Chinese economy, conflicts may weaken Africa’s economy

The International Monetary Fund (IMF) regional economic outlook for Sub-Saharan Africa released towards the end of last month, points to wobbly growth in 2014. While projections are largely glossy, threats also remain real.
One of the Chinese factories in Rwanda. China is one of the biggest investors in Africa and any drop in the economy will affect the African continent. (File)
One of the Chinese factories in Rwanda. China is one of the biggest investors in Africa and any drop in the economy will affect the African continent. (File)

The International Monetary Fund (IMF) regional economic outlook for Sub-Saharan Africa released towards the end of last month, points to wobbly growth in 2014. While projections are largely glossy, threats also remain real.

Ideally, IMF says 2014 should be a better year for Sub-Saharan Africa economies with growth projected to pick up from 4.9 percent of last year to 5.5 percent this year. But all this depends on the fortunes of major emerging economies such as China and on-going conflicts on the continent.

“The high growth that many countries in Sub-Saharan Africa have enjoyed in recent years has been supported by strong growth in the largest emerging market economies. Should growth in these countries, particularly in China, slow much more than currently envisaged, the implications for the region could be significant,” says the IMF in the April analysis.

Unfortunately, it appears the threats are real and more evidence is emerging to support fears that China is unlikely to meet its growth targets.

The Chinese Academy of Social Sciences (CASS), a top government affiliated think tank in Beijing, last month revised downwards its 2014 GDP growth forecast for China from 7.5 percent to 7.4 percent. CASS also warned that growth could plummet to as low as 7 percent.

The Chinese economy expanded at a rate of 7.4 percent in the first three months of 2014, according to the country’s National Statistics Bureau — lower than 7.7 percent recorded in the same period last year.

Most importantly, the 7.4 percent growth in the first quarter is the lowest since the third quarter of 2012. Between January and March this year, 30 out of China’s 31 provinces and municipalities missed their yearly economic growth targets as they refocused their efforts on battling spiraling debt.

However; in its regional economic report for Asia Pacific also released in April, the IMF sounded confident that China will meet growth prospects of 7.5 percent in 2014 — that is 0.3 percent higher than its earlier forecast announced in      October.

But why is China’s growth important to Africa’s fortunes?

According to IMF, Sub-Saharan Africa Economic activity continues to be underpinned by large investments in infrastructure, mining and maturing investments. China is the leading foreign actor in each of these sectors and this gives it a central role in Sub-Saharan economies where it currently ranks as a leading trade partner.

“In 2013, China-Africa trade surpassed the $200 billion mark for the first time, making China Africa’s biggest trading partner,” revealed China President Xi Jinping.

Therefore, in the event that economic activity is low in China with industries scaling down on production output, it would lead to less demand for minerals and other raw materials which would automatically hurt Africa’s export returns.

This anticipated reduction in African exports to emerging economies, IMF warns, is most likely to affect the outlook for some commodity prices particularly copper and iron ore — with adverse implications for further mining investment for these commodities.

Regarding investment attraction to Sub-Saharan Africa, IMF warns that tighter financial conditions in China could also reduce the appetite of Chinese companies to invest abroad.

Experts such as Stephen Roach, former Chief Economist with Morgan Stanley, noted that China’s economic slowdown is a result of its new structural reforms and might persist for a few more years before stabilizing again.

Roach’s assessment strikes a code with IMF’s projections that China’s GDP growth will drop from its 7.5 percent in 2014 to 7.3% next year. These are some of the external factors that Sub-Saharan African economies must keep a wary eye on.

Yet it’s also important to remember that all these are just projections and things could always improve or worsen based on the ever shifting global forces.

For instance; on Thursday this week, the China Federation of Logistics and Purchasing released the official manufacturing Purchasing Managers Index (PMI) for April with figures indicating that it rose to 50.4 from 50.3 in March.

The significance of this is that; a PMI reading above 50 indicates an expansion in manufacturing activity from the previous month while any reading below that would mean a contraction; so as long as these figures remain positive, it’s good news for many African economies who have China as a leading destination for their exports especially minerals.

Internal risks

Besides external factors, the IMF notes that domestic risks are more significant in some African countries; these too are likely to exert their own pressure on the already frail prospects.

“Security conditions remain difficult in some areas. The ongoing conflicts in the Central African Republic and South Sudan are exacting a heavy toll in those countries and threatening spillover effects on some neighbouring countries,” notes IMF.

Based on that backdrop, the IMF now advises economies in this region to put greater emphasis in the coming months on sustaining the macroeconomic stability that has underpinned the high growth enjoyed by the region in recent years.

As advice to policy makers, IMF says countries should be ready to adjust their fiscal plans in the event of a fall in external financing while allowing the exchange rate to adjust appropriately. But even where external financing is more secure, fiscal policy needs to emphasize rebuilding buffers, provided growth is at   potential—the case in many countries. 

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