HOW TO RESTART AFRICA S GROWTH ENGINE

HOW TO RESTART AFRICA S GROWTH ENGINE Copyright Institute for Security Studies 22 June 217

Restarting the Growth Engine Regional Economic Outlook for Sub-Saharan Africa African Department International Monetary Fund June 217

Outline Adjustment Financing A Broad-based Slowdown Insufficient Adjustment Increasing Vulnerabilities Recalibrating the Policy Response 3

216 saw a broad-based slowdown, with commodity exporters being particularly hit... Real GDP Growth, Average 21 15 Frequency 8 Weighted BWA Median = 5.1 7 Resource-intensive countries average = 5. ERI 6 Nonresource-intensive countries GAB 5 LBR BFA 4 BEN AGO SYC CIV 3 2 COM BDI LSO CMR SLE KEN TCD MOZ 1 CAF MDG GNB MLI STP COG TGO NAM NER RWA COD SSD GNQ CPV GIN ZAF GMB SWZ MUS SEN MWI UGA NGA ZMB TZA ZWE GHA ETH 2 2. 1.5 1..5..5 1. 1.5 2. 2.5 3. 3.5 4. 4.5 5. 5.5 6. 6.5 7. 7.5 8 >8 Percent 4

216 saw a broad-based slowdown, with commodity exporters being particularly hit... Real GDP Growth, 216 Frequency 8 Weighted Median = 3.7 7 average = 1.4 BEN 6 Resource-intensive countries CPV 5 Nonresource-intensive countries COM CMR BFA 4 TCD COD GHA CAF GIN 3 COG GAB BWA MDG NER GNB 2 GNQ BDI AGO NAM GMB LSO ERI STP SLE MLI SEN CIV 1 SSD NGA LBR SWZ ZAF ZWE MWI ZMB MOZ MUS SYC UGA TGO RWA KEN TZA ETH 2 2. 1.5 1..5..5 1. 1.5 2. 2.5 3. 3.5 4. 4.5 5. 5.5 6. 6.5 7. 7.5 8 >8 Percent 5

and in some cases, compounded by rising food insecurity. 6

Inflation is ticking up in many countries in the region. 3 Number of Countries with Inflation Rates Greater than 1 Percent 25 Number of countries 2 15 1 5 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 7

Outline Adjustment Financing A Broad-based Slowdown Insufficient Adjustment Increasing Vulnerabilities Recalibrating the Policy Response 8

Fiscal deficits have widened among hardest-hit countries and remain elevated elsewhere. 8 Fiscal Balance, 21 16 6 Percent of GDP 4 2 2 4 6 Average 21 13 216 Average 21 13 216 Average 21 13 216 Oil exporters Other resource-intensive countries Nonresource-intensive countries Overall balance (percent of GDP) 9

Fiscal deficits have widened among hardest-hit countries and remain elevated elsewhere. 8 6 4 Fiscal Balance and Real GDP Growth, 21 16 Percent 2 2 4 6 Average 21 13 216 Average 21 13 216 Average 21 13 216 Oil exporters Other resource-intensive countries Nonresource-intensive countries Real GDP growth (percent) Overall balance (percent of GDP) 1

Higher borrowing costs have made recourse to external market financing less attractive 1, 9 8 Frontier and Emerging Market Spreads, 214-17 Emerging markets Sub-Saharan Africa frontier markets Basis points 7 6 5 4 3 2 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 11

...leading to greater recourse to domestic financing,... Dec. 216 or latest available, percent of commercial bank assets Exposure of Commercial Banks to the Government 35 Increasing Exposure 3 SLE AGO BDI 25 GAB SYC 2 UGA KEN GHA GNB CIV 15 MWI CPVMOZ NGAZMB TCD CAF TZA GIN CMR MLI BEN MDG SEN SWZTGO 1 NER ZAF COG MUS BFA NAM LSO 5 GNQLBR COM BWA Decreasing Exposure SSD STP 5 1 15 2 25 3 35 Average December 21 13, percent of commercial bank assets 12

