Shaking the present and building the future!

In Africa, economic growth in 2019 stabilized at 3.4% and is projected to increase to 3.9% by 2020 and 4.1% by 2021, but will remain below historic rates. The basic concepts of growth are also changing as private consumption increasingly moves from production and exports. The investment represented over half of the continent’s growth for the first time in a decade, with private consumption contributing less than one per cent.

The Economic Tragedy of the XXth Century: Growth in Africa (NBER Working Paper No. 9865) explores the deteriorating economic status of the African continent in terms of how rich and African nations themselves may support the world’s poor nations. The authors describe the most significant reasons behind the disaster using the strong structural determinants of economic development in a cross-section of countries. The first to blame was the investment shortage. The investment rate in Africa has declined over the past 40 years. Investment has declined since 1975 to 8.5% for the entire continent, compared with investment levels between 20 and 25% of the average OECD economy and 30% of East Asian economies. In addition, most investments have been biased towards the public sector, which is inefficient. The investment rates have risen, but only marginally, recent reforms in Africa.

However, the 2020 Outlook reveals that development is smaller than inclusive. Inclusive growth was achieved in just about one-third of African countries, reducing both poverty and inequality. This year the main theme is to provide Africa’s future staff with education and skills. Africa has remained behind other developing regions in education and training, following improvement over recent decades. Policy initiatives will include both quantity and quality management steps and match education policies with labour market requirements.

This calls for greater access to schools in remote areas, increased opportunities for investment in education, a demand-based education system that will meet the needs of employers, investment in nutrition to support disadvantaged children and the development of STEM and ICT capabilities. The economy calls for radical universalism in education budgets to tackle inequalities in education — setting high expectations for the poor and vulnerable and for basic education, where social benefits are greatest.

The economy indicates that public spending on education and infrastructure is complementary because investment in both is far higher than investing in one. The productivity of spending on education in Africa is much less than in Asia. The good news, however, is that African nations could almost achieve universal primary enrolment without increasing expenditure by increasing the efficiency of education spending – at 58 per cent for primary education. Key policies to improve spending efficiency and education quality include conducting education expenditure audits and reviews, improving teacher quality, and using performance-based financing. In its last part, the report provides short-to-medium term forecasts on the evolution of key macroeconomic indicators for all 54 regional increasing investment and quality of education involves carrying out auditing and evaluation of education expenses, increasing the training of teachers and using performance financing. Increasing investment and quality of education involves carrying out auditing and evaluation of education expenses, increasing the training of teachers and using performance financing. 

The coronavirus (COVID-19) has resulted in large-scale downturns and interruptions in supply chains due to harbour closures in China, resulting in an unprecedented global shock in all economic sectors. Africa has its full impact and plans are in place throughout the continent to control and manage its humanitarian challenges. The effects have been felt in economic terms, demand for raw materials and commodities from Africa has been decreased in China and access to the industrial parts and manufactured products of the area has suffered from obstacles in Africa. In a continent already struggling with broad geopolitical and economic instability, that causes additional uncertainty. Although Chinese growth will fall in the short term, it is expected to rebound quickly. Some suggest this could even happen in the second quarter of 2020 when the virus will hopefully be contained. Central banks are implementing measures to mitigate the effects of the virus on the economy. In early March, the World Bank announced it would commit USD 12 billion in aid to developing countries.

Africa has gone through a period of sustained political and financial instability but there have been significant rises in M&A investment in Africa in the following years, which are reflective of potential economic improvements. COVID-19 could interfere with this projected rise and create more short-term uncertainty about how it will affect the African investment opportunities, productivity and consumer demand on the continent. As such, events could be sufficiently important to trigger a shift in terms of a current M&A agreement, and transactions may therefore be delayed. Conditions of COVID-19 could also delay due diligence of M&A necessary for the progress of a transaction to finalization. In addition, the virus can be described as a major force event that causes further delays or terminations. 

It is our hope that the rebound of COVID-19 will coincide with the implementation of the AfCFTA in July 2020, which should further boost Africa’s business activity in the next few years. AfCFTA is the first African trade agreement across continents with the potential to facilitate and harmonize trade and the development of infrastructure in Africa. After the further uncertainty of dealing with COVID-19 impacts, this stimulus will be welcome to the investment environment. 

African publishers have waited several years before any planned capital increase is implemented for the improvement of political and economic instability in Africa. The Global Transactions Forecast from Baker McKenzie has shown that in 2019 there were no IPOs in South Africa. The numerous global trade tensions also eroded investor trust, with capital raisers seeking signs of resolution before IPOs were launched. With Africa looking to take advantage of new global and regional trade agreements, forecasts indicated that capital markets would recover over the coming years, but this could be delayed because uncertainty regarding the impact of COVID-19 reaches its peak in Africa. There is, therefore, an expectation that IPOs in the region are decreasing, not just because of the virus of equity but because COVID-19 has an influence for IPO companies on the underlying business case and will influence their ability to raise capital. 

