Home Blog Africa: Embracing Impact: How Africa Can Overcome the Emerging Market Downturn

Africa: Embracing Impact: How Africa Can Overcome the Emerging Market Downturn


By J. Peter Pham and Aubrey Hruby

In January 2016, oil prices fell to their lowest levels in more than a decade. Meanwhile, China, the world’s second-largest economy, is experiencing its most sluggish growth in a quarter century—compounding the downward trend in commodity prices and dampening the global economic outlook. The effects of this broad slowdown will hurt African economies more than most, because China and other emerging markets have not only been primary consumers of African commodities, but also have been significant sources of financing for the major infrastructure and other development projects that are essential to Africa’s future growth.

Growth projections, and degrees of optimism, vary greatly across a complex continent. But it is possible to make some generalizations about which countries will emerge unscathed—or even, better off—after the emerging market downturn passes, and which countries must act quickly and decisively to alter their negative economic course.

North Africa is projected to experience steady growth over the next five years, and standout performers like Morocco will do especially well, while for others, like Libya, the future is less rosy. East Africa is also set to perform well overall, and the International Monetary Fund (IMF) projects that Kenya, Ethiopia, Rwanda, and Tanzania will each grow at more than 6.5 percent in 2016, a full 3 percent over the continental average. West Africa is a mixed bag, as Nigeria struggles with falling commodity prices and corruption scandals, while Côte d’Ivoire and Senegal are widely considered some of the best prospects for investing in Africa. In southern Africa, low economic growth and governance woes in the region’s powerhouse, South Africa, will continue to drag down the region’s overall economic outlook.

Snapshot of Emerging Market Troubles

Commodity prices have decreased dramatically since the latter half of 2015. Oil, iron ore, copper, and platinum have been especially hard hit. This commodity price crash is causing significant budget shortfalls and weakening of currencies in commodity-exporting economies worldwide. Currency pressure in oil-exporting nations has been most pronounced—and not just in Africa.

Despite some progress on export diversification, the majority of African countries remain dependent on commodities, particularly extractives like oil, iron ore, and copper, for their economic growth. In Angola, for example, oil made up 94 percent of exports in 2013. In Zambia, copper made up 68.3 percent of total exports. All these commodities are currently experiencing rapid price declines and many African countries are suffering from deteriorating terms of trade.

Gold and non-extractive commodities such as cocoa and coffee remain stable by comparison, and thus countries reliant on these products—including Ghana, Côte d’Ivoire, and Ethiopia—have been less vulnerable to price shocks, though significant dependency on any one or two products remains problematic. Countries that are not reliant on commodities at all are better off in the current market conditions than their commodity-dependent counterparts.

The downturn in commodity prices has been aggravated by economic troubles in China, which in 2015 experienced its slowest growth in a quarter of a century. According to the IMF, the country’s GDP grew 6.9 percent last year, down from 7.3 percent in 2014. It is expected to shrink further to 6.3 percent in 2016. China’s slowdown has led to declining Chinese demand, coinciding with, and contributing to, the decrease in commodity prices. China shopped voraciously for the world’s commodities during the years of its rapid economic expansion, and its woes are spilling over into other markets that are already struggling with plummeting export values.


Slowing Chinese growth, in particular, will have a negative effect on African economies. China is the continent’s largest trading partner, making up 13 percent of Africa’s total exports. Chinese concessionary and commodity-backed lending supports tens of billions of dollars of badly-needed infrastructure projects across the continent. As China’s growth slackens, its interest in and ability to finance African projects—and especially valuable infrastructure—will necessarily slow, causing African governments to have to rethink their infrastructure development plans.

Brazil and Russia are both experiencing negative growth, and thus are unlikely to make up for the slackening Chinese role in African markets in the short-term. India remains a positive outlier, as it is expected to grow by 7.5 percent in 2016. Given India’s long-standing commercial patterns in East and Southern Africa, the India-Africa relationship could prove a bright spot in a gloomy economic forecast.

Impact on African Markets

The overall fear of an emerging markets slowdown blinds most mainstream investors to nuanced differences between economies and dampens investor confidence in African markets. Current projections anticipate that sub-Saharan Africa’s average GDP growth will drop just over a percentage point to 3.8 percent in 2015. Oil-exporting countries will be hit slightly harder, with expected growth of only 3.6 percent in 2015.

Current IMF projections do suggest that a combination of factors will lead to an economic rebound for emerging markets in late 2016. Sub-Saharan Africa’s average growth has dipped from 5.0 percent in 2014 to 3.8 percent in 2015, but is expected to begin growing in late 2016 and grow on average by 5 percent until 2020. By comparison, sub-Saharan Africa’s growth prospects in 2010 and 2011 were 4.8 and 5.8 percent, respectively, and rising.

As both Africa’s largest economy and most populous country, Nigeria has often been regarded as a bellwether of the continent’s economic well-being as a whole. The country’s average annual GDP growth rate between 2005 and 2013 was an impressive 7.5 percent. But the rapid fall of oil prices has hit Nigeria’s budget hard. While the country has managed to diversify its economy to a degree, more than two-thirds of government revenues are reliant on oil sales. The country’s deficit is expected to double to $15 billion in 2016, equivalent to 3 percent of Nigeria’s GDP. Nigeria’s estimated 2015 GDP growth will be closer to 4 percent, where it is expected to stay annually until 2019.