Exchange rates have depreciated, but not sufficiently in some cases with parallel markets spreads emerging 8 Depreciation of National Currencies Against the U.S. Dollar since December 213 (+ indicates depreciation) 7 6 Spread with parallel rate, latest available Change in exchange rate, Dec. 213 Mar. 217 5 4 3 2 1 AGO NGA GHA SLE Percent ZMB DRC TZA GIN ZAF NAM LBR ZWE¹ UGA STP RWA KEN MUS ETH BDI Oil exporters 1 Unofficial estimates report the spread to be around 2 percent between cash U.S. dollars and domestic bank deposits and bond notes. Other resource-intensive countries Nonresource-intensive countries 13

and reserves are trending lower for the region, and acutely so in oil exporters 7 International Reserves, 214 16 6 Months of imports 5 4 3 2 1 Sub-Saharan Africa interquartile range Oil exporters median Nonresource-intensive countries median Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 14

Outline Adjustment Financing A Broad-based Slowdown Insufficient Adjustment Increasing Vulnerabilities Recalibrating the Policy Response 15

Debt levels are on the rise across the region Public Debt, 2 16 16 14 12 Sub-Saharan Africa interquartile range Sub-Saharan Africa median Oil exporters median Percent of GDP 1 8 6 4 2 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 16

and public debt is on the rise, increasing the pressure on debt sustainability... Public Sector Debt Accumulation, 21 16 Simple average, percentage points 15 1 5-5 -1 211 13 214 16 211 13 214 16 211 13 214 16 Oil exporters Other resource-intensive countries Nonresource-intensive 17

...especially in oil-exporting countries. External Debt Service-to-Exports Ratio, 21-16 Total Debt Service-to-Revenue Ratio, 21-16 25 25 2 Interquartile range Sub-Saharan Africa median Oil exporters median 2 Interquartile range Sub-Saharan Africa median Oil exporters median 15 15 1 1 5 5 21 211 212 213 214 215 216 21 211 212 213 214 215 216 19

The financial sector is feeling the pinch, with asset quality declining,... 3 25 2 Nonperforming Loans to Total Loans 213 Latest available Percent 15 1 5 CAF SLE GNQ NER LBR GHA CMR TCD AGO GIN TZA ZAF BWA NGA GAB NAM COG SEN MDG BDI SYC SWZ RWA UGA KEN MUS LES MOZ Resource-intensive countries Nonresource-intesnive 2

...and credit to private sector slowing sharply. 2 1 Change in Credit Growth to the Private Sector, Average 211 13 vs. 216 Percentage points -1-2 -3-4 -5 TCD GAB COG AGO GNQ CMR NGA ZWE CAF GIN ZMB BFA LBA GHA BWA TZA NAM NER ZAF SLE COD MLI GNB GMB LSO RWA KEN MUS UGA TGO SWZ SEN BDI BEN CPV STP ETH COM MWI MDG ERI CIV SYC MOZ Oil Exporters Other resource-intensive countries Nonresource-intensive countries 21

The outlook is still subdued with modest growth rebound, subject to downside risks,... 6 Real GDP Growth 5 4 Percent 3 2 1 212 213 214 215 216 217 218 219 22

...and driven by the three largest economies. Contributions to Regional Real GDP Growth, 216 17 23

A Few Words on South Africa 24

Policy uncertainty has increased and confidence remains very weak 3 25 2 15 1 5-5 -1-15 -2 Policy Uncertainty and Confidence BER Political Constraints (RH S) 1/ BER Consumer Confidence Index (LHS) 2/ BER Business Confidence Index (RHS) 3/ 1 9 8 7 6 5 4 3 2 1 24 25 26 27 28 29 21 211 1/ BER Political Constraints shows the percentage of manufacturers who consider the political climate as a business constraint. 2/ BER Consumer Confidence Index is expressed as a net balance. The net balance is derived as the percentage of respondents expecting an improvement less the percentage expecting a deterioration. 3/ BER Business Confidence Index shows the percentage of business respondents who consider current business conditions as "satisfactory" as opposed to "unsatisfactory". 212 213 214 215 216 217 25

Agriculture and mining stabilization drive the 217 recovery with business cycle sensitive sectors taking over thereafter 2.5 2. 1.5 Contributions to Growth - Supply (percent) 2. 1.5 1. Contributions to Growth - Supply (percent) Other Projections Projections Finance, real estate and business services Wholesale and retail trade; hotels and restaurants Mining and quarrying Ag riculture, forestry and fishing Real GDP 1..5. -.5-1..5. -.5-1. 214 215 216 217 218 219 Other Finance, real estate and business services Wholesale and retail trade; hotels and restaurants Mining and quarrying Agriculture, forestry and fishing Real GDP Sources: StatsSA and IMF staff calculations. 214 215 216 217 218 219 Sources: StatsSA and IMF staff calculations. 26

