SLOWDOWN IN EMERGING MARKETS TO AFFECT GROWTH IN EAST AFRICAN COMMUNITY ECONOMIES

Slowing growth and deflationary pressures in emerging markets including China and other major developed economies could derail expected robust economic growth in East Africa in the coming year.

In its latest Regional Economic Outlook for Sub-Saharan Africa released last week, the International Monetary Fund projects that strong growth in the majority of sub-Saharan Africa’s economies underpinned by a robust regional expansion in 2014 and 2015.

In East Africa, real gross domestic product (GDP) growth is expected to pick up across the region led by Tanzania with a real GDP growth of 7.2 per cent in 2015, followed by Rwanda with 6.7 per cent and Kenya with 6.2 per cent respectively, according to the report. Uganda is projected at 6.3 per cent next year while Burundi is trailing with 4.8 per cent next year.

On average, the economic projections for this year are higher than registered last year, whereby Tanzania led the growth with 7.0 per cent, followed by Uganda with 5.8 per cent, Rwanda with 4.7 per cent, Kenya with 4.6 per cent and Burundi with 4.5 per cent. 
Overall real GDP for sub-Saharan Africa is projected to expand from 5 per cent to 5.75 per cent in 2015.

However, this overall positive outlook could be undermined by an expected slowdown in emerging markets, particularly the ongoing rebalancing of Chinese demand towards private consumption.

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These trends could soften global demand for key sub-Saharan exports, including commodities, according to the Fund. This is because during the past decade, growing links with emerging markets have not only supported the region’s expansion and economic diversification but have also increased its vulnerability to external shocks.

“Overall, slower global growth is of course less than helpful for sub-Saharan Africa. Still, it is important to note that what we are seeing is lower global growth than what was expected earlier in the year. But in relation to last year, it is not a slowdown. There should not be any extra drag for sub-Saharan Africa from this forecast. Nonetheless, a global environment that is not robust also means that growth in sub-Saharan Africa will not be much higher,” said Abebe Selassie, IMF African department deputy director said.

Mr Selassie observed that the situation in large emerging markets like China, Brazil, and India also poses risks to the region.

“I think slower growth in these countries is probably the bigger source of concern for policy makers in the region. We have seen considerable softness in commodity prices related to this, even as export volumes remain strong,” he said.

But in recent years, a number of emerging economies have begun to play a growing role in financing of infrastructure in the region. In addition, regional states have resorted to scouring international debt markets as well as negotiating for concessionary loans from friendly countries — with a focus on China, Japan, Brazil and India — due to huge recurrent expenditures, a narrow tax base and poorly developed capital markets.

The above combined with an increase in foreign direct investment makes the region vulnerable should the ongoing slowdown in emerging markets continue.

Even increased global integration makes the region more vulnerable. While rising global economic and financial ties have been a boon for the region, vulnerabilities to external shocks have increased according to the IMF report. As a result of these strengthening ties, many sub-Saharan African economies increasingly move in sync with other economies outside the region, especially China and also Europe, which remains an important trading partner.

For instance, in East Africa, Kenya is currently a major exporter of cut flowers and vegetables to the European Union. Kenya exports flowers to the EU worth Ksh46.3 billion ($537 million) and vegetables worth more than Ksh26.5 billion ($307 million) annually. The EU takes about 40 per cent of Kenya’s fresh produce exports.

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The report notes that lower or higher growth in either advanced or emerging markets translates over time about one to one into lower or higher growth in sub-Saharan Africa.

“This means as growth slows down in emerging markets and only gradually strengthens in advanced economies, especially Europe, the external sector is likely to be less supportive for many sub-Saharan African countries,” the report cautions.

For instance, globally, commodity prices are projected to decline further in 2014 as aggregate demand in China is expected to fall. In addition, there are signs of better agricultural production except for coffee expected to decrease particularly in Brazil, the biggest producer.

Non fuel commodity prices are expected to continue falling in 2014 — down 1.7 per cent, from a drop of 1.2 per cent in 2013, whereas metal prices are projected to further drop in 2014 by 6.8 per cent, from a decline of 3.5 per cent and 14.3 per cent in 2013 and 2012 respectively, figures from National Bank of Rwanda show.

This week, China announced that its GDP had increased by 7.3 per cent in the third quarter, the lowest quarterly growth since the depths of the financial crisis in 2009, compared with 7.5 per cent in the previous quarter, adding to concerns that it could become a drag on global growth.

One factor that could affect some sub-Saharan African economies much more abruptly would be a reversal in the market sentiment, according to the report.

A market reversal could happen especially if trade partner growth and demand for regional exports weakens more than expected, or if investments become more sensitive to domestic vulnerabilities, according to the report.

“In such an environment countries where significant external financing needs have been increasingly filled by tapping international markets could find it difficult to continue in that way. Funding conditions would likely deteriorate with potential renewed pressures on external reserves and exchange rates forcing an immediate fiscal policy adjustment including public investment cutbacks,” the IMF report cautions.

“The demand boost from investment would be reduced, along with the positive supply effects over the longer term. This, in turn, would lower growth expectations and could further reduce investors’ appetite,” the report says.

Infrastructure deficit

The report also underscores the need for countries in the region to expand their infrastructure, where the existing gap could potentially undermine growth prospects.

“The challenge for countries like Kenya, Tanzania, Uganda, Rwanda and Ethiopia is to sustain this economic growth further. This will require addressing potential bottlenecks to growth. A good example of potential bottlenecks is infrastructure. There is a significant shortage of electricity in the region. Roads and ports are also congested in many cases. Addressing this is going to be very important going forward,” Mr Selassie said.

But the report points out that the major obstacle to addressing the continent’s infrastructure deficit does not generally appear to be a lack of financing, but rather capacity constraints in developing and implementing projects.

“Countries should seek to make the most of new financing instruments and flows by improving their absorptive capacity and removing remaining regulatory constraints, while controlling fiscal risks and maintaining debt sustainability,” the report says.

The report recommends that countries strengthen their public financial management capacity by upgrading their ability to plan, execute, and monitor public investment.

There is also a need for strengthening their project appraisal procedures, and adopting a medium-term budgetary framework that includes adequate provisions for the cost of operation and maintenance. This is in addition to exploring public-private partnerships that can be an effective tool to upgrade infrastructure.

This, however, needs to be underpinned by an appropriate institutional and legal framework, and to be carefully monitored to minimise fiscal risks, according to the report.

The report also warns that tightening financial conditions — stemming from a faster-than-expected normalisation of US monetary policy, adverse geopolitical developments, or a worsening of the countries’ fundamentals — could also result in lower and more expensive access to external funding and a scaling down of foreign direct investment.

The East African