When China sneezes, does Africa catch a cold?
The precipitate drop in commodity prices - aggravated by the slowdown of the Chinese economy - has devastated Africa's commodity exporters. Nicholas Norbrook however contends that this crisis could yet be turned into an opportunity.
IT has no precedent in human history: the emergence of hundreds of millions of people into industrial-era jobs and living standards. It was the result of 40 years of 10% growth since the death of Mao Zedong in 1976. The last time a continent-sized country industrialised this successfully - the United States - the number of people involved was in the tens of millions.
Inevitably, a tectonic movement of this size caused shakes, tremors and a tsunami of investment into commodities to keep pace with the Chinese dragon's appetite. A good chunk of this money has helped transform African economies over the past decade. But, like all good stories, the China resource bonanza has a twist, and it is one worthy of Oscar Wilde.
In Wilde's The Picture of Dorian Gray, the protagonist stays blemish-free while, hidden away in an attic, his true likeness grows disfigured. Certain African countries may suffer the same affliction: happily surfing on a decade of sky-high commodity prices while not getting down to the hard work of transforming their economies. These are the countries which will catch a cold when China sneezes. In the euphemism of International Monetary Fund (IMF) boss Christine Lagarde: 'We are concerned about their capacity to buffer shocks.'
There will be winners
China's slowdown may be devastating to Africa's commodity exporters - like South Africa, Zambia and the Congos - but it is prompting countries such as Ethiopia, Morocco and Rwanda to take economic restructuring seriously. Those African governments that back their farmers and map out credible industrial policies could benefit hugely as China rebalances from investment to consumption.
When China's stock exchanges swooned in 2015, a veil fell. The dragon, believed to be hale and hearty a few years ago, was spluttering. Growth rates have fallen for the past five years. Given its level of development - Chinese gross domestic product (GDP) per capita is $7,500 - the government's debt levels are uncharacteristically high and the population is uncharacteristically old.
But China remains the world's second largest economy, with its GDP of more than $18 trillion. Even 3% growth would increase China's GDP by $540 billion per year, the equivalent of adding a Nigeria to its national production. Former African Development Bank (AfDB) president Donald Kaberuka snorts: 'I don't believe the doom-and-gloom narrative over China and commodities.'
Wages in China are still rising, and the current economic malaise may even have its upside. Jule Treneer of investment fund Madrona Partners suggests that Beijing's planners actually welcome the slower growth rate. They may be 'looking to limit investment growth in the cash-guzzling state-owned enterprises and inject some market discipline'.
But it is unlikely that China's growth will ever be so commodity-intensive again. As a result, the bankers at Goldman Sachs slashed their copper price forecast by 44% through 2018. The price of oil, which has defied gravity for so long, seems irrevocably dampened by Iran's re-entry into the market, while any upward movement of the price is likely to reignite the US shale oil sector, another price dampener.
It would be wrong, according to commodities expert Philippe Chalmin, to blame only China for the slide in prices: 'We are seeing the inevitable down slopes of a natural cycle, one that we have already seen in the 1970s and the end of the 1990s - a period of high prices that brings a large investment in production as operators try to snatch market share and then over-supply.' He predicts stagnant or descending prices for most commodities until 2020.
Hopes that Africa's new economic and diplomatic partners - including Turkey, Brazil and India - can plug the gap between demand and current levels of supply seem unlikely to be met in the short term. For the first time in three decades, emerging markets are set to record net outflows of capital, some $541 billion, in 2015. The IMF warns that emerging markets will experience a round of corporate defaults that will drag down their economies for years.
There are a number of African countries for whom falling commodity prices have become a real threat. In the frontline are the commodity exporters who sell to China. Glencore, an Africa-focused mining giant, has halted production at two copper mines in Zambia and the Democratic Republic of Congo. Currencies supported by commodities are under strain.
'Already we've seen the Zambian kwacha weaken rapidly as a result of the falling copper prices because it relies extensively on copper as its source for foreign exchange,' says Gaimin Nonyane, an analyst at Ecobank.
Angola devalued the kwanza in 2015 by a total of more than 20% and, along with Nigeria, has restricted imports in a bid to save foreign exchange reserves.