Global finances are currently evaluating and responding to the impact of COVID-19, ensuring they can adjust to new and unprecedented circumstances that the virus has created. The enormous global economic downturn caused by China’s decreasing output will influence African lenders to make financial institutions on the continent more borrowers-like and somewhat slow. As global economic growth is a driving force behind commodity prices, local prices are affected by the worldwide effects of the virus. The incertitude about the effect of COVID-19 on the local markets is likely to contribute to greater average investment risk for the future. A temporary decrease of share prices, on the other hand, always gives prudent investors opportunities. 

In Africa, businesses, as well as individuals, may not find themselves insured in any COVID-19 impact, since epidemic and pandemic losses are generally not covered in insurance policies, whether or not the insurance includes business interruptions and property damages or product losses and personal life or non-life insurance. COVID-19 being a new disease, it would not have been specified in current insurance policies explicitly. Many policy violations have provisions for increased penalties, although under current situations it is doubtful that such exceptions would protect them. As such, the policy wording should be thoroughly monitored. Some insurance corporations offering cancelled event coverage including specific references to epidemics or pandemics may be affected. Reuters said that the insured expense of Tokyo Olympics was estimated at around USD 2 billion from financial services firm Jefferies, including television, hospitality, and sponsorship.

In Africa’s development of infrastructure, China has long been a key partner. Baker McKenzie ‘s research with IJGlobal, “A Changing World: New trends in emerging market infrastructure,” has shown that in the past year’s China has focused on sub-Saharan Africa as part of the Belt and Road Initiative (BRI) both in relation to its needs for natural resources. From 2014 to 2017, nearly half of Chinese policy banks lent EUR 19 billion to energy and infrastructure projects throughout the region. In the region of China’s BRI, a multi-million – dollar plan to connect Asia, Europe and Africa, coronavirus already affected activity. According to a new report produced by Baker McKenzie and Economist Corporate Network, sustainable development should be central to the Chinese Belt and Road Initiative, to remain a major force in the development of global infrastructure. The report points out that the definition of sustainability for BRI also necessarily increases with immediate term setbacks and delays because of the constant spread of COVID-19 throughout the world, to protect the health of BRI project participants including both the workers and the larger local populations in the projects undertaken. 

Over a span of several months, COVID-19 will have an effect on Chinese foreign trade. As the largest African trading partner, China already feels the effects of COVID-19 in Africa. With China shutting down its production facility and closing its ports, demand for African goods has fallen. In China, importers cancel orders due to port closures and a reduction in China’s consumption. Commodity sellers in Africa are forced to discount their goods elsewhere. More than three-quarters of African exports to the rest of the world focus heavily on natural resources and any reduction in demand impacts most of the continent’s economies. The risks of industrial commodity export to China are significant in countries such as the DRC, Zambia, Nigeria and Ghana, such as iron ore and copper. The OPEC has greatly reduced its prospects of oil demand this year as a result of the virus. This year’s OPEC is the result of the virus. 

As China belongs to the global supply chain, factory shutdowns increase the risk of supply chain disturbances for multinationals that already affect manufacturing plants around the world, including in Africa, with retardation, crude material shortages, higher cost and decreasing orders. Furthermore, an analysis of African imports from abroad shows that over 50% of Africa’s combined needs consist of industrial machinery, manufacturing and transport equipment. At present, external imports from outside Africa account for over half the total volume of importations into African countries; the main suppliers are Europe (35%) China (16%) and India (14%) as well as the rest of Asia. Disturbances due to the effects of COVID-19 would also contribute to lower availability of manufactured products imported from China into Africa. 

With the generic existence of the virus, how supply chains can be easily modified to meet the requirements can hardly be envisaged. Vietnam and Indonesia’s obvious choice of re-routing supplies chains as a result of the ‘trade wars’ between the U.S. and China is nearly fully capable and not necessarily able to meet the needs if China can not produce them, and these states face additional COVID-19 challenges. Although Vietnam has recently stated that all 16 infected people have been cured and Indonesia has only reported two cases so far, both countries have reported coronaviruses. 

China seems more interested in investing in the African mining sector than any other large economy. Chinese mining investors were responsible for only 10 mining operations on the continent in 2011, according to China Mining 2018 reports. The interest of China in the mineral resources of Africa was driven, in part, by strong growth in the electrical, construction and manufacturing sectors, and on the other, by a year-by-year drop in domestic mining production capacity, by decreasing ore grades, increased labour costs and an even stricter regulatory environment. In exchange, China has one of the world’s strongest building infrastructure capacity and is probably the most suitable for helping Africa tackle its large infrastructure gap. Therefore, China’s COVID-19 outbreak inevitably has hit the African mining industry, although the extent and duration of the outbreak remain highly unsure. Reuters estimated that in 2019 China produced almost 1 billion tons of steel and consumed approximately 900 million tons mainly as a result of infrastructure and construction consumption. Shutdowns led to a decrease in steel and iron ore demand. Lithium, cobalt, copper and iron ore companies from Africa are already seeing declining demand from China, due to shutdowns in production processes and disruptions to the global supply chain. 

