China`s economic slow-down means suppressed demand for Africa`s commodities. So what options are available to Africa?
Which hand has
Africa been dealt this year you may be wondering? Well take slumping commodity
prices, entire reliance on one export destination – China - added onto the
effects of this Chinese economy slowing down appreciably in the last 18 months,
and what you get is Africa increasingly bearing the brunt of the turmoil in
Beijing. This is a classic case of China sneezing, and the whole of Africa
catching a cold. Little wonder, especially considering that Chinese investment
into Africa significantly outstrips that of all other countries, accounting for
as much as $3 to each $1 from the United States for instance. For Africa, the
weak pace of growth in the Chinese economy has meant lower demand for its
commodities, leading to Sino-Africa trade almost dropping by half from its peak
during the 2013-2014 periods.
China which is
Africa`s largest trading partner is now battling the effects of debt fueled expenditure which created overcapacity in its economy, misallocated expenditure
and other structural deficiencies in its economy. Its stock markets have taken
a battering recently, prompting the Chinese government to prop up the financial
markets and devalue the Chinese Yuan in an attempt to stop the economic
bloodbath. This great fall of China is already reverberating globally, causing
uncertainty and panic to an already fluid situation in the world’s capital
markets. Not least to be affected however, is Africa, which has readily opened
its arms to the Asian giant`s economy over the years.
Fathom Consulting,
a London based independent think tank forecasts that Africa will be the worst
affected continent as a result of the stuttering Chinese economy. The most
vulnerable African countries will be those whose primary exports to China form
a larger chunk of total GDP, especially those with a higher export similarity
with China, such as Zambia and Angola. Using a matrix looking at various
factors to determine which African countries would be greatly affected by the Chinese
slowdown, Fathom Consulting found out that Zambia and South Africa ranked first
and second respectively, with countries like Angola, Sierra Leone and Liberia
not too far behind.
Could India be the Answer?
With recent
economic data showing that the value of Chinese imports fell 14, 3% in the 12
months to August in renminbi terms, could India potentially be a more lucrative
alternative export destination for Africa? Take Zambia for example, it is
Africa`s second biggest copper exporter, and depends on the metal for at least
70% of its foreign exchange earnings and anywhere between 25-30% of government
revenues. Not just for Zambia, but for a host of other African countries who
export mineral commodities, the obvious question on their minds would be to
find another alternative destination for their produce, at least in the short
term. The situation in China will likely get worse before it gets better,
although Beijing insists that the worst is over.
India –Africa
trade which stood at just $5 billion about a decade ago is forecast to surpass
the $100 billion mark this year, highlighting the exponential growth in trade between
Africa and India, whose biggest trading partners in Africa are Nigeria, Angola
and South Africa. India which is the only BRICS member country on a sound
footing economically is home to around 1,3 billion people – nearly as much as China
– represents a ready market for some of Africa`s commodities. India only has
0.3% of the energy reserves it needs to support its massive economy. In 2010,
India imported 75% of its oil reserves from Africa and this figure is expected
to top 90% by 2025.
India has got a
lot going for it, taking into account its favourable demographics. Its
dependency ratio is declining and about 30% of its population is under the age
of 14, unlike in China where the aging population will mean a higher dependency
ratio and ultimately a lower consumption. Going forward then, India might
provide a market for Africa to tap into with its huge demand for energy as well
as other commodities. This would provide some much needed respite for African
countries that have been left in the lurch by the slowdown in China`s economy.
But is India the panacea to the problem in the long term?
Diversifying trade relations
This argument is
definitely not something new. Calls for African countries to diversify their
economies have been made in the past, but they seem to be falling on deaf ears
as the pace of economic reform has been rather lethargic. The current scenario
with a slumping Chinese economy will hopefully stir African policy makers into
action. Far from merely diversifying their economies to reduce unsustainable
dependence on just one commodity, as in the case of Zambia, African countries
also need to trade with a
range of diverse nations, and not become too reliant on a single trade partner
as is the current situation with China.
These reforms
are necessary in ensuring that Africa`s growth story progresses unchecked, in
consideration of its fast growing and youthful population. Analysts concur that
in order to eliminate poverty in Africa, a sustained growth of at least 7%
annually is needed, but hampered by the current events gripping China, sub-Saharan
Africa growth is projected to be only 3.0% this year and 3.5% in 2016 according
to some estimates.
Could Africa`s ‘salvation’ come from within?
It’s no secret
that Africa’s one billion plus population is a vast market that can be a
powerful engine for growth, but several bottlenecks have meant that
intra-African trade has failed to take off in a meaningful manner. Regional
integration and the removal of barriers inhibiting trade within Africa would
need to be implemented with a view towards creating sustainably diversified
African economies that will not suffer the caprices of reliance on one large
trade partner.
Recent data
however, shows that intra-African trade stands at a paltry 12% of countries`
total trade. By comparison, 60% of Europe`s trade is within itself and so is
the case with Asia and even North America. Intra-African trade would present a
good opportunity for most African countries to make the necessary structural
changes in a focused move towards creating more diverse economies.
For now however,
as China`s economic “hard landing” continues to unfold, the turbulence this has
created in Africa will continue particularly in those countries whose exports to China constitute a large
proportion of their GDP. And the continued softening of commodity prices that
we have been witnessing will only serve to exacerbate an already fragile
macro-economic environment in Africa.
Hi Perry,
ReplyDeleteI'm a student at a Zimbabwean college, Id like to start an Investment club. Can I please have your email address, I think I'd need some advice from you. my email kfambisai@live.com
Hi kuda, thanks for visiting the blog. I have sent you an email.
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