The gross domestic product (GDP) growth of countries in sub-Saharan Africa is expected to moderate throughout 2023, with the regional average falling to 3.5%, from 3.6% in 2022 and below the 2010 to 2019 average of 4.1%, credit risk and strategy decisions research company Fitch Solutions Country Risk and Industry Research country risk head Jane Morley said on April 13.
This is owing to global headwinds, including tightening financial conditions, lower commodity prices and the lagging impact of higher inflation following Russia's invasion of Ukraine, while further tightening of global financial conditions will dampen economic activity in many sub-Saharan African markets, she noted.
"We expect some tailwinds to regional growth from strengthening activity in smaller economies such as Côte d’Ivoire, Mozambique and Tanzania."
Further, in many cases, inflation is forecast to remain above 2010 to 2019 levels.
This will compound domestic constraints, such as power cuts in South Africa and Zambia, falling oil production in Nigeria and Angola, and weakening business sentiment in Kenya and Ghana.
Growth will slow in four of the region’s top five markets, namely Angola, Kenya, Nigeria and South Africa, strengthening only in Ethiopia from 4.4% in 2022 to 6.4% this year, owing to an improving security situation.
However, an anticipated economic recovery in China, which is sub-Saharan Africa's main trading partner, and an improving outlook for smaller economies such as Tanzania, Uganda, Côte d’Ivoire, Senegal and Mozambique, will prevent a sharper regional slowdown, she noted.
COUNTRIES
Fitch Solutions anticipates a marked slowdown in economic growth in South Africa, which is sub-Saharan Africa's most industrialised economy, to 1.2% this year from 2.1% in 2022.
"We expect that the economy will fall into technical recession in the first quarter, shrinking by 0.8% quarter-on-quarter, after having contracted by 1.3% in the fourth quarter of 2022," she added.
Worsening power outages will act as the main drag on consumer activity and business sentiment. Indeed, the Bureau for Economic Research’s business confidence index fell further to 36 out of 100 in January, pointing to greater lack of confidence, the company noted.
However, aggressive monetary tightening in 2022 and rising prices - Fitch forecasts inflation will slow to a still-high 5.5% this year, from an average of 6.9% in 2022 - will have a lagged impact on household spending.
"While we expect some fiscal slippage in the 2023/24 fiscal year, this will be driven by higher public spending on debt servicing, social security and the wage bill, with limited space left for consumption expenditure," Morley highlighted.
Meanwhile, unreliable electricity supply will also curb production of manufactured and mining goods destined for export, with weakening external demand further clouding the export outlook.
Additionally, while support for the ruling African National Congress (ANC) is likely to recover slightly from currently low levels, there is a growing risk that South Africa will enter a period of coalition politics after the May 2024 general election, said Fitch Solutions sub-Saharan Africa country risk senior analyst Gianmarco Capati.
"Given that Ramaphosa remains more popular than his party, our core view is that the majority of the ANC will continue backing him, as general elections planned for May 2024 draw nearer."
Further, while Ramaphosa’s efforts to consolidate power bode well for his reform agenda, this will continue to face headwinds. Despite increasing measures to end the country’s ongoing power crisis, including the appointment of an Electricity Minister in February’s Cabinet reshuffle, loadshedding is likely to persist in the near term, he added.
Indeed, new projects will take time to come online and progress on separating ailing State-owned utility Eskom into profitable units is likely to remain limited, not least because of disagreements between Public Enterprises Minister Pravin Gordhan and Mineral Resources and Energy Minister Gwede Mantashe.
"Meanwhile, we continue to expect that fiscal consolidation will be paused in the 2023/24 fiscal year, as spending pressures increase in the run-up to elections," he said.
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"There is a growing possibility that South Africa will enter a period of coalition politics, the policy implications of which will depend on the nature of any alliance. While a grand coalition with the centrist Democratic Alliance is possible and would ensure broad continuity, one with the more radical Economic Freedom Fighters (EFF) would lead to more populist policies," said Capati.
Meanwhile, in Kenya, which is East Africa’s largest economy, Fitch Solutions forecasts that growth will weaken to 5.1% this year, from an estimated 5.4% in 2022. Kenya’s purchasing managers index dipped from a strong 52 in January to 46.6 in February, as the depreciation of the Kenyan shilling accelerated and foreign reserves declined further to 3.7 months of import cover in February from 3.9 months in January, noted Morley.
"We anticipate that these headwinds will persist over 2023, as weaker investor confidence amid growing perceptions of foreign-currency shortages are coupled with continuing drought conditions, weighing on farmers’ incomes and keeping food prices elevated. Indeed, we forecast that inflation will barely slow to 7.2% this year, from an average of 7.6% in 2022, which is close to the upper limit of the central bank’s 2.5% to 7.5% target range."
Meanwhile, slower growth in developed markets, 0.9% in 2023 according to Fitch Solutions' forecast, down from 2.6% in 2022, will translate into lower demand for Kenya’s agricultural exports, including tea, flowers and vegetables, she added.
Fitch Solutions forecasts that Nigeria, which is sub-Saharan Africa's largest economy and oil producer, will record below-trend growth of 2.3% this year, down from 3.1% in 2022. While growth strengthened to 3.5% year-on-year in the fourth quarter of 2022, from 2.3% in the third quarter, the company does not believe this trend will continue into 2023.
The Central Bank of Nigeria’s decision to demonetise the large denomination banknotes has led to weeks of acute cash shortages in the first quarter, severely disrupting commercial operations and preventing payments. Indeed, Nigeria’s PMI fell to a two-year low of 44.7 in February, signalling a contraction in private sector activity.
"We also believe that February’s disputed general election will have disrupted the non-oil sector amid prolonged business closures. While these headwinds will ease in the second quarter of 2023, a weak outturn in the first quarter will act as a drag on full-year growth in 2023," Morley added.
Additionally, Fitch Solutions projects that Nigeria’s crude output will stagnate at an average of 1.5-million barrels per day in 2023, following a record decline of 14% in 2022. While offshore output will be ramped up, unplanned outages and oil theft will keep total crude production low in 2023. This will weigh on public revenues and cloud the outlook for net exports, she noted.
