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Africa braces for a post-pandemic world

03 June 2020 Gareth Stokes

A slower than expected recovery in commodity prices will be a drag on Africa’s economic growth as the world emerges from lockdown. Isaah Mhlanga, chief economist at Alexander Forbes, said the impact on so-called single commodity countries would be even worse, siting Angola and Ghana (oil) and Zambia (copper), among others. He was presenting on the economic consequences of COVID-19 for Africa, during a media webinar held on 28 May 2020. Africa also faces a significant decline in economic activity as developed world demand falters.

There were three broad economic trends in place when the world entered pandemic, namely growing debt, deglobalisation, and digital everything. These trends are likely to persist as we emerge from crisis, with some minor changes. “We are likely to see higher taxes to service debt,” said Mhlanga. He expects most governments to turn to financial repression to deal with their spiralling debt problems. Forbes.com describes financial repression as “methods [used by] governments to increase tax income and domestically-held debt”. The aim of such a strategy is to ‘force’ the private sector to service debt. 

What is financial repression?

FAnews readers will have to get used to hearing about ‘financial repression’. The concept was explained to us in a recent presentation by Russell Silberston, head of multi-asset absolute return at Ninety One (previously Investec Asset Management). He described the phrase in layperson’s terms: “Financial repression is government policy or regulation that steers funds towards government. So, for example, keeping interest rates artificially low and forcing investors to the government bond market. It is, politically, the least painful way to reduce debt”. Early evidence supports that South Africa is taking this path for now. Our Repo rate, at just 3,75%, is certainly lower than expected. 

Mhlanga said that financial repression introduced the potential for high inflation in the medium to longer term; but that the short term outlook for inflation remained benign due to poor consumer confidence and higher debt levels. This in part explains why the South African Reserve Bank’s inflation outlook, published alongside its 21 May interest rate announcement, points to 3,4% CPI through 2020, with a slight increase to 4,4% in 2021 and 2022. Asset managers can respond to the ‘growing debt’ trend by reassessing their cash and bond exposures, seeking alternative return diversifiers, and adding inflation protection to their portfolios. 

Forecasting 1,8 million job losses

Rising unemployment as a consequence of lockdown exacerbates the low inflation environment. “Unemployment rate will increase,” noted Mhlanga. “Lockdown has also meant that consumers are unable to spend on things they would spend on during usual times”. Latest estimates from the South Africa Revenue Services (SARS) point to a chilling 1,8 million job losses in the domestic market. 

The deglobalisation trend is driven by populism, protectionism, and localisation. On a global stage we are already seeing increases in tension between China and the United States. Locally, President Cyril Ramaphosa shared his thoughts on the matter in a presentation to the South African National Editor’s Forum (SANEF). “Among other things, we will accelerate structural reforms, promote localisation and industrialisation, repurpose state owned enterprises, and strengthen the informal sector,” he said. Asset managers will likely respond to this trend by increasing their global diversification and paying close attention to sectors of the economy that are focused on automation, robotics, and digital transformation. 

Africa is at risk of lagging the West on the third and final global trend, labelled ‘digital everything’. “The lack of infrastructure prevents the fast adoption of digital rollout across many African countries,” observed Mhlanga. Asset managers will focus on sector and stock diversification and seek out opportunities where healthcare and technology intersect. 

A dismal post-pandemic outlook

The global growth outlook post pandemic is dismal. Latest IMF estimates suggest a 3% contraction globally, with a 6% contraction in developed economies and a softer 0,5% decline in emerging markets. Country performances will vary widely based on factors such as economic diversity and market sophistication. It is, for example, forecast that South Africa’s GDP will fall by up to 7% this year. It is now clear that the massive growth shocks through 2021 will result in an almost permanent ‘dent’ in economic activity – it will take years to recover, with further contractions in per capita income across Africa. Aspects such as growth, levels of reserves, and the extent of foreign investor participation in local markets  will prove telling in coming years. 

“Most African countries are not investment grade,” said  Mhlanga. “Which means they are categorised as high yielding countries and have to price debt higher versus local currency funding costs, than better risk countries”. Alexander Forbes warned that many countries on the continent have high proportions of foreign debt, which makes repaying and servicing debt difficult, especially in the absence of GDP growth. How South Africa emerges from crisis depends on our approaches to debt and economic growth. 

The worrying fiscal position entering lockdown will have worsened significantly once the dust has settled. And to date government’s promises re stimulating the economy ring hollow. “Our economic strategy going forward will require a new social compact among all role players,” said Ramaphosa, “to restructure the economy and achieve inclusive growth”. He promised “a massive infrastructure and maintenance programme that mobilises public and private resources on a significant scale”. Infrastructure spend has worked before; but it could be difficult in the current debt environment.

Time for a different approach on jobs

Government’s promises re job creation are also concerning. They are recommitting to a range of public employment initiatives that have stuttered along over decades. It is unlikely that expanding programmes like the National Youth Service, Community Works Programme, and the Presidential Youth Employment Intervention will deliver either the quantity or quality of jobs that South Africa needs to prosper and thrive over the coming decade. 

Writer’s thoughts:
Alexander Forbes painted a grim picture for African economies existing the global pandemic. They point to rising debt levels and lasting effects on GDP growth trajectories. To thrive in these conditions requires innovative thinking… Imagine our surprise when government responds by rehashing past policies that failed to deliver during the good times. What three things would you like to see from government to stimulate the economy and create jobs? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

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