With Africa facing the impacts of the Russia-Ukraine War, runaway food price inflation and the tailwinds of Covid-19, 2022 was a year of enormous economic disruption – and economists and bankers tell African Business that its negative impacts are likely to spill over into 2023.
As the new year kicks off, Africa is likely to experience a contraction of its annual GDP growth as rising inflation and interest rates hikes continue to bite, restricting borrowing and government spending, says Charlie Robertson, chief economist at Renaissance Capital.
“It’s going to be a year of austerity for many lower-income countries, not just Africa. They can’t borrow easily from abroad. It’s too expensive. We’ve got a global slowdown, which won’t help exports. And that’s a tough combination. Governments will have to take measures like removing the fuel subsidy or at least reducing it in the second half of 2023, which is likely to hurt the middle classes.”
But whether African economies wilt further under the barrage of external shocks or make tentative steps towards recovery is likely to differ widely among individual countries. In particular, the continent’s oil exporters could be buoyed by robust energy prices which currently sit at $75 a barrel – at least for the time being, says Miguel Azevedo, head of investment banking, Middle East and Africa (exc. SA) at Citigroup.
“On one hand, for energy producer countries, 2023 appears as a good year considering the current spike in prices, while 2024 will be less profitable. For industrial commodities producers, however, it is the other way around: 2023 will probably be a little bit under pressure, and in 2024, as the world economy grows, things will improve.”
How to revive Nigeria’s economy?
The economic performance of the continent in 2023 could to a large extent depend on the performance of three major economies – Nigeria, South Africa and Egypt – and the omens in the first two are not good.
In the first months of the year, all eyes will be on Nigeria, Africa’s largest economy. Its presidential election on 24 February is likely to temper economic expectations as investors hold fire pending a stable process.
And whoever wins the contest – which pitches Bola Tinubu of the ruling All Progressives Congress (APC) against Atiku Abubakar of the main opposition People’s Democratic Party (PDP), with Peter Obi of the Labour Pary potentially playing the role of kingmaker – Nigeria’s next president faces a daunting task in reviving a moribund economy.
Despite its plentiful oil reserves, theft from pipelines, corruption and a lack of refining capacity means that the country continues to spend billions on wasteful fuel subsidies. Meanwhile, the Buhari government’s tight control of the naira and penchant for state interference in the economy have restricted growth further.
With GDP expected to grow by just 3.2% this year, according to the IMF, analysts are urgently calling for the removal of fuel subsidies and a devaluation of the naira if the country is to take advantage of rising oil prices.
“In conjunction with a wider budget deficit forecast, the prioritisation of subsidies has worsened fiscal finance and policy risks. Lacklustre oil production is expected to persist throughout 2023, limiting oil revenue inflows and weakening economic growth,” says Jee-A van der Linde, senior economist at Oxford Economics.
“If the naira, which is currently more than 50% overvalued, was to weaken to fair value around N680/$, then budget revenues from energy – over half of budget revenues – should jump by 50%,” says Robertson.
Azevedo says that the removal of subsidies is one of several policy presciptions that would allow the country’s natural entrepreneurialism to thrive.
“Although from a very low base, I am relatively positive about Nigeria. The people and the entrepreneurial spirit will always prevail. If you remove some of the obstacles which are politically imposed, say, for instance, subsidies in refined products that consume a lot of money, I think Nigeria can only improve economically,” he says.
But van der Linde cautions that a change in political leadership might not necessarily lead to structural reform of the Nigerian economy. All three of Nigeria’s major candidates are political insiders and none has all have avoided radical pledges to disrupt the status quo.
“All three candidates are relatively aligned on most policy points, meaning that we do not expect any notable change to Nigeria’s policy environment following the elections – for better or worse,” says van der Linde.
Another difficult year for South Africa
The continent’s second-largest economy, South Africa, is again expected to face a difficult year. According to the IMF, GDP growth is expected to rise by just 2.1% in 2023. External shocks are likely to be exacerbated by ongoing political instability – in recent months, President Cyril Ramaphosa has been fighting for his political life after a damaging report accused him of misconduct following an unreported theft of hundreds of thousands of dollars at his private game ranch.
While the ANC’s power brokers have – for now at least – shielded the president from impeachment, factional opponents aligned with former President Jacob Zuma are likely to feel emboldened to continue their attacks on his leadership.
Meanwhile, the country’s institutions and services continue to decline. State energy provider Eskom, saddled with debt and outdated power infrastructure, continues with regular load-shedding (power cuts) in an attempt to relieve pressure on the grid. In December, Eskom CEO André de Ruyter resigned, becoming the 11th boss to have left the company in just over a decade. With an unstable leadership and little progress on the radical reform it requires, 2023 looks to be another year where South African businesses and individuals will be unable to rely on a stable power supply.
Robust growth expected in Egypt
At the other end of the continent, Egypt continues to be greatly exposed to the global supply chain disruptions caused by Russia’s war in Ukraine.
