African Growth Dampened As South Africa Slumps Amid Virus Outbreak

South Africa says it expects three more years of sluggish growth, the latest blow to Africa’s faltering recovery as the continent braces for the impact of plummeting Chinese demand during the coronavirus outbreak.

Plagued by soaring deficits and electricity shortages, the South African government announced on Wednesday that it aims to slash public-sector wages by more than US$10-billion over the next three years in an attempt to avoid a junk rating for its credit rating.

After enduring five years of declining per-capita income, South Africa is now forecasting three more years of the same. It expects GDP growth of barely 1 per cent annually, less than the population growth of 1.4 per cent.

“Persistent electricity problems will hold back growth,” Finance Minister Tito Mboweni said in his budget speech on Wednesday. He also warned that the outbreak of coronavirus, the disease known as COVID-19, is a “source of uncertainty” for the global economy.

South Africa’s economic weakness and China’s slowdown are two of the biggest obstacles that will hamper African growth this year. Africa is particularly vulnerable to the Chinese economy because of its rapidly growing resource exports to China over the past decade.

The World Bank is projecting that Sub-Saharan Africa’s economy will grow by only 2.9 per cent this year – slightly less than previous forecasts. Slow growth in the region’s two biggest economies, Nigeria and South Africa, is a key reason. The falling price of oil and other commodities is also hurting some of Africa’s biggest and most resource-rich economies.

The International Monetary Fund announced last week that it is cutting Nigeria’s growth forecast to 2 per cent this year, down from 2.5 per cent in its previous forecast, largely because of plunging oil prices as a result of the COVID-19 outbreak. Nigeria is the top African oil producer.

Nigeria had seemed to be entering an economic recovery, with growth of 2.3 per cent last year, a slight increase from 1.9 per cent in the previous year, but the decline in oil prices will damage its recovery. Crude oil prices have dropped by about 11 per cent this year, while the prices of copper and iron ore have also declined.

The IMF categorizes 21 African economies as resource-intensive, and these countries will suffer the worst effects from the Chinese slowdown. Among the hardest hit are expected to be Zambia, Angola, Nigeria, Ghana, the Republic of Congo and the Democratic Republic of Congo.

Several other African countries will be hit by the collapse of Chinese tourism during the COVID-19 outbreak. South Africa, for example, normally receives 100,000 tourists from China annually, and Mauritius receives as many as 90,000 annually, but Beijing has ordered a halt to overseas bookings by Chinese tour groups because of the outbreak.

In his budget speech, Mr. Mboweni predicted that the new African Continental Free Trade Area (ACFTA) – which takes effect in July – will “open up new markets, promote regional integration and contribute to economic growth.”

But some analysts are skeptical of these claims. “I am very pessimistic on the ACFTA, since I think that sorting out the details will take far longer than the governments have given themselves, and that big practical barriers to trade will continue,” said John Ashbourne, senior emerging markets economist at Capital Economics.

South Africa’s continued economic stagnation is a major problem for overall African growth, since it contributes about one-fifth of total GDP in Sub-Saharan Africa.

Mr. Mboweni confirmed that South Africa is cutting its growth projections again. Last year, his department had forecast 1.7-per-cent growth in 2020, but now it expects only 0.9-per-cent growth this year, largely due to the rolling electricity blackouts that continue to paralyze the economy. Some analysts are forecasting even lower growth of just 0.5 per cent this year.

The government recently acknowledged that the power blackouts are likely to continue for the next two years. Its electricity monopoly, Eskom, has been riddled with corruption and mismanagement for years. After years of pressure, the government has finally announced that it will allow South African cities and mining companies to produce their own electricity or buy their electricity from independent producers.

The government’s deficit and debt are both soaring. The budget deficit is now projected to reach 6.8 per cent of GDP by next year, compared to a previous estimate of 6.5 per cent, and the government’s debt