The biggest issue going into 2021 for African economies, without a doubt, will be sovereign debt.
We began 2020 with the usual excited forecasts about the growth potential of African countries. Despite the slowdown caused by the coronavirus pandemic, almost all African economies are expected to return to decent growth rates in 2021. Some might even pick up the momentum they had going into 2020.
But it will be difficult to look past debt management challenges in several key African countries over the next few months. There’s still a concern among analysts that Zambia’s default last month could trigger other defaults, given how many other governments piled on debt when the pandemic shut down their economies, with fewer options to pay back.
At the same time, many of the governments have had to borrow to fund more public spending as a result of the pandemic, and will likely borrow even more, given the relatively low global interest rates.
“Low interest rates are a sweet poison. The Covid-19 crisis has worsened fiscal imbalances in Africa,” says Ludovic Subran, chief economist at Allianz SE. “The increasing of public spending and the decreasing of government revenues from tourism, natural resources and taxes pushed up public debt to hardly sustainable levels.”
Subran and other global economists are worried African governments now have less fiscal space than after the onset of the financial crisis to boost economic recovery. “The main economic challenge for Africa is to finance growth sustainably,” he says.
But at the same time, low interest rates, and a weaker US dollar should encourage more investors to bet on African sovereign debt. Countries including Ghana, Kenya, and Nigeria are expected to return to the capital markets in 2021. It’s likely others will follow, in part because finance ministers will feel they have little choice.
“High US and European debt will keep US yields below 2%, encouraging a bid for yield,” says Charles Robertson, chief economist at Renaissance Capital. “We think emerging capital and African borrowing costs will be the lowest they’ve ever been in the 2020s.”
Robertson advises his bank’s clients to take advantage. “So buy a basket of African hard currency debt, including Egypt, Kenya, Ghana and Angola. “
The Africa Continental Free Trade Agreement (AfCFTA), which kicked in on Jan. 1 after many pauses, delays, and doubts, holds promise.
There is a lot of optimism that this agreement to lower trade barriers between the majority of Africa’s 54 countries could have positive transformative effects for intra-Africa trade, which is expected to rise by as much as 50%. It is also expected to encourage and boost foreign direct investment, as the continent, following in the footsteps of the EU, develops one point of entry and common agreements for international companies doing business in Africa.
“I believe that the impact of the AfCFTA has already started,” says Landry Signé, a fellow at Brookings Institution and policy advisor to African governments on implementing the agreement. He says some of the biggest changes haven’t been about policy. Rather, it’s been about a significant shift in approach to doing business on the continent. He points to young African startup entrepreneurs developing more digital businesses with a pan-African target at launch, or a global automaker like Volkswagen opening a factory in a market as small as Rwanda with the view to serving the entire East African subregion and beyond.
The agreement has been signed for over a year now and was in fact meant to have been implemented in July, but for the pandemic. But there are still doubts some members may not fully implement the free trade in practice, or will pick and choose when they do.
“One of the challenges the African continent is likely to face is the tendency of some leaders to think in nationalistic terms which will certainly slow down the region economic recovery efforts,” says Cesar Augusto Mba Abogo, the former finance minister of Equatorial Guinea.
For example, Nigeria, Africa’s largest economy, only this month reopened its land borders with its neighbors, including Benin and Niger, after closing them down a year ago in an attempt to stop smuggling. And it’s still much easier to get in and out of South Africa, Africa’s most advanced economy, with a UK or US passport than a West African or East Africa passport.
Signé acknowledges there will be bumps along the way, but he believes the medium to long-term payoff will be worth it: “It is really powerful to have one voice in terms of trade and there are many intangible gains by having Africa’s economies united.”
Mba Abogo agrees. “For local small and medium-sized enterprises, access to regional markets can strengthen their competitiveness and growth,” he says. That in turn, “can alleviate the jobs crisis, which mainly affects the most notable pockets of vulnerability on the continent: young people and women.”