With no end in sight to the war, reduced harvests and wheat exports still held up in the Black Sea, Egypt will continue to look at diversifying its food supply.
In February 2022, foreign investors pulled $20bn out of the country’s debt market as they feared the consequences of soaring oil and commodity prices on the North African economy.
Nevertheless, Cairo ended the year on a strong note, securing a $3bn IMF loan which is expected to catalyse additional financing of about $14bn from Egypt’s international and regional partners, including new financing from Gulf countries and other partners through the ongoing divestment of state-owned assets.
The deal with the includes a shift to a flexible exchange rate regime, monetary policy aimed at gradually reducing inflation, and fiscal consolidation to ensure downward public debt trajectory
Egypt’s hosting of the Cop27 climate summit in Sharm El-Sheikh in November concentrated minds on the country’s vast green energy potential and allowed the government to strike a number of deals to contribute towards its energy transition. In talks with the IMF, the authorities requested access to the Resilience and Sustainability Facility, which could provide up to an additional 1bn IMF Special Drawing Rights to support climate-related policy goals.
All of this means that despite external pressures, the IMF projects that Egypt will grow by a robust 6.6% in 2023.
Senegal and Kenya lead regions
In East and West Africa, meanwhile, analysts are looking to Senegal and Kenya to lead the way.
Senegal’s plan to commence hydrocarbon exports from its large offshore reserves is prompting excitement among investors.
“At the end of October, the energy ministry confirmed its expectations that gas production will commence next year, while the construction phase of the floating production storage and offloading facility for the Sangomar Field Development Phase 1 was completed at the end of November. The latter will be Senegal’s first offshore oil project with a capacity to produce 100,000 barrels of oil per day, and production is expected to commence in late 2023. As a result, GDP growth is expected to reach 7% in 2023 before increasing further to 8.6% in 2024,” says van der Linde.
But experts caution that careful planning will be needed to avoid the “resource curse” that has afflicted so many other African countries.
“If there is the right governance if there are the right politics and the right policies, and if they use these windfall revenues to invest in infrastructure and help create the foundations for long-term growth, then it’s all very good. But I haven’t seen it happening in other countries,” says Azevedo.
In Kenya, the new administration of William Ruto is getting underway with its plans to unleash the “hustler nation” of small enterprises and informal traders. Ruto has already made some eye-catching moves to boost investor confidence, including removing the fuel subsidy, cutting back on pre-election spending pledges and winning a bigger-than-expected tranche of IMF funding. With growth of 5.3% expected this year, analysts hope that Ruto can go some way towards delivering on his ambitious election pledges.
“I see a lot of drive in Kenya,” says Azevedo. “The new administration is trying to do things differently and people are very excited about it. Even the people that were not convinced before the elections, now realise that there is a new drive, a new willingness to do things and to do them faster. Let’s see if it materialises and, very importantly, if it becomes institutionalised,” he says.
A year of debt restructuring
Elsewhere, 2023 will see widespread debt restructuring talks. Last November, the Ghanaian government proposed its budget plan for 2023, which includes the restructuring of both local and foreign currency debts that will likely incur substantial losses for investors.
Next on the list is Ethiopia. At the beginning of 2022, the Ethiopian government, which has been buffeted by the war in the Tigray region, requested debt treatment under the G20 Common Framework – a process created during the Covid-19 pandemic which applies the Paris Club methodology of debt relief but with China and other multi-lateral lenders playing a role.
Although the official creditor committee has met four times, it has not yet reached an agreement.
As a peace agreement was reached last November 2022 between the Tigrayan forces and Abiy Ahmed government, the medium-term macro and fiscal outlooks are likely to improve in 2023 – the IMF currently projects an economic expansion of 3.8%.
Tunisia, which is going through political turmoil after President Kais Saied adopted a new and controversial constitution which reduces the parliament’s power, is also facing a high probability of debt reorganisation, according to Oxford Economics.
In the past 10 years, foreign direct investment has decreased more than twofold while the country’s external debt went from $22.6bn (2010) to $41.6bn (2021).
“Government finances remain a significant strain on the country’s creditworthiness,” says van der Linde.
To avoid the risk of defaults across Africa in 2023, Chatham House urges deeper cooperation between China – which has emerged over the last two decades as the biggest individual lender to dozens of African countries – and the Paris Club of wealthy lending countries.
China retreats, US steps in
While is increasingly clear that easy days of Chinese credit are coming to an end on the continent – the country is currently distracted by a domestic Covid-19 crisis which has prompted rare unrest – the US is looking to step up its role on the continent after years of disengagement.
In December, US president Joe Biden promised Africa $55bn over the next three years during the US-Africa leadership Summit held in Washington.
This is more than China’s $40bn at the last Forum on China-African Cooperation (FOCAC) in 2021, and more than Japan’s $30bn at the 8th Tokyo International Conference on African Development (TICAD) last August.