Beyond the talk of the spread of the novel coronavirus in Africa, there is a major concern people of Africa should be talking about, and it is how African economies and businesses will survive the economic scourge of the virus. The spread of the pandemic around the world is generating economic and financial ripples and storms that are very likely to do a lot of damage to businesses and economies on a scale that might be beyond the measurements of the Richter scale. The fatalities African businesses and economies are exposed to are very severe.
The major risks businesses and economies in Africa are exposed to come from deficiencies that are arising from supply chain challenges caused by restrictions and mandatory quarantines in major industrial centers around the world and a drop in demand for raw materials from the more developed world. It also extends to restrictions that affect businesses on the African homeland. Moreover, all these issues are escalated by impending issues that have been raging for a while in the backgrounds of the scheme of things and daily workings of the economy. This makes it very challenging to respond to the adverse scenarios the after-shocks of the pandemic poses to Africa.
The risks the virus creates for African economies include;
Direct economic impact of reduction in global production
Shortage in supply through supply chain challenges Economic impact of behavioral changes of consumers and businesses Downsizing of business operations and a higher unemployment rate Capital and money markets shock effects
Policy makers in Africa don’t have sufficient tools to respond to the adverse effects of the Covid-19 virus pandemic on their economies because for a long time they have ignored completely or where lackadaisical in their approach to pressing economic issues. Many African economies have been chronically sick for a long time without proper medication; the coronavirus will only add more damage to the injured economies.
Most African economies are like identical twins, having similar challenges of fiscal rascality, carrying irresponsible debt burdens, with a weak tax collection base, absolutely depending on revenue from commodities, afflicted with an addiction to foreign produced consumables, adopting policy patterns that lead to further under-development and genuinely lacking the will to start large scale manufacturing but wallowing in archaic sentiments and throwing pity parties without enough booze.
It is without doubt that the coronavirus pandemic would plunge the world economy into a global recession; firstly because the economic costs of the virus cannot be envisaged in view of the fact that it’s uncertain for how long the pandemic would persist, secondly, because the financial costs to tackle the scourge of the virus is massive. Economic activities will remain muted globally till the world wins the war completely on the coronavirus. Another uncertainty is the speed of recovery of business sentiment after the tide of virus has been stopped completely. We would be wrong to predict a definite timeline for recovery at this time. We are also uncertain of the volume of damage the virus will do to businesses globally before its tenure is terminated.
The impact of the virus is already touching down on commodities and financial markets. WTI crude has touched below $20 while Brent Crude was seen below $30. WTI Crude opened at $60 this year and was still seen at $53 in February. The economies of Angola, Nigeria and few other African countries run on crude oil sales and there will definitely be severe budget deficit in these countries. South Africa which is experiencing a second recession in two years has a lot of companies who might not survive the carnage of the Covid-19 pandemic especially those in the tourism industry. South African Airlines which is under a bankruptcy protection is one company that has received bigger blows than many others.
African equities have been hit due to foreign investors drawing down on their investments in African exchanges and indiscriminate panic selling of share holdings across African exchanges. The Nairobi Stock Exchange lost Sh120 billion in market capitalization in one day and will still lose more value. In South Africa, the FTSE/JSE Africa all share index lost about 11% in one day. In Nigeria the NSE All Share Index lost 4.28% in one week.
Risk assets have been extremely volatile since the outbreak of the coronavirus pandemic; it has completely lost investor appeal as there is a flight to safe havens globally. Investors don’t seem to trust the effectiveness of individual government responses and this is causing a sell-off in sovereign debt. Sovereign debt spreads are therefore widening considerably and this is a further stretch to the debt metrics of many African countries that are already bearing excess debt burdens. A sovereign debt debacle has begun with downgrades in debt quality. South Africa’s government long-term foreign-currency issuer ratings were downgraded by Moody from Ba1 to Baa3. This means South African debt is now classified as Junk. Additionally many African countries would require emergency loans to combat the coronavirus pandemic and this in addition to revenue losses would cause an unsustainable debt situation.
Dollar shortages arising from the global economic panic caused by the coronavirus pandemic is driving down Emerging Market currencies in a crazy fashion. The coronavirus is responsible for the free falling Zambian kwacha; it’s the reason why the South African Rand is testing all time lows almost hitting ZAR18 to $1.The Nigerian case seems to be the worst as her policy makers are still head strong on keeping an artificial exchange rate. The Nigerian Central Bank just devalued the Naira and set a peg at N380 to $1 while the black market rates have started diving further. The ripple effects of a multiple exchange rate system might be the funeral of the Naira.
Mostly, African economies live in a consumer centric environment and the fall in value of their local currencies is already causing a cost-pull inflation. Consumers are beginning to feel the pain of accommodating higher retail prices. Economies and businesses who depends on imports from China and Europe are also having supply challenges as their supply chains have been broken completely due to travel restrictions and shut down of factories. Uganda and Mozambique are facing inflation induced by scarcity because business operators have been left in the cold without supplies.
While the coronavirus pandemic might be a trigger for deflationary risks in the more developed world it brings inflationary risks to many in underdeveloped Africa. Once the coronavirus pandemic is defeated, there is a high probability of a sluggish recovery with dawdling growth in global output and commodity prices rising softly. This implies we expect a period of stagflation at the end of the coronavirus crises. Commodity prices will remain low and subdued for an extended period of time and this will bring more pain for Africa. Growth will be negative for a prolonged period of time in Africa. Prevalent metrics in Africa are flawed and need to be adjusted through progressive policies and drastic behavioral changes.
Egypt, who had made progress with new economic reforms in recent years, could see all his gains wiped out in the weeks ahead. The largest threat to Egypt is a global trade downturn which will reduce traffic and revenue on the Suez Canal, a massive drop in tourism revenue and a fall in crude oil and natural gas prices and demand. South Africa’s mining industry is bracing to take a severe blow, the mining industry in South Africa which contributed 8.1% to her GDP in 2019. Over 400,000 people are employed in the mining industry directly. With commodity prices diving and demand also dropping, there would be a major loss of revenue and jobs.
African economic prospects will remain subdued and uncertain with the bias on the downside majorly due to the fact that the coronavirus impact on the global economy will definitely lead to a global recession and the size of the recession is likely to be bigger than the post Lehman brothers recession of 2008, the situation is also more apprehensive because Africa is much more involved in the global economy than it was involved ten years ago. Most African countries are also lagging behind in accommodative fiscal and monetary policies to bolster production and trade and any emergency policy decision would do little or nothing to ease the pain the coronavirus pandemic brings.
When we recover fully from the coronavirus pandemic, there would be much more serious challenges to confront, the severity of which would be determined by the duration and intensity of the coronavirus pandemic. The adverse effects on trade, commodity prices and employment could be worse than imagined and more extensive has we project global GDP to remain negative for an uncertain period of time and a new downside set to materialize in economic perception. A major risk would be degenerating credit quality. How much the deterioration will be is still vague for now but many African countries would have their debt downgraded to non-investment grades and credits would be more difficult and expensive to access. The constraints on monetary policy that Africa would encounter, post-coronavirus pandemic should be a wake-up call to African countries to adopt a rapid, vigorous and significant fiscal and socio-economic response which would have enough discretion to start an industrial and thriving economic hub. A new world will emerge at the end of this scourge and it will be an opportunity for Africa to redefine his position in the global economy. The developed world may desire to diversify production away from China and Africa would be a prospect for new industrial centers. It’s pertinent that Africa takes maximum opportunities this new world presents
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