Economy: Africa is not prepared for the end of cheap money


Posted on December 17, 2018 08:43

Nigeria, Algeria and South Africa all go to the polls in 2019. Together, they represent nearly half of Africa’s gross domestic product (GDP). We probably will not see a hat-trick of reformist governments emerge, but the trio illustrate three big, interrelated trends that will govern Africa’s macro­economic landscape in the coming year: governance, debt levels and the role of commodities.

African administrations will be under a microscope over the next few years. Many countries need to refinance loans – a legacy of the cheap-money era after the 2008 global financial crash. The quanti­tative easing of rich-country governments took domestic interest rates close to 0%, pushing big investors far into frontier markets to find yield.

But today conditions are not the same: “Investors are going to be demanding far higher risk premia, for example, to get involved in local currency debt markets against a backdrop where the dollar continues to strengthen,” says Razia Khan, chief economist for Africa for Standard Chartered bank (see page 112).

It means countries with a credible fiscal position will still be able to tap the market; others will struggle to raise finance. For the IMF, the solution was already clear back in May: “With debt vulnerabilities rising in the region, sub-Saharan African countries will need to further rely on sustainable sources of financing, making domestic revenue mobilisation one of the most urgent policy challenges for the region.”

Those deathless words – revenue mobilisation – are in fact the beating heart of governance and the social contract: tax and the subsequent delivery of public goods. South Africa knows a thing or two about it, having seen its award-­winning tax agency destroyed by corruption under former president Jacob Zuma. President Ramaphosa’s firing of Zuma appointee Tom Moyane as South African Revenue Service commissioner in November bodes better for the tax collector. But the window for Ramaphosa to push through reforms with popular support is small.

Beyond South Africa, things are even less glorious. Nigeria’s paltry tax-revenue-to-GDP ratio of 6% remains amongst the lowest in Africa. David Cowan, head Africa economist at Citibank, says that in nearby Ghana “there are two million tax payers but nine million people with mobile phones. They should be paying tax!” He is clearly not worried about his popularity in the watering holes of Accra.

If demand for commodities outpaces debt-servicing rates, commodity exporters should be more insulated from revenue worries. But there are possible worlds where this does not hold up: for example, one in which a US-led trade war knocks global demand.

Standard Chartered’s Khan says virtually no one is planning for this as a core scenario. But, should it happen, many African countries are ill-prepared. “We’re likely to see the impact on commodity prices being transmitted fairly rapidly, and that would come at a very unfortunate time for many of the region’s economies,” Khan concludes.

This article first appeared in December-January 2019 print edition of The Africa Report

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