Growth projections for diversified countries in East Africa—especially those with a small but growing manufacturing base—are better than their commodity-dependent peers.

Ethiopia, for example, notwithstanding some domestic political and ethnic unrest, is set for more than 8 percent growth in both 2016 and 2017. Ethiopia’s state-led development model has focused on industrialization and manufacturing, and well-known names in the industry have flocked to Ethiopia to set up textile and shoe processing plants. Producing and getting goods to market is globally competitive in Ethiopia, given its low electricity prices and massive public expenditures on infrastructure. A string of hydroelectric dams that has begun to come online—including the Grand Ethiopian Renaissance Dam, scheduled to be completed next year, which, with its 6,000 megawatts (MW) capacity, will be Africa’s largest hydroelectric project—also assures manufacturers of a steady and cheap power supply for their operations.

Homegrown Problems

The Chinese slowdown and falling commodity prices do not explain all African nations’ economic challenges. There are other, homegrown problems that affect some African economies, and many started long before the current downturn

Corruption and mismanagement: Corruption, especially in the oil sector and around other valuable extractive industries, remains a major impediment to growth. Corruption issues plague South African President Jacob Zuma, who in February 2016 pledged to repay $24 million of public funds he used to upgrade his private residence.
Onerous debt obligations: With a strong dollar and slowing growth, public debt has soared, reaching nearly 71 percent of the country’s GDP in mid-2015; by comparison, Ghana’s debt was 120 percent of GDP in 2000 before the country joined the Heavily Indebted Poor Countries Initiative and qualified for debt relief.
Environmental curveballs: Progressively worsening drought across southern Africa has drained Zambia’s dams and, by extension, the country’s hydropower potential—which accounts for more than half of Zambia’s electricity supply. Combined with the high cost to import electricity and diesel fuel for generators, the government overspent its 2015 budget by $1.4 billion due to emergency power purchases.
Insecurity and political instability: Domestic instability continues to threaten even the fastest-growing African economies. Nigeria’s northern half continues to be racked by the violent terrorist insurgency Boko Haram; Kenya continues to be targeted by terrorist strikes; Ethiopia has faced escalating protests, some of which resulted in violence, in various parts of the country over the past three years; and the Democratic Republic of the Congo faces a fraught election cycle that could easily plunge the country, or the region, back into conflict.

Reasons for Optimism

Despite the current bump in the road, there are fundamental reasons for optimism about Africa’s continued economic growth. Key demographic trends coupled with increased economic diversification and deepening regional integration bode well for African economies in the medium and long-term.
Promising demographics: Africa is home to a large, and growing, population of young people, and in fifteen countries, half the population is under eighteen years old. While burgeoning youth populations present a challenge to governments to improve education and infrastructure systems and provide employment for a growing segment of the population, they also offer an opportunity: in 2050, 25 percent of the global workforce will be African.
Diversifying products and partners: African countries are increasingly exporting diverse products to larger numbers of partners. Moreover, intra-African trade has almost doubled in the past two decades, albeit beginning from a low base. This key opportunity for trade diversification has largely been overlooked until now, and efforts toward greater regional integration are underway.
Growing discretionary spending and strong African brands: Analysts project that the number of African households with disposable income will pass 128 million by 2020. This rising consumer class may not automatically turn into an importing class, as many have predicted. Strong African brands, many of which have localized supply chains, and a growing preference to buy local will help mitigate the impact of widespread currency devaluation and slower growth.
Africa’s more diversified economies, and particularly oil-importers including Ethiopia, Kenya, and Côte d’Ivoire, actually stand to gain from a collapse in commodity prices, as fuel import costs will drop. The same principle applies to import bills for food, and the UN Food and Agriculture Organization recently determined that sub-Saharan Africa would save an estimated $10 billion dollars on its food import bill as a result of falling global commodity and transport costs.


To weather the emerging market downturn, African governments should:


Attack inefficiencies and prioritize productivity.

African countries continue to be held back by lagging productivity and sluggish competitiveness rates. In the latest World Economic Forum Global Competitiveness Report, even countries with high economic growth—like Ethiopia and Côte d’Ivoire—do not rank well, coming in at 109th and 91st, respectively, out of 140 countries ranked. The current downturn offers African governments an opportunity to attack costly inefficiencies, including lengthy transport processes and other non-tariff barriers to the movement of goods, people, and capital.

Current low oil prices also offer a rare opportunity for countries to eliminate expensive petrol subsidies. Angola has already cut subsidies, raising fuel prices by 39 percent; in Nigeria, oil prices are already so low that the fuel subsidy that has long troubled prior administrations—and at its height cost the government some $13.6 billion a year—is not currently being paid. The time is ripe to eliminate it from the books altogether.

Intensify diversification efforts.

Many African countries have made commendable progress in diversifying trade partners and products, and they will suffer much less in the current downturn than those economies that remain highly dependent on one or two products. But while progress has been made, it needs to be prioritized in both good and bad economic times.