The ripple effects of such moves are tough on everyone, with inflation rocketing. Governments are not paying contractors, so subcontractors are not getting paid and so on down the line. The director of a state-backed company linked to Angola's President Jose Eduardo dos Santos tells The Africa Report that even that company has been having trouble finding dollars, an ironic state of affairs. The Dorian Gray-style pact struck by Angola's leadership with shadowy Beijing-linked groups such as Sam Pa's 88 Queensway Group is a caricature of the negatives associated with the China-Africa relationship.
In Luanda, the wealthy are putting their money into property while the less wealthy are buying up tins of tuna - whatever works best to shield against inflation. In Ghana, the chief executive of Union Savings and Loans, Philip Oti-Mensah, has advised small business clients to amalgamate purchases into one large sum rather than pay foreign suppliers monthly.
Space at the bottom
If the drop in commodity prices marks China's shift away from investment and towards consumption-led growth, with a consequent acceleration of wage inflation, this might leave space free at the bottom rungs of the manufacturing ladder.
'There are over 80 million labour-intensive jobs from China that Africa can try to capture,' says Helen Hai, who helped Chinese shoe manufacturer Huajian to set up operations in Ethiopia and is now advising Chinese companies on African investment.
But the leap to manufacturing jobs will not be made overnight. Mozambique, for example, has bet heavily on coal and gas projects to bring transformative amounts of money into infrastructure. With coal prices down recently to $50/tn from $200/tn in 2008 and gas prices down 50%, many projects are now under threat.
But, in a saga that reveals the temptations and troubles with commodity-exposed countries that lack solid institutions, Mozambique has already started spending its cash. This includes a controversial bond launched for the EMATUM fishing company, about which former prime minister Luisa Diogo has said: 'We have gone off the rails.' Ghana already went cap in hand to the IMF after its own spending habits outstripped income following the country's first oil find, pumped in 2010.
Debt levels in Africa are creeping up too. There was $11 billion in sovereign debt issuances in 2014. As currencies depreciate, the cost of servicing that borrowing will go up. When added to the potential for an interest-rate hike in the US, this adds another headache for African finance ministers looking for external finance.
For the most China-exposed countries, there is also the need to pay back loans granted by Chinese state-run banks. According to Eric Olander, a China watcher based in Vietnam: 'The Chinese have made no indication that they're going to forgive these loans ... Maybe they'll give holidays for another two or three years ... But this is what worries me - that in Africa we're going to be back to where we were in the 1980s, where those loans crippled these economies.'
And while Chinese investment in African infrastructure that is already under way is unlikely to be affected, might there be a freeze or slowdown in fresh money coming from China? Kai Xue, a lawyer at DeHeng Law Offices in Beijing, points to the new 'One Belt, One Road' policy of China's President Xi Jinping as evidence that priorities have changed. 'The lion's share of outbound resources are going to go towards this initiative,' he explains.
Ancient trade routes
The idea is to resurrect ancient Chinese sea and land trading routes, and Beijing wants to recycle $1 trillion of foreign reserves into 40 Eurasian countries to boost trade to $2.4 trillion by focusing on infrastructure and construction. While some regions of East and North Africa are part of the programme, the rest of the continent is not. So while East African train projects are going to continue, there are question marks over new projects elsewhere.
Although Chinese companies are important contributors to the building of African infrastructure, China represented just 3% of total foreign direct investment into Africa in 2013. The nature of that investment is also changing. Using data from China's commerce ministry, Wenjie Chen, David Dollar and Heiwei Tang at the Brookings Institution found that Chinese companies are increasingly active in the service sector and manufacturing, not just in the big resource deals that tend to dominate headlines.
It is also worth noting the relative scale of Africa in China's global investment. 'Just a fraction of that lending goes to Africa,' says Kai. 'Venezuela in the past three years has received nearly $50 billion from one of the policy banks, which totals several years of lending to all of Africa.'
