The Global Commodity Price Rebound and driving GDP output in Africa

Resource-based economies are prone to achieve unstable GDP (Gross Domestic Product) output primarily due to global commodity price fluctuations. A decrease in the global trading price of a commodity item leads to a reduction in the income earned by the exporting nation and a deterioration of the national current account. This phenomenon has a negative, multi-layered impact on GDP output and other economic indicators. Conventional economic wisdom suggests that a country can mitigate this commodity export risk by diversifying its economy and creating a rigorous manufacturing and services sector. The reality of the matter is that a resource-based economies’ GDP output is more vulnerable to changing commodity cycles. With that said, African countries may be relieved to learn that 2018 is forecast to be a better year for bullish commodity exporters.

From 2006-2016, the IMF estimates that Angola’s crude oil exports accounted for an average of 97 percent of the nation’s export revenues to the rest of the world. Furthermore, at the peak of the commodity cycle in 2014, Angola’s crude oil exports brought in over US$60 billion in foreign exchange reserves. This figure declined drastically a year later when global commodity prices plunged. Foreign exchange inflows decreased by almost 50% to just over US$33 billion. The sharp decline in export revenues also led to a depreciation of the Angolan Kwanza against the US Dollar.

The Angolan example affirms the structural challenges many resource-based economies face in Africa. These countries are better placed to achieve sustainable economic growth by shifting their reliance from exporting a broad range of metals, crude oil and other raw materials for foreign exchange reserves. Arguably, a paradigm shift that prioritises the expansion of manufacturing sectors to diversify and buffer national economies from commodity price fluctuations is needed.

Like Angola, Nigeria felt the devastation caused by the commodity slump in 2015. The 70% decline in the price of crude oil from peak levels in 2014 resulted in Nigeria experiencing severe balance of payments shortages in its current account, causing the Naira to depreciate sharply against the U.S. dollar throughout the 2015-2016 period. As the largest oil producer in Africa, petroleum exports account for over 90% of Nigeria’s total export revenue, creating an impending need for the West African country to move into downstream petroleum production and related activities, as a way of expanding the local industry.

Key sectors that can drive GDP output in Africa

Agriculture: The World Bank’s Agricultural Index expects an average 1-2 percent rise in prices in 2018 due to a slight reduction in global grain production. Raw material prices increased by 2 percent in 2017 and this price increase is expected to tick up even further in 2018, albeit gradually. The 2018 market outlook is fairly stable for African grain and other agricultural raw material producers, provided their input costs remain relatively constant.

Metals and minerals: Africa has an abundance of metal deposits including aluminium, zinc, copper, nickel and iron ore that have all risen appreciably due to constrained global supply and several other bottlenecks. However, the market remains steady with China driving the resurgent global demand for metals, particularly in its property, manufacturing and infrastructure sectors. Market analysts are expecting further metal price increases in 2018 as demand picks up from the rest of the world and global GDP continues to strengthen on the back of equity markets reaching record levels in recent time.

Energy: The World Bank expects crude oil prices to trade at an average of US$56 per barrel in 2018, up from US$53 per barrel in 2017. This slight increase is due to a stabilizing and growing U.S. shale oil market offsetting the expected OPEC production cutback by the oligopolistic organisation, seeking to increase oil prices. Based on this assumption, major African crude oil exporters such as Nigeria and Angola should achieve stable export revenues, which would bolster both countries current account balances and contribute positively towards GDP in 2018.

Despite the many shared challenges faced by lower-income countries, Mozambique has emerged as a country with one of the largest liquified natural gas (LNG) reserves in Africa, with the potential to transform the country’s medium to long-term economic prospects. Energy experts estimate that there is 100-200 trillion cubic feet of LNG just off the country’s Indian Ocean coastline and if production is optimised Mozambique could become the third-largest exporter of LNG in the world within a decade. However, billions of dollars in capital investment is needed to meet the construction and infrastructure requirements that could unleash LNG exports flowing to overseas markets. In the past few years the Mozambique LNG industry has attracted interest from several energy multinationals, prompting energy experts to predict that greater multinational investor participation in the local LNG industry between 2018-2020 is a real possibility. Nonetheless, in order to achieve a significant reduction of the current account deficit, it is suggested that Mozambique will need to create an efficient and productive LNG industry, with robust export revenues only expected by 2022.

Creating a regulatory environment that encourages investment; protection of property rights; an unwavering stance on strict adherence to the rule of law; sustainable long-term private sector investment and the necessary political will is required across African economies and across the private and public sectors to fulfil national economic goals. Following this model the Asian Tiger economies have succeeded in making the transition from low-income countries to one of the globe’s most advanced economic regions. Despite the road to economic development being long and tough, African economies can replicate the successes of the Asian Tigers.