How Africa can weather the slowdown: weaker commodity prices have hit Africa hard, but if its economies diversify and reform they can return to robust growth.

Author:Toben, Christian
Position:PERSPECTIVE
 
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Driven by strong raw materials trade, sub-Saharan Africa made tremendous economic progress over the past 10 years--growing 5% per year on average. But fortunes changed from 2014, as dependence on commodities turned from asset to liability. Diminishing export revenues have led to weakened growth, waning investor confidence and increasing fiscal constraints.

Restoring inflows of foreign direct investment (FDI) is vital. FDI can help economies develop through infrastructure, and recover through more diversified, resilient, international trade. Crucial to this shift will be the banks. Providing the global connections and financial partnerships for commerce, and offering transparency on risk in local markets, banks can assist sub-Saharan Africa in its recovery.

A reversal of fortune

In 2014, economies across sub-Saharan Africa could look back on a decade of considerable progress. Given relative insulation from the effects of the 2008 global financial crisis--due to limited integration in international capital markets--average economic GDP growth rates were at a healthy 5% annually, with the chance to move up to 6%. This put the region's economic expansion only just behind that of rapidly emerging Asia.

Healthy commodity prices since the millennium underpinned such progress. Growing economies in other parts of the world (particularly China) sustained strong demand for sub-Saharan African agricultural goods and raw materials. Demand for oil, along with cocoa exports, boosted Ghana's GDP by a notable 15% in 2011 alone.

But what a difference two years can make. Commerzbank's latest report, Tackling the Headwinds after the Economic Turnaround, finds that sub-Saharan African economies' reliance on raw material revenues turned "from a blessing to a curse". Slack demand for raw materials from abroad, and especially slower-than expected GDP growth in China--which buys 40% of the region's exports--have had a significant impact on trade. Prices for commodities have plunged. Some, such as iron ore and oil, have collapsed by over 60% in the past two years.

Unsurprisingly, Africa's major oil exporters--Nigeria and Angola--have been hit hardest. Relying on hydrocarbon exports for 75% and 80% of government revenues respectively, they now face the lowest price in 11 years.

Weak commodity revenues, have, in turn, led to serious economic challenges for the region. For example, currencies have depreciated rapidly. Combined with soaring inflation rates, particularly...

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