But China has more vested interests in Africa's development. With Western markets much harder to penetrate, developing a consumer base for Chinese manufacturers in developing markets is high on Beijing's agenda. Phone maker Xiaomi, known as the 'Apple of China', appointed Mobile in Africa as its distributor on the continent in September.
China watcher Olander says that you can see the seriousness of Chinese businesses around the world: 'The Chinese presence in markets like Vietnam, for example, is staggering ... building consumer brands and mobile phones and technology and clothing. And they are doing it in India. They are doing it in South America. They are doing it in Africa.'
Africa will be struck in 54 different ways by any knock-on effect from the downturn: energy-importing countries such as Ethiopia and Senegal are celebrating the drop in the oil price, and Morocco has already taken advantage of it to remove its costly petrol subsidy. Commodity expert Chalmin argues that the crunch in natural resource prices will separate the real economic performers in Africa from those who had just been getting fat on resource rents.
For commodity producers, the first order of priority is cutting their coat according to their cloth: slashing government spending is one obvious route, especially if the debt markets will be more expensive due to a hike in US interest rates. But there are other low-hanging fruit for those strong enough to grab them.
Acha Leke, a consultant with McKinsey and author of the recent report 'South Africa's Bold Priorities for Inclusive Growth', points to South Africa's potential to provide business services to African companies. South Africa currently captures just 2% of that $38 billion market. Given its position on the continent and its strong financial and legal base, 'we are so punching below our weight,' says Leke.
There is perhaps a leaf to be taken out of China's book when it comes to selling construction services. Chinese companies often offer a package that includes financing as well as construction. South Africa - with its advanced banks like Standard Bank and large construction companies like Aveng and WBHO - could look to do the same thing.
And while selling business services may be South Africa-specific, Leke has tips for other countries too. He points to a job for the state in 'aggressively marketing' a country's products abroad and playing a coordination role in helping the private sector penetrate new markets. 'Each time [US President Barack] Obama travels he takes a bunch of private-sector people with him, and there's a reason that gets done,' Leke says.
Opportunities abound elsewhere, too, especially in infrastructure. Nigerian solar start-up Solynta Energy has recorded rapid growth with its pay-as-you-go model, taking a slice of the $5 billion Nigerians pay annually for generator fuel. Chief executive Uvie Ugono argues that decentralised solar power can 'solve the power problem here in the same way that mobile phones solved the telecommunications problem'.
African countries can also make huge productivity gains through better governance. Nigeria's main refineries and power stations have started to increase the number of megawatts and barrels they produce - proof, according to Lagos-based economist Ayo Teriba, that President Muhammadu Buhari's reputation for toughness is getting more out of civil servants in the energy sector. 'Fool around with him, and he gets you!' Teriba explains.
A catalyst for change
But, at its heart, perhaps this collapse in commodity prices is exactly what Africa needs to turn its attention to the foundation stone of national progress in many economies throughout history: agriculture. There is a real opportunity here, too, with rising appetites and wealth levels in both Africa and Asia, and an extra 2.5 billion mouths to feed by 2050. Much of the world's remaining unused arable land and water is in Africa - a comparative advantage that policy-makers need to use to their benefit, not sell off on the cheap.
Former AfDB president Kaberuka says that 'African countries will need to adjust as China transitions its economic model towards consumption.' But, like many, he pines for proper agricultural policies and worries that they will not be properly financed. 'You have to guarantee prices,' says commodities expert Chalmin. 'That is what has always worked to stimulate farmers.'
A look at the data in the Mo Ibrahim Foundation's latest governance index shows that Morocco, Rwanda and Ethiopia have performed best in building up smallholder agriculture. All of them help by supporting prices. The IMF commended all three in 2014 for having delivered broad-based growth. Nigeria's recent success in providing fertiliser subsidies also gives pause for thought. Time to green that portrait of Dorian Gray.
Nicholas Norbrook is Managing Editor of The Africa Report, helping to set up the magazine in 2005. He has been a producer for Radio France International, and has lived and worked in West Africa. In 2011 he won the Diageo Business Reporting award for Journalist of the Year. The above article first appeared in The Africa Report (November 2015).
*Third World Resurgence No. 307/308, March/April 2016, pp 37-39