Port shutdowns, restrictions on travel and production shutdowns are lowering demand, causing oil importers in China to cancel African purchases and forcing sellers to divert cargoes, often at discounted prices. OPEC+ did not agree this week about conditions for cutting oil supplies in order to address demand challenges that led to the COVID-19 crisis, the start of an oil price war and a further drop in oil prices. Demand for Liquefied Natural Gas ( LNG) also decreased due to the risk of cancelling much of China’s total gas imports. China is the second-largest worldwide oil consumer and one of the world’s largest LNG importers. However, once China recovers, it is also expected that this will result in an increase in raw material demand. Furthermore, significant COVID-19 breakdowns in mining regions in Africa may affect labour productivity, skilled technicians’ availability to transit from affected areas and the ability to produce raw materials through labour-intensive mineral operations. Mining companies in the region will carefully plan to avoid such a scenario and to ensure that the spread of the virus is efficiently mitigated. 

Furthermore, the African automotive industry will experience an impact, as the Hubei province is an epicentre for the virus and is a large centre for the development of car parts. Moreover, consumer demand is projected to affect already existing market conditions in the sector, as sales are affected by the resulting economic downturn.

In African countries, the detection of the virus could be a challenge due to a lack of laboratory capabilities and medical supplies. The WHO noted that 36 African countries are being equipped with virus test kits, and it has helped to train and provide African health workers with personal protective equipment. Moreover, quarantine centres and medication stocks are identified by the majority of African countries. In the case of the virus, healthcare facilities across the continent will feel the intense strain. The effect of COVID-19 on the global pharmaceutical market is already beginning with price rises in pharmaceutical ingredients manufactured in China, which have been unavailable after significant factory closures and disruption of the supply chain. At the beginning of March the Foreign Trade Directorate General of India announced that the country would limit its exports to 26 medical products, including paracetamol, and antibiotics, that would cause a shortage in Africa. A large percentage of global generic medicines are produced in India. 

This year, high-value investment is scheduled to be in the TMT industry in Africa, where many telecommunications companies are looking to expand infrastructure and the booming e-commerce sector is showing M&A opportunities. Nevertheless, COVID-19 insecurity can delay expected investment, because tech investors are waiting for insecurity and recover from short-term effects. The impact of reduced demand in China and the effect of supply chain breaks on the material needed for the production of its products has had a negative impact on its companies, most large technology multinationals have stated on various media platforms. Many were forced to close their stores, factories, production facilities and offices so that employees could work from home. The most vulnerable labour-intensive sectors of the virus have an impact on the planned projects, development and releases of products in the sector. This is likely to cause a shock and also lead to project delays in Africa. 

The global theatre industry is predicted to suffer if people stop going to cinemas for fear of the virus is picked up, allowing traditional broadcasters and live streaming platforms a chance to benefit from the holiday at home and television viewers. It will be important to see what changes film distributors are making in order to deal with this issue. Transactional video-on-demand services can be used as one tool for new models. Either way, the effect would possibly disrupt the conventional dependency on theatres as the first release window and, in the end, the way the film distribution industry is business will be modified. 

In Africa, there are about one million Chinese and many Africans are visiting China as students, tourists, and business travellers. With China and other virus-impaired regions restricting non-essential travel and banning events and mass gatherings, the effect on tourism in Africa will be notable. International travel-related enterprises like hotels, airlines, luxury and consumer goods have suffered as a result of travel prohibitions in and out of Africa. Vacations were cancelled and reprogrammed in viral areas, and people stopped going to entertainment venues and restaurants to prevent exposure risk. Moreover, African airlines are threatened by the epidemic and the number of Chinese flights from Africa decreases considerably. If the travel ban persists, it may hurt the airlines serving some of the busiest airways in the world. ASATA recently reported the effects of leisure travel and constructive steps being taken by travel suppliers to support the affected parties, such as waiving of cancellation charges for those unable to travel more frequently. 

According to the Franklin Templeton Emerging Markets Equity team, consumption represents 70% of China’s GDP. The COVID-19, decreasing short-term consumption and a reduction in demand for global consumer products, will directly affect the use of travel, leisure, retail and selected optional consumption. For example, luxury brands are expected to be hit by falling demand and shifting priorities. According to Bain & Company and Altagamma, Chinese consumers accounted for about 35% of world sales of luxury goods last year and the drop in demand as a result of travel prohibitions and mobility constraints will have an impact on the global luxury goods market. However, world panic shopping has led, as people stock up when they become in danger of being quarantined, to an increase in demand for food with longer shelf durability and medical products. The shutdowns in China have also affected labour-intensive segments of the supply chain, with global supply chains projected to be affected and retail supply shortages, including in Africa, are likely to result. 

Online retailing is a major beneficiary of the effects of COVID-19 – the sector has experienced growth while people turn to online shopping, avoiding crowded shops. In Africa, the same situation may well lead to healthy sales bumps in online retail. Retailers in Africa are preparing to deal with the impact on their liquidity, which might result in job losses, of a potential selling decline due to restrictions on both the supply of products and demand. The online retail sales strategy could provide a solution.

Data References: Baker Mckenzie