Beyond the talk of the spread of
the novel corona virus in Africa, there is a major concern people of Africa
should be talking about, and it is how African economies and businesses will
survive the economic scourge of the virus. The spread of the pandemic around
the world is generating economic and financial ripples and storms that are very
likely to do a lot of damage to businesses and economies on a scale that might
be beyond the measurements of the Richter scale. The fatalities African
businesses and economies are exposed to are very severe.
The major risks businesses and
economies in Africa are exposed to come from deficiencies that are arising from
supply chain challenges caused by restrictions and mandatory quarantines in
major industrial centers around the world and a drop in demand for raw
materials from the more developed world. It also extends to restrictions that
affect businesses on the African homeland. Moreover all this issues are
escalated by impending issues that have been raging for a while in the
backgrounds of the scheme of things and daily workings of the economy. This
makes it very challenging to respond to the adverse scenarios the after-shocks
of the pandemic poses to Africa.
The risks the virus creates for
African economies include;
11 .
Direct economic impact of reduction in global production
22 .
Shortage in supply through supply chain challenges
33 .
Economic impact of behavioral changes of consumers and
businesses
44 .
Downsizing of business operations and a higher unemployment rate
55 .
Capital and money markets shock effects
Policy makers in Africa don’t
have sufficient tools to respond to the adverse effects of the Covid-19 virus
pandemic on their economies because for a long time they have ignored
completely or where lackadaisical in their approach to pressing economic
issues. Many African economies have been chronically sick for a long time
without proper medication; the corona virus will only add more damage to the
injured economies.
Most African economies are like
identical twins, having similar challenges of fiscal rascality, carrying
irresponsible debt burdens, with a weak tax collection base, absolutely
depending on revenue from commodities, afflicted with an addiction to foreign
produced consumables, adopting policy patterns that lead to further
under-development and genuinely lacking the will to start large scale
manufacturing but wallowing in archaic sentiments and throwing pity parties
without enough booze.
It is without doubt that the
corona virus pandemic would plunge the world economy into a global recession;
firstly because the economic costs of the virus cannot be envisaged in view of
the fact that it’s uncertain for how long the pandemic would persist, secondly
because the financial costs to tackle the scourge of the virus is massive.
Economic activities will remain muted globally till the world wins the war
completely on the corona virus. Another uncertainty is the speed of recovery of
business sentiment after the tide of virus has been stopped completely. We
would be wrong to predict a definite timeline for recovery at this time. We are
also uncertain of the volume of damage the virus will do to businesses globally
before its tenure is terminated.
The impact of the virus is
already touching down on commodities and financial markets. WTI crude has
touched below $20 while Brent Crude was seen below $30. WTI Crude opened at $60
this year and was still seen at $53 in February. The economies of Angola,
Nigeria and few other African countries run on crude oil sales and there will
definitely be severe budget deficit in these countries. South Africa which is
experiencing a second recession in two years has a lot of companies who might
not survive the carnage of the Covid-19 pandemic especially those in the
tourism industry. South African Airlines which is under a bankruptcy protection
is one company that has received bigger blows than many others.
African equities have been hit
due to foreign investors drawing down on their investments in African exchanges
and indiscriminate panic selling of share holdings across African exchanges.
The Nairobi Stock Exchange lost Sh120 billion in market capitalization in one
day and will still lose more value. In South Africa, the FTSE/JSE Africa all
share index lost about 11% in one day. In Nigeria the NSE All Share Index lost
4.28% in one week.
Risk assets have been extremely
volatile since the outbreak of the corona virus pandemic; it has completely
lost investor appeal as there is a flight to safe havens globally. Investors
don’t seem to trust the effectiveness of individual government responses and
this is causing a sell-off in sovereign debt. Sovereign debt spreads are
therefore widening considerably and this is a further stretch to the debt
metrics of many African countries that are already bearing excess debt burdens.
