Friday, December 19, 2008
By Bright Simons
I was recently asked to comment on the outlook in 2009 for African economies in the face of a sudden downturn in commodity prices and within the broader context of the ongoing global economic crisis.
First of all, let us keep things in perspective. It is true that recent falls in commodity prices amount to about 30% from 2007 peaks according to some respectable estimates. But the more fundamental issue is that Sub-Saharan Africa’s share of global trade has fallen to 1.5% over the past three decades from a high of 6%. Both imports and exports as a share of GDP have fallen, but exports more dramatically. Africa has been losing market share to other regions in the export of non-fuel commodities at a drastic pace, for a very long time, with both prices and volumes under pressure. This is a more definite account of the continent’s economic condition than any secular trend in the prices of commodities.
Moreover, over the past two decades, commodities have, as a collective, lost half their purchasing power compared to manufactures (based on calculations from figures in the UNCTAD Commodities Combined Prices Indices of recent years).
The common cry is that most African countries rely on the export of primary commodities for around 70% of their external earnings profile, but since I argue that the real issue is a historical stagnation of real prices AND falling volumes relative to other indicators, the policy preferences in the region will probably continue towards diversification of non-traditional exports (seafood, fish, fruits and vegetables etc., which have seen about a 15% increase over the last decade).
With all the above facts in mind, I will add the following points.
The near-term downturn in commodity prices will have non-uniform effects across Africa.
The countries that rely more on soft commodities (cocoa, coffee, sugar etc.) will feel the disruption least, with the most significant impact remaining, in their case, the historic impacts I catalogued above (one might, in this regard, extrapolate from the events in the last broad downturn in the wake of the Asian Financial Crisis).
Those exporting hard commodities (essentially, industrial minerals and fuel commodities), especially those in Southern Africa could be hit very badly. Zambia, for instance, has in the course of this decade doubled its external earnings due preeminently to the copper price surge (the industrial metal supplies more than half of all the country’s export earnings)? The recent 20% or so fall must feel alarming for Lusaka. The slowdown in China should also exacerbate the collapse of hard commodity prices, with some rather harsh impacts on countries like Angola, Nigeria, Zimbabwe, Congo and Gabon.
The gold exporting countries (like Ghana) are very likely to see stable returns as hard-hit investors turn to the comfort of gold. Consider the precious minerals boom of the early 1970s. Slowing energy prices should also have a positive indication for the industrial outlook in better-managed countries (the extractive industries as well as factory production will benefit from lower cost inputs).
Following from the original point that both prices and volumes of Africa’s primary commodity exports have been under historic pressure (with growth in real prices down 10% over the past 3 decades and 50% relative to manufactures), it follows, as has already been said, that non-dependence on commodities has been the guiding principle of African economic reform over the past decade (Structural Adjustment comes to mind).
Yet one regular element of diversification, manufactures, at least, remain elusive on the continent (take the dynamic manufacturing sector of undergarments for instance – Swaziland and Mauritius alone account for 85% of Africa’s total output). Only Botswana and Mauritius appear to have managed a credible diversification in favour of manufactures. And even with those two not all pundits are cheering.
2009 will on that score definitely open with high dependence on commodities
intact.
Meanwhile the calculations of the World Bank and the UN suggest that 700 billion dollars in overseas development Assistance (ODA) will be required over the course of the next few years to fund millennium development goals on the continent, but only $440 billion thereabouts are anticipated to be delivered, leading to a shortfall of $260 billion thereabouts.
African countries had, within that context, hoped to raise capital on the international markets to fund infrastructural investment in order to foster a reduction of dependence on non-performing commodity exports and promote greater domestic utilisation of hard commodities – Ghana’s attempts at building an integrated aluminum industry and the longstanding policy to develop an integrated iron and steel complex (both compromised) are obvious instances. Greater industrial output, it is believed, will lessen dependence on primary commodity exports and maximise domestic revenues towards the attainment of the millennium development goals.
The global downturn means unfortunately however that raising credit on the international markets in the short term will be much more difficult than was the case when Ghana and Gabon raised $750 million and $1billion respectively in 2007. Reports abound of many African finance policy chiefs abandoning efforts to print commercial paper for the global debt market.
Likewise, the use of forward trading instruments, futures options and derivatives to hedge the price of commodities will prove less attractive in the current scenario despite the tentative successes of countries like Ghana in that area in recent times.
But, to repeat, for countries like Ghana dependent largely on soft commodities, which tend for buyers in Europe and North America to be more income-inelastic and sensitive more to supply side movements (as opposed to demand-side) than hard commodities, the outlook is likely to remain generally stable. They should do well to pay attention to structural dynamics in global trade such as new trends in market information processing, logistics, customer analysis etc. in order to explore emerging and niche markets.
Hard commodity exporting countries should seek to boost domestic economic activity through the right fiscal incentives. With tariffs forming up to 30% of revenue structure in Sub-Saharan Africa (almost twice what is the case elsewhere in the developing world), such countries are likely to see very reduced flexibility should staple food prices continue to remain at their current or higher price levels as the trend appears to suggest.
A revival of commodity agreements, through UNCTAD for instance, will fail, like the ancestral Havana Charter of 1948, to have any impact, and is at any rate too distant a prospect to deserve serious attention in the current context. In fact, the growing obviousness of OPEC’s emasculation gives credence to this stance. One might argue that they shouldn’t even be contemplated.
As far as other effects are concerned, I remain slightly aloof as to the definiteness of their impact.
I have seen credible analyses that suggest a weakening of Africa’s infantile capital markets as overseas investors relapse into a phobia for risky emergent markets, leading to even lower market liquidity, worse intermediation spreads (efficiency of operations measured by gap between borrowing and lending rates) for the banking sector, and downward pressures on African currencies in the wake of dollar- or euro- denominated capital flight.
Well, Africa’s total stock market capitalization is still less than a third of Zurich’s SXE, and, excepting those in Nigeria and South Africa, marginal as a factor of GDP size or growth. The effect on the ongoing construction boom across the continent should be more conclusive, particularly in countries where speculator influence is high, such as in Namibia and South Africa.
With regards to the inward flow of Chinese FDI, I argue that Chinese investment in Africa is focused more on hedging resource stocks as part of a geopolitical or geoeconomic vision of international business that underemphasizes short-term and medium-term price trends and exaggerates the importance of unimpeded access and direct control. I doubt that the guys and gals from Beijing and Shanghai will pack and flee. But obviously, uncommitted investments may see a sliding trend if the Asian giant’s own growth slows even more and outward-looking investors find it harder to raise fair-priced finance in the country’s capital markets.
Lastly, the dollar’s recent conduct may suggest a weakening over the medium-term. Could that tempt speculators back to the commodity markets and create some respite?
The only thing absolutely certain is that better-governed African countries will fare best in the coming year.
Bright Simons is development director at IMANI, an independent think tank in Ghana and an affiliate of www.AfricanLiberty.org
