Economic Outlook: Southern Africa

Despite the weak outlook for advanced industrialised economies, IHS Global Insight expects GDP growth in Southern Africa this year to be close to the pre-crisis rates of 2008.

Growth in both the oil and non-oil sectors, combined with robust demand from fast-growing emerging markets will see GDP grow +5.2% this year, up from a lacklustre +2% in 2009 and +4.6% in 2010. But disparities within the region will persist with the greatest growth being seen for oil and metals exporters.

In South Africa, the region's largest economy, real GDP growth is expected to grow +3.5% in 2011, up from +2.8% in the previous year. Robust real output performance in South Africa, Nigeria, and Angola - the region's first-, second-, and third-largest economies, respectively - are a clear indication of economic rebound in sub-Saharan Africa.

Weak infrastructure will remain a drag on the region's potential despite serious attempts to rectify this situation in many countries. If the inflow of foreign direct investment into sub-Saharan Africa falls, the result will be a dampening of longer-term growth prospects for the region.

Only in comparatively scattered pockets of the continent do utility, transportation, and communication networks exist that are adequately developed to support a "takeoff" phase of economic growth. Unfortunately, much of Africa's untapped potential is literally inaccessible because producers do not have a feasible way to send their goods to the market.

But the growth momentum that began in 2010 will remain on track as the region's exports rise on the back of high world commodity prices. Performance in the metals, wholesale and retail trade, and agricultural sectors should also be relatively strong.

Investment in agriculture and infrastructure is building economic capacity in several countries, but much remains to be done. The service subsector, including telecoms, banking, and tourism, will also gain momentum. Tourism will continue to be a driver during the next several quarters, particularly in eastern and southern Africa, barring serious fallouts from the Euro-Zone debt crisis.

Net oil exporters are particularly benefiting from improving oil market conditions. With production on the rise in some sub-Saharan Africa, the high prices have magnified the effects of the production increase on overall growth and high energy demand from the oil-export destinations - the US, EU, China, and India - have driven new investment. China in particular has strengthened its commitment to Angola as a source of crude-oil supply.

The non-oil sectors, particularly infrastructure, will continue to receive policy emphasis and demand for residential and commercial space will also drive growth in the construction sector. In countries like Angola and other war-torn areas, a strong effort to improve the countries' physical infrastructure will provide a good foundation for future growth. But there are also downsides. Construction wage inflation in South Africa will remain high over the medium term as a result of critical skill shortages.

Potential shocks

Fluctuations in demand for commodities by industrialised and major emerging commodity-importing countries or supply shocks in developing commodity-exporting countries will continue to produce sharp swings in both world commodity prices and trade balances. With world growth expected to remain below the pre-recession rate, aid flows, particularly from traditional donors, are likely to be low, as will remittances, which account for a large share of GDP in some of the region's economies.

Commodity price swings have always been a significant factor for economic growth in the region. Although the share of commodities in world trade has declined, commodities continue to dominate trade in sub-Saharan Africa. Exports of primary commodities average more than 90% of total exports across the region.

One way to minimise such dependency is to diversify the export base. The chances for such diversification in the short-to-medium term are low, and the risk, therefore, although moderating, remains high. In South Africa, the region's largest economy, gold, metals and metal products, and other minerals account for 57% of export revenues.

Although such data indicate that the region's economic powerhouse is not as dependent on the export of raw commodities as other countries in the region, South Africa is still vulnerable to price swings. For the region as a whole, a major cyclical downturn in the world economy would weaken demand for both oil and non-oil commodities, with negative consequences for growth. Similarly, a severe, political crisis in any of the region's major economies could dampen investment and raise the risk of slower growth throughout the region.

Management of mineral resources will be the key to diversification of the economic base and poverty reduction. The region's long-term growth capacity will depend heavily on the degree to which it can use its oil wealth to support other sectors. The track record is poor, but authorities believe they will achieve long-term diversification goals.

Working in favour of these efforts are the historically strong mining and agricultural sectors as in the case of Nigeria and Angola. Mining-code reform and improved transportation infrastructure, coupled with new investment in value-adding industries such as refining/smelting, could spur growth.

A slowdown in the pace of reform would constrain growth in the region. Many of the countries in the region are fragile democracies, with some leaders only paying lip service to reform. Political instability, corruption, and economic mismanagement have always been a major constraint on the region's development prospects.
Since independence from colonial rule, poverty among the population has increased, nearing 70% in the case of Nigeria. With the underlying causes of stagnation still in place in many countries - structural imbalances, poor infrastructure, overdependence on oil, and political instability - economic growth will remain below expectations in the outer years unless these problems are resolved.

Debt relief will be a positive factor for the region. Since 2006, the World Bank, the International Monetary Fund, and the African Development Bank have delivered substantial debt relief to a number of African nations under the terms of the Multilateral Debt Relief Initiative (MDRI).

The Paris Club of lending nations also announced a deal that saw two thirds of Nigeria's debt to them written off and the remainder subjected to a buyback arrangement. Debt relief does not in itself bridge the gap between Africa's current resources and its long-term needs, but it is another important step forward on the long road to significant real economic expansion.

While the risks to the region's outlook are substantial, sub-Saharan Africa offers one of the strongest medium term growth construction outlooks in the world. One needs to carefully assess political and economic risk, and ensure that an investment can withstand short term commodity price swings, but the long run return can be substantial.