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.