After the storm of 2020, policymakers in Sub-Saharan Africa will be hoping for calm in 2021. But with vaccine distribution posing a key challenge in the region, economic recoveries may be slower than other parts of the world. And debt relief initiatives are unlikely to provide much support either. The two largest economies, Nigeria and South Africa, will probably take steps on the road towards financial repression.
- After the storm of 2020, policymakers in Sub-Saharan Africa will be hoping for calm in 2021. But with vaccine distribution posing a key challenge in the region, economic recoveries may be slower than other parts of the world. And debt relief initiatives are unlikely to provide much support either. The two largest economies, Nigeria and South Africa, will probably take steps on the road towards financial repression.
- Barring South Africa, and a few tourism-dependent economies in the south of the continent, most other African countries are on track to suffer a smaller hit to output this year relative to other parts of the world. We think that the region as a whole will contract by around 2.5% in 2020 (compared to 3-7% falls in other EM regions). But this year’s outperformance is unlikely to continue into 2021. In this Update we outline what lies in store for Sub-Saharan African economies next year.
- 1) African policymakers have mountains to climb to access and distribute vaccines. Many countries around the globe have placed large COVID-19 vaccine pre-orders and some vaccination campaigns have already started, but vaccines are likely to reach Africa later than most other EMs. Most countries will have to rely on the multilateral COVAX facility, which will probably distribute doses at a later point. Poor infrastructure and cold storage facilities also make distribution in Africa more challenging than elsewhere.
- The result is that the “vaccine bounce” in economic recoveries is likely to be delayed as the slower roll-out of vaccines inevitably holds up any boost to activity from a lifting of containment measures. What’s more, the flipside to the fact that virus restrictions have caused relatively smaller losses in GDP in Africa this year is that there is likely to be a more limited rebound when measures are eased.
- Instead, indirect benefits from vaccines may provide quicker and more support to growth. A rebound in external demand, particularly for commodities will benefit the region’s producers of oil (Nigeria and Angola) and industrial metals (Zambia, South Africa) even as the rally in metal prices runs out of steam.
- And the return of international visitors would boost recoveries in tourism-dependent economies like Mauritius, Namibia and Rwanda. Finally, an improvement in global risk appetite will benefit those economies with fragile external positions (Mozambique, Zambia, and Ethiopia). Taken together, we expect that GDP in Sub-Saharan Africa will grow by around 4.9% in 2021.
- 2) Multilateral debt relief efforts won’t be a panacea. One of the main legacies of the coronavirus crisis is that African governments will be left with larger public debt burdens. In order to provide some respite, a number of debt relief initiatives have been introduced – most notably the G20’s Debt Service Suspension Initiative (DSSI). The DSSI is set to lapse in June 2021 and, unless extended, participating countries – like Angola, Mozambique and Ethiopia – will have to resume official bilateral debt repayments to G20 creditors. This will narrow their already-limited fiscal space.
- In any case, as we argued recently, the DSSI has not lived up to expectations due to the potential negative consequences of signing up, selective involvement by China and lack of private sector participation. A more ambitious debt relief initiative, the G20’s “Common Framework”, is unlikely to make much more headway. The plan outlines conditions for reducing debt with broader creditor participation, but it may be insufficient to ease mutual mistrust between private bondholders and China. And the wide array of lenders will make any debt restructuring under the Common Framework long and arduous.
- Many governments will probably end up living with higher debt burdens, which will come at the cost of tight fiscal policy that acts as a headwind to recoveries. But some countries may struggle to cope with a mounting debt pile and run into trouble servicing their liabilities. Ethiopia, Kenya and Ghana face perhaps the greatest debt risks. While the robust economic recoveries that we expect in all three economies next year will probably ease default concerns, debt problems could come back to haunt them down further the line. Zambia’s disorderly default this year serves as a cautionary tale.
- 3) South Africa to veer off harsh austerity path. While South Africa is not facing an acute debt crisis, public debt is on an unsustainable trajectory. Without austerity (or faster growth), we estimate that the debt-to-GDP ratio could reach nearly 120% by the end of this decade from about 82% in the current fiscal year.
- The authorities have already outlined harsh austerity measures to stabilise the debt ratio. Under the plans, the debt-to-GDP ratio would peak at 95% in 2025/26, before beginning to fall back. But much of the blueprint rests on a three-year public wage freeze that may be politically difficult to push through.
- The government will probably struggle to stick to unpopular spending cuts, especially as South Africa will emerge from crisis with record high unemployment and there will be pushback from powerful trade unions. Signs of waning commitment to austerity emerging next year will probably bring closer more interventionist tools to keep a lid on borrowing costs (i.e. financial repression).
- 4) Nigerian policymakers to stick to heterodoxy. In contrast to South Africa, the pandemic doesn’t appear to have pushed Nigeria’s government to tighten the belt. While budget plans for 2021 aim to keep the budget deficit unchanged, the blueprint includes a 21% rise in spending. The administration is signalling loud and clear that it has no appetite for austerity.
- Officials seem determined not only to stay clear of fiscal consolidation, but also to maintain a firm grip on the currency. While the multiple exchange rate system has been simplified, and largely unified around the Nafex rate (at 392/$) this year, policymakers seem reluctant to let the currency float freely. The gap with the black market rate (at 475/$), which we think is closer to the fair value, remains large.
- We expect that the Central Bank of Nigeria will continue with its piecemeal approach next year, keeping as tight grip on the naira as possible, only letting the currency weaken when pressure mounts. Without austerity or a sizeable exchange rate devaluation that would help ease balance of payments strains and boost government revenues (as the local currency value of US dollar-denominated oil exports would rise), officials will find themselves running out of options in financing the budget shortfall. There is a clear risk that policymakers also resort to financial repression policies, including outright deficit monetisation.
Virág Fórizs, Africa Economist, firstname.lastname@example.org