appetite for high-yielding debt offerings. However, this could derail much-needed fiscal consolidation efforts and raises medium-term debt sustainability concerns.
Countries such as Egypt, Ghana and Zambia all still run fiscal deficits in excess of 6% of GDP, while their interest payments as a share of revenue exceed 30%. Egypt and Ghana have already issued substantial amounts of Eurobonds in 2019 Q1.
Nigeria: isolated giant
Growth hit 2.4% in Q4 and the non-oil economy expanded by 2.7%. Although oil pipeline leakages present downside risk, leading indicators point to a solid start to the year, and FX liquidity risks have eased off as reserves benefit from robust foreign appetite for domestic debt. This prompted an easing in monetary policy, which together with the new minimum wage will support consumer demand.
Nigeria’s growth is forecast to rise to 2.6% in 2019, but is this enough? The short answer is no. GDP growth is catching up with population growth but still lags behind labour force growth. The unemployment rate has increased almost threefold since 2014. The last four years are characterised by delays in passing the budget, ineffective fiscal expenditure, fuel shortages and limited progress on the Petroleum Industry Bill. While President Muhammadu Buhari successfully campaigned for re-election on the theme of ‘Next Level’, a marked improvement in policy during his second term seems unlikely.
The fintech opportunity
In Nigeria only 39% of the adult population had a bank account in 2017. It is lagging behind a large number of its African peers, and there is significant scope to reap the benefits of increased financial sector depth and coverage, including shifting people to the formal economy, improving access to finance and supporting SME development. Many countries on the continent have employed financial technology to bridge this gap.
The IMF has labelled fintech a game changer for SSA and notes that countries such as Kenya now represent global leaders in the mobile money space. But is there a mobile money opportunity in Nigeria? A look at mobile penetration rates suggests so, with Nigeria rivalling the likes of Kenya. The size of the Nigerian mobile market, the largest in Africa, makes the opportunity even more appealing. Unfortunately, Nigeria has yet to take advantage of this opportunity.
According to the IMF, Nigeria only registered 447 mobile money transactions per 1,000 adults in 2017, compared to Kenya’s 52,000. There have been some positive developments on this front. The Central Bank of Nigeria recently launched Payment Service Bank (PSB) licences, allowing telecom firms to directly offer a limited set of financial services.
While the way forward is still uncertain with negotiations ongoing, media sources seem optimistic, highlighting that the likes of MTN and Airtel are considering aggressive moves in the mobile money space.
Cobus de Hart is a chief economist at Oxford Economics in West and North Africa