Slowing growth has been reflected in weak employment creation which ground to a halt in 216 5 4 3 2 1-1 -2-3 -4-5 Employment Growth: Contribution by Sector (percent) 29 21 211 212 213 Formal sector - Public Formal sector - Other Informal sector Ag riculture Private households Employment g rowth 214 215 216 Q1-217 27

Headline inflation is expected to return with 3-6 band percent by end 217 7. Headline Inflation (y/y percent chang e) Projections 6.5 6. 5.5 5. 4.5 4. 3.5 3. 214 215 216 217 218 219 22 Source: IMF staff estimates.

After improving in 216, current account balance is expected to gradually deteriorate as growth picks up 1-1 -2-3 Current Account (Percent of GDP) -4-5 -6-7 Goods and services Income Transfers Current account 213 214 215 216 217 218 219 22 Sources: SARB and IMF staff calculations.

Fiscal consolidation is expected to continue 4 Structural Primary Balance (percent of GDP) Fiscal impulse Structural Primary Balance Projections 3 2 1-1 -2 25/6 26/7 27/8 28/9 29/1 21/11 211/12 212/13 213/14 214/15 215/16 216/17 217/18 218/19 219/2 1/ Uniform increase in fiscal impluse necessary to reach authorities FY17/18 debt target.

to stabilize public debt in the medium term 6 55 5 Public Debt (percent of GDP, calendar year basis) Staff Baseline 216 Budget EM Median 217 Budget Projections 45 4 35 212 213 214 215 216 217 218 219

Outline Adjustment Financing A Broad-based Slowdown Insufficient Adjustment Increasing Vulnerabilities Recalibrating the Policy Response 32

Three priority areas to ensure a stronger and durable recovery: ØReinforce emphasis on macroeconomic stability ØStructural reforms to support healthier macro balances ØStronger emphasis on social protection 33

What supports growth spells: improved policies, better institutions, fewer market distortions, and a better external environment. Impact of an improv ement of 25 percentile points starting from the median 8 7 6 5 4 3 2 1 Trade openness Inflation Sub-Saharan Africa: Impact on Spell Duration (Years) Investment to GDP Total public debt Oil price, change Terms of trade growth Polity 2, cumulative change Real GDP per capita growth Macroeconomic Variables External Shocks Institutions Other Relative price of investment to consumption Note: Each bar shows the change in the expected duration of a growth spell (in numbers of years) if a variable improves by 25 percentile points from the median value in the sample of sub-saharan African countries, while holding other variables constant. 34

More emphasis on adjustment needed in many cases Hardest-hit resource-intensive countries: Strong fiscal consolidation required, with strong focus on revenue mobilization Where available, greater exchange rate flexibility/elimination of exchange restrictions important Other countries: Where growth is still strong, emerging vulnerabilities need to be addressed from position of strength Infrastructure investment needs to be addressed through higher revenue mobilization to safeguard debt sustainability 35

Reforms needed to support macro objectives ØDomestic revenue mobilization Ø Greater emphasis on safeguarding financial stability Ø Fostering economic diversification ØState-owned enterprise reforms to limit contingent liabilities 36

Stronger emphasis on social protection necessary Ø Low growth and widening macroeconomic imbalances risk aggravating social dislocation and increasing poverty Ø Social protection programs often fragmented, not welltargeted, and cover a small share of the population Ø Need to better target these and also use savings from regressive expenditures such as fuel subsidies to help vulnerable groups 37

Conclusion q Strong domestic policy response to revive growth q Macroeconomic and structural policies Ø Countries where growth has slowed è focus on macroeconomic stability to set the stage for a growth turnaround that can be sustained Ø Countries enjoying a growth spell è address emerging vulnerabilities and focus on prolonging growth Ø All countries è complementing efforts to unlock growth potential 38

Thank you! The online edition of the Regional Economic Outlook for sub-saharan Africa is now available online at www.imf.org 39