This guest post is by Tom Cleveland of ForexTraders.com.
GDP growth prospects exceed 5.4% in 2012. Export industries are on the rise. Tourism is expanding. Government stability is increasing.
Are these headlines from one of Asia’s emerging economies? Most certainly not! These economic realities relate to the Sub-Saharan Africa (“SSA”) region and its member states.
The benefits of positive growth dynamics are not spread equally throughout the region, but the differences are small and understandable, leading to a higher prosperity level that has been years in the making.
While the rest of the world has had to deal with contraction, Sub-Saharan growth has continued largely unabated. World output, forecasted by the International Monetary Fund in its recently published “World Economic Outlook”, is projected to fall from 3.9% to 3.5% for 2012, but the SSA region is expected to grow from 5.1% to 5.4%, exceeded only by China, India, and other emerging Asian economies. Data for each Sub-Saharan Africa country are depicted in the diagram presented below:
Not all countries will show accelerated growth in 2012, but all are expecting positive GDP growth rates for year over year. South Africa, Nigeria, and Ghana’s combined growth forecasts exceed the region as a whole, but different conditions prevail in each country. South Africa, heavily dependent on trade with Europe, is the lowest performer in the group. Nigeria continues to benefit from the petroleum industry, and Ghana has joined in with oil production beginning last year. The Cedi has depreciated 20% versus the Greenback over the period, but expectations are that mining companies will soon reverse the trend.
The crisis in Europe has caused many nations around the world to ratchet back their growth forecasts due to diminished European demand for imported goods. In many regards, these downward revisions have had little impact on SSA countries, with the exception of South Africa. Exports to Europe constituted a 40% share of trade for SSA countries in the early 1990’s, but through a concerted effort to diversify exports to other emerging markets around the world, this dependence on Europe has been halved over the past two decades.
The region has also benefited from the run up in commodity and agricultural prices over the past few years, but, even though a downturn has been realized in market prices in 2012, economic growth prospects remain positive.
A further deterioration in Europe, however, could slow demand in these crucial markets, such that Sub-Saharan Africa markets are not completely immune to the goings on up north. Exports might suffer, but remittances and capital flows might also be impaired. After the crises in Europe and Japan in 2011, there has been a steady flow of repatriation of banking and corporate funds back to their respective homelands to prepare for the worst.
Capital flows in emerging markets can be very fickle for these reasons, and officials in Sub-Saharan countries must be mindful to encourage the inflow of investment capital to the region. Major funding is needed for infrastructure, health, and educational needs, which cannot be met by local investments alone.
Officials must also be mindful of complacency. It is easy during high-growth periods to respond to immediate needs while ignoring fiscal deficits and the ravages of inflation, which has been high but is abating. Budgetary discipline is a necessity to buffer the impact of downside risks, should they occur.
Sluggish growth in South Africa may be a problem, but for now, economic prospects in the Sub-Saharan region are stellar.
Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. From 1980 until 1999, Tom served as CFO for various Visa International entities, retiring with the title of Group EVP and Treasurer. Currently, Tom researches economics and writes columns for ForexTraders.com. Tom’s most notable work within forex education is his “Trading Psychology” series.