The potential of the agricultural sector is largely untapped, and African governments should look to their own backyard for successful examples of agricultural diversification. In Morocco, the government prioritizes high-value crops, including citrus fruits and tomatoes, and established the Agency for Agricultural Development to aid such efforts. Ethiopia has taken a local approach, and provides agricultural inputs and technical know-how to millions of smallholder farmers. As a result, the country doubled its maize production over a twenty-year period, and is now the second-largest maize producer in sub-Saharan Africa.

Focus on adding value locally.

In the face of high import costs, African countries should focus efforts on local value addition. In the past, African governments have attempted this in diverse ways: Gabon banned the export of unhewn timber in 2010, while Ghana used tax incentives to encourage cocoa companies, such as ADM and Cargill, to process cocoa locally and create value-added products including cocoa butter, cocoa liquor, and cocoa powder. Processing agricultural produce nearer to African farms would not only reduce waste from spoilage, but also create well-paying jobs for Africa’s youthful population that are resistant to commodity price shocks, a point emphasized by African Development Bank President Akinwumi Adesina.

African countries do not always need to look too far afield for inspiration or partners to create value-added exports. The 2014 $2.3 billion Gabon-Morocco partnership will combine ammonia (produced from Gabon’s abundant natural gas reserves) with phosphoric acid (from Morocco’s phosphate deposits, the largest in the world) to produce fertilizer is a good example of a joint venture that will create jobs and generate revenue for both countries. The fertilizer produced, once the project is completed, will then be able to meet almost one-third of the expected demand across Africa. An important component of this initiative is a plan, championed by the Moroccan phosphate group OCP’s Chairman, Mostafa Terrab, to develop a network of small- and medium-sized enterprises to subcontract for the project and create a true ecosystem of value-added business in the partner countries.

To support the progress being made in Africa, the United States should:

Sustain and expand high-level commercial diplomacy across Africa.

US companies often misperceive the level of risk in investing in African markets. This perception gap was first outlined in Ernst and Young’s 2013 Africa Attractiveness Survey, which found that 86 percent of business leaders who already work in Africa believe that the continent’s attractiveness will improve in coming years. Only 47 percent of those without a business presence on the continent believe the same. The US government has an important role to play in making these businesses more comfortable venturing into African markets.

While continuing the high levels of health and development assistance established under his predecessors, President Barack Obama has shifted focus to business by adding a new layer of commercial diplomacy to his administration’s Africa strategy. The inaugural 2014 US-Africa Leaders Summit had a significant business component, and at the first-ever US-Africa Business Forum, American companies announced tens of billions of dollars of investment into Africa; a second Forum will take place in 2016.


The Obama administration has also launched Power Africa as a hallmark initiative, through which it aims to address longstanding obstacles to electricity access across African countries, and hopes to spur the generation of 30,000 MW of new power (when Power Africa launched in 2013, sub-Saharan Africa’s power capacity was overwhelmingly concentrated in South Africa, and two-thirds of Africans lacked regular and reliable electricity access) by partnering with governments and the private sector. Currently, more than one hundred companies, including Citi, General Electric, and Goldman Sachs, are Power Africa partners, standing prepared to invest in energy projects across African markets.

These programs appear to be working. In 2014, the United States became the largest investor in Africa, increasing FDI projects by 29.5 percent from 2013. In the latest Ernst & Young attractiveness survey, researchers found that while the number of foreign direct investment projects on the continent decreased between 2013 and 2014, the amount of capital involved, and the subsequent jobs created by the projects, increased. North Africa proved an especially attractive place to invest, and the region experienced a growth in the number of FDI projects and FDI capital between 2013 and 2014. The next US administration should continue—and even scale up—the commercial engagement policy.

Moreover, as significant as the African Growth and Opportunity Act (AGOA) has been for commercial relations between the United States and African countries, the next administration should set a priority to continue its predecessors’ high-level engagement, with the objective of upgrading the unilateral preferential trade scheme under AGOA into a permanent program. This lasting program should encourage African integration, while also opening the door to a future free-trade agreement between the United States and Africa as a whole (to date, Morocco is the only African country with a free-trade agreement with the United States). Bilateral investment treaties, which afford investors important guarantees about fair and equitable treatment and access to neutral arbitration, among other protections, should also be pursued.


The current emerging market downturn offers a serious challenge to economies across the developing world. For countries that have successfully diversified their economies, the impact of falling commodity prices may prove less painful than for those countries that rely heavily on the export of one or two items for economic growth. Effects of this downturn on economic powerhouses China, Brazil, and Russia have already trickled down to negatively affect African growth.

Some countries—including Morocco and some of those in East Africa—will weather the downturn better than their neighbors and will use current economic conditions as an opportunity to effectively prepare for the next price shocks. Hopefully, others will follow.

Dr. J. Peter Pham and Aubrey Hruby are, respectively, Director of and Senior Fellow at the Atlantic Council’s Africa Center. This article is adapted from their new report Embracing Impact: How Africa Can Overcome the Emerging Market Downturn.

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