East Africa, Bright Spot In 2016 In A Tough Economic Environment
African leaders in Davos recently expressed excitement about 2016 and the prospect for sustained growth. This was surprising to the World Economic Forum crowd and to those still digesting 2015. In 2015, sub-Saharan Africa suffered its slowest economic growth rate since the 1998 global financial crisis. The region’s real gross domestic product plummeted from 5 percent in 2014 to around 3.8 percent in 2015 but should rebound to 4.3 percent in 2016, according to the International Monetary Fund.
All indications, including the current oil and gas market, suggest that the IMF will adjust this projection downward. Slowing momentum is rightfully scaring investors but the high expectations need not be as tempered as they are, particularly in East Africa where a few countries are expected to outperform the region.
Following a successful election process in October 2015, the country is plowing forward with GDP expected to grow north of 6 percent in 2016 — similar to 2015. President John Magufuli’s push for improved efficiency in the public sector spells great upside for the economy, with some research suggesting GDP growth could approach 7 percent in 2016.
Investors could see the greatest opportunity in sectors circling around the emerging gas potential in the country. For example, in 2015, growth reached 15-to-17 percent and 9-to-11 percent in construction and transport respectively. Sustained investment in infrastructure will maintain these growth levels in 2016. This includes the construction of Mtwara-Dar es Salaam gas pipeline, which is expected to help ease the electricity burden in the next few years. The liquefied natural gas sector underlines Tanzania’s long-term growth opportunity but the country could use a little help from the staggering agriculture sector – the not-so-lucky recipient of a dry rainfall season.
A low year of global oil prices suggest the potential for greater-than-expected economic growth. As an oil importer, Tanzania will see a drop in the input costs of its exports. In 2015, exports grew in many sectors including manufacturing as oil prices hovered in the $55 range compared to nearly $100 in mid 2014. This growth did not happen with gold exports, but the decline in that sector mirrored the downward trend of its share in the country’s total exports (currently just above 20 percent compared to nearly 45 percent in 2011). Although higher capital goods imports could be a challenge in 2016, it’s fair to say that the even lower oil price below $35 will strongly counter other import costs.
The focus is on the presidential election right now. But March will come soon with the National Resistance Movement (NRM) under President Yoweri Museveni likely remaining in power. Questions will arise on stability and peace as Museveni extends his rule beyond 30 years.
Periodic incidents of violence and allegations of vote buying will continue in the 2016 election, as compared to the 2011 election. All that said, it is fair to expect sustained economic growth in 2016, hovering around 5 percent. Recent data on the 2015 economy shows that the country can weather an election (and the usual pressures of its contentiousness) by growing more than 5 percent in 2015. Infrastructure investment, through the maintenance of ongoing projects including the Mombasa-Kigali railway, faces little political challenge in election time and thus will be vital to that growth number.
The development of the oil sector however remains a long-term project. Contrary to the prices prior to mid-2014, the low oil price environment will not speed up investment and project completion dates in the short term. In an ironic twist, the low prices will help the current oil importing country and the big deficit in its current account. This will help the country in its efforts to employ tighter monetary policies as it focuses on the threat of rising inflation. The political tension of this month and a couple months following the election will be a factor in how markets respond to Uganda’s currency – affecting the deficit and inflation. But come April, expect Uganda to be back on track for a strong end to 2016.
Kenya is expected to maintain the economic horsepower from 2015, growing 5-to-6 percent compared to nearly 5.5 percent in 2015. Recent flooding and monetary tightening could have downwards effects on the 2016 projections and spell concern for the shilling in the medium term. Yet a strong underlying economy should push forward.
Strong growth in the agriculture, construction, finance, ICT and transport have countered the challenges in Kenya’s under-performing manufacturing sector and befuddled tourism sector, now negative for seven straight quarters. Major projects in transport and energy, including the Mombasa rail station, will ensure that the 2016-sector growth mirrors 2015. Agriculture could be stronger than expected but, as it is with most countries on this list, agriculture is at the mercy of weather uncertainties where low rainfall has been the story.
Kenya will benefit from low oil prices, similar to its other East African peers. The healthy growth in other import costs however may offset any benefit. A slouching shilling will be a factor in this equation as the country’s many dollar-based imports will be more expensive in the medium term. A potential downgrade will hang over the country’s fiscal outlook. This will connote trouble for Kenya in the credit market where secondary markets are pushing up the yield on Kenya’s 10-year euro bond.
All this said, Kenya remains the “comeback kid” in Africa when challenges arise. Don’t be surprised if the country’s real GDP growth reaches beyond 6 percent.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at firstname.lastname@example.org.