A sovereign debt debacle has begun with downgrades in debt quality. South
Africa’s government long-term foreign-currency issuer ratings were downgraded
by Moody from Ba1 to Baa3. This means South African debt is now classified as
Junk. Additionally many African countries would require emergency loans to
combat the corona virus pandemic and this in addition to revenue losses would
cause an unsustainable debt situation.
Dollar shortages arising
from the global economic panic caused by the corona virus pandemic is driving
down Emerging Market currencies in a crazy fashion. The corona virus is
responsible for the free falling Zambian kwacha; it’s the reason why the South
African Rand is testing all time lows almost hitting ZAR18 to $1.The
Nigerian case seems to be the worst as her policy makers are still head strong
on keeping an artificial exchange rate. The Nigerian Central Bank just devalued
the Naira and set a peg at N380 to $1 while the black market rates have started
diving further. The ripple effects of a multiple exchange rate system might be
the funeral of the Naira.
Mostly, African economies live
in a consumer centric environment and the fall in value of their local currencies
is already causing a cost-pull inflation. Consumers are beginning to feel the
pain of accommodating higher retail prices. Economies and businesses who
depends on imports from China and Europe are also having supply challenges as
their supply chains have been broken completely due to travel restrictions and
shut down of factories. Uganda and Mozambique are facing inflation induced by
scarcity because business operators have been left in the cold without
supplies.
While the corona virus pandemic
might be a trigger for deflationary risks in the more developed world it brings
inflationary risks to many in underdeveloped Africa. Once the corona virus
pandemic is defeated, there is a high probability of a sluggish recovery with
dawdling growth in global output and commodity prices rising softly. This
implies we expect a period of stagflation at the end of the corona virus
crises. Commodity prices will remain low and subdued for an extended period of
time and this will bring more pain for Africa. Growth will be negative for a
prolonged period of time in Africa. Prevalent metrics in Africa are flawed and
need to be adjusted through progressive policies and drastic behavioral
changes.
Egypt, who had made progress
with new economic reforms in recent years, could see all his gains wiped out in
the weeks ahead. The largest threat to Egypt is a global trade downturn which
will reduce traffic and revenue on the Suez Canal, a massive drop in tourism
revenue and a fall in crude oil and natural gas prices and demand. South
Africa’s mining industry is bracing to take a severe blow, the mining industry
in South Africa which contributed 8.1% to her GDP in 2019. Over 400,000 people
are employed in the mining industry directly. With commodity prices
diving and demand also dropping, there would be a major loss of revenue and
jobs.
African economic prospects will
remain subdued and uncertain with the bias on the downside majorly due to the
fact that the corona virus impact on the global economy will definitely lead to
a global recession and the size of the recession is likely to be bigger than
the post Lehman brothers recession of 2008, the situation is also more
apprehensive because Africa is much more involved in the global economy than it
was involved ten years ago. Most African countries are also lagging behind in
accommodative fiscal and monetary policies to bolster production and trade and
any emergency policy decision would do little or nothing to ease the pain the
corona virus pandemic brings.
When we recover fully from
the corona virus pandemic, there would be much more serious challenges to
confront, the severity of which would be determined by the duration and
intensity of the corona virus pandemic. The adverse effects on trade, commodity
prices and employment could be worse than imagined and more extensive has we
project global GDP to remain negative for an uncertain period of time and a new
downside set to materialize in economic perception. A major risk would be
degenerating credit quality. How much the deterioration will be is still vague
for now but many African countries would have their debt downgraded to
non-investment grades and credits would be more difficult and expensive to
access. The constraints on monetary policy that Africa would encounter,
post-corona virus pandemic should be a wake-up call to African countries to
adopt a rapid, vigorous and significant fiscal and socio-economic response
which would have enough discretion to start an industrial and thriving economic
hub. A new world will emerge at the end of this scourge and it will be an
opportunity for Africa to redefine his position in the global economy. The
developed world may desire to diversify production away from China and Africa
would be a prospect for new industrial centers. It’s pertinent that Africa
takes maximum opportunities this new world presents
Olugbenga Ojo is a Senior Economist at Businessmail and Velocity Markets
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