Razia Khan is Standard Chartered Bank’s London-based Regional Head of Research, Africa and one of the leading analysts of African economies. She spoke to MJ Morgan about the continent’s economic outlook during a period of unprecedented uncertainty.
African Banker: Given the market turbulence that still exists as a consequence of the global financial crisis, what is the outlook for sustained growth on the continent?
Razia Khan: While there is considerable uncertainty around the global economic outlook, few believe that we are likely to see anything on the scale of 2008/09. For Africa, this is significant. While mature economies seeing forced fiscal consolidation are likely to experience a number of years of still-weak growth, the outlook in Asia – an increasingly important trading partner to Africa – is different. The hope is that Africa has sufficient growth momentum of its own to be able to see off global headwinds. In terms of portfolio investor flows, African markets have also been impacted differently by recent volatility relative to the aftermath of the Lehman’s bankruptcy in late 2008. We haven’t – for example – seen investors withdrawing en masse from African markets.
Relative to the pre-crisis era, we’ve seen much more interest in frontier African markets from real money investors (typically pension funds with a longer time horizon), rather than more leveraged investors. This may be providing a buffer of sorts, helping to shield African markets from global financial market volatility.
Significantly, there is more recognition of Africa as a growth region in its own right, and a downbeat view of mature markets may only be adding to Africa’s longer-term attractiveness. Investor positioning, and increased exposure to African markets, may be much more of a structural play.
Q: What has been driving African economic growth?
A: Pre-crisis, domestic consumption stood out as the main driver of African growth. While there might be concerns about the lack of productivity gain in sectors like manufacturing and agriculture, a lot of the growth in somewhere like Nigeria would simply be the fact that agricultural output is up but not necessarily on the back of productivity gain.
Contrary to popular perception, Africa’s growth has not been driven by commodities. In fact, external trade region-wide tends to have a very small share of overall GDP: the African average is about 30%.
I think there is a need to separate out what we’ve seen in terms of real economy performance from obviously the concerns that have been at the forefront for financial markets. But clearly there is uncertainty ahead.
Q: How important is China’s continuing growth for the continent?
A: Given the scale of demand that China represents, even a Chinese economy growing at around 7% over the medium term would still be very significant for Africa. A lot of the fear-mongering – talk of an outright slowdown in growth and its potential negative impact on Africa, therefore appears a bit overdone. Following the global economic crisis, China’s adoption of fiscal stimulus measures helped to create a floor under commodity prices.
More recently, there is evidence of Chinese buyers using the temporary pullback in commodity prices to replenish stocks of strategic commodities – and this may well help to stabilise, perhaps even boost the external balances of many African economies. While Europe remains Africa’s largest trading partner by far, the outlook is not entirely gloomy, and talk of a significant Chinese slowdown impacting on demand for Africa’s commodities is probably overdone.
Q: How do you see the China-Africa relationship evolving?
A: One thing that has not been remarked upon a great deal just has to do with the very balanced nature of Chinese-African trade. We all know about how rapidly China has been growing and how that has translated into demand for commodities, and that has created greater demand for Africa’s exports to China.
But if you look at the Africa-China trade balance, over time it has been remarkably balanced – and that is something that tends not to get much attention. The China-Africa economic relationship tends to be seen in very one-sided terms, but the reality is that despite a scaling up in trade flows, that relationship has been remarkably balanced.
Africa’s demand for Chinese exports has kept pace with China’s demand for Africa’s exports, speaking volumes about the kind of growth rate we are likely to have seen in Africa in the recent past. Part of this may be down to a higher propensity to import in Africa, but that can’t possibly be the whole story.
Q: What does that suggest to you?
A: I don’t think we can exclude entirely the higher propensity to import in Africa – for a lot of manufactured goods especially. It also suggests that maybe African economies have been growing faster than we would necessarily think. We saw this with Ghana with its rebasing, where the official GDP figures hadn’t been rebased since 1993, and with the rebasing it turned out that the economy was probably 60–70% greater than had previously been thought. I just wonder about the extent to which that applies to other African economies.
When we look at the current account deficit numbers [we see] numbers that really beggar belief. Deficits in the region of 9–10%. Is it the deficit numbers that we’re getting right or are we just getting the GDP figures badly wrong? Are African economies much larger than we think, and have they been growing faster all along?
Q: How has the sovereign debt crisis that has menaced the US and the EU affected the development of the African market?
A: A few months ago, there were expectations of a surge in Eurobond issuance by African sovereigns, with many outlining plans to issue maiden Eurobonds. Things appear to have gone quieter in the wake of recent market volatility, with countries that have seen significant volatility in their domestic currencies in particular, now questioning the wisdom of ramping up external borrowing.
That said, we expect that we will see more issuance over time, with sovereigns such as Zambia likely to tap international capital markets, perhaps following elections there in September.
Countries that have already issued Eurobonds have seen a significant tightening in the way their debt has traded, reflecting the advantages enjoyed by those who opted for the external borrowing route relatively early. There is much demand for this asset class, with relatively little supply, and that has been reflected in the way the debt has traded.
Q: Do you see any growth hot spots?
A: If we are just looking at overall growth rates, clearly Ghana, in its first full year of oil production, has risen from a fairly low base, not withstanding their rebasing of GDP. Ghana looks like it is going to be achieving a few years of very healthy growth rates.
But the challenge for Africa post-crisis isn’t so much what the headline growth rates are suggesting but how meaningful that growth is. As we get further out and see a relative maturing of economies, we are going to have to see much more in the way of productivity gains driving that growth, to keep it sustainable and I think that is going to be the challenge for a lot of Africa. There is only so much you can do with growth just by farming more, by increasing agricultural output, without actually doing anything transformative to achieve that higher output.
Q: How can this kind of transformative growth be fostered?
A: In the wake of the crisis, there is room for pause, where one has to ask ‘is governance really improving as rapidly as it would need to improve, to create a policy environment that is going to be conducive to growth?’.
We tend to look at the impact of the global financial crisis in terms of what it did to headline growth; so down substantially in 2009 and then up in a very healthy way. But headline growth rates in general have masked a lot of the human cost of the crisis. If growth is different, qualitatively, that is something that will need to be addressed.
Q: Do you see any examples of this kind of approach?
A: In terms of sustainability of growth, it’s all about human development. For the moment, the focus is on resource economies, and strong commodity-driven gains have seen some economies powering ahead – at least in terms of their headline growth rates.
But in the long-term, the economies that we should be super-optimistic about are the ones that manage to balance that with the necessary degree of human development. It is these economies that are much more likely to see the productivity gains that will lead to more transformative growth.
In Africa, Mauritius provides an interesting example in this regard, having been noted for the success of its human development- centric policies despite having very little in the way of other resources.
The challenge for other more resource-rich African countries is to go down the same route developmentally. In most instances, commodity wealth will be finite, but human capital is not limited to the same extent. An investment in education is likely to keep paying for itself, for generations.
I think one of the successes that is rarely remarked on is how Ghana stands to get that much closer to achieving the MDGs, maybe not quite by the 2015 deadline, but soon after. While Ghana has at times been criticised for its expansionary fiscal policy, what the country has to show for it also needs to be looked at.
Q: What about South Africa?
A: The fact is that South Africa will find it very hard to compete with other economies on a skills level because the economy, so many years after apartheid, just isn’t developing the kind of skills that are needed. The issue is that South Africa can’t necessarily complete with the low-skill, low-wage economies because it doesn’t have low wages – given the extent of unionisation.
So I think that the rand is always looked at as a constraining factor for manufacturing but no one should fall under the illusion that simply engineering a weaker rand would suddenly result in huge surges in South African manufacturing. Competitiveness is never going to be about the level of a currency alone, and needs to be looked at more widely.
Q: Are South Africa, the Democratic Republic of Congo, etc truly cursed by their mineral wealth?
A: How do you really measure wealth? I think too often in the African context there has been this big preoccupation with resources wealth when the countries that are likely to pull ahead on a sustained basis are the ones that are generating the good human development indicators, the better performance, the building of skilled labour that is going to be able to transition to the next phase of development. And where it’s not happening, no matter how optimistic we’d want to be, I think realistically we need to recognise that resource wealth on its own is not a long-term driver of development at all. What is done with that resource wealth matters.
Q: What are the prospects for industrialisation on the continent going forward?
A: Although there has been much talk about Africa’s improved growth performance over the last decade, the really exciting phase of Africa’s growth still lies in the future. In the years ahead, we should see a much greater reach for financial inclusion in Africa, and hand in hand with this, more critical mass behind the rise of the African middle class. We should also see much more transformational growth than has been the case so far.
In some instances, there is early evidence that this is already happening. Take for example a country such as Zambia, which has made significant strides with the liberalisation of its agricultural policies, making it easier for food exporters to invest in productivity gains. Zambia has seen several consecutive years of record grain harvests.
Globally, there have only been a few instances of such dramatic change taking place in a short space of time. But in an increasing number of African countries, there is now more optimism that this transformative growth can take place. The test, of course, will be to ensure that policy remains conducive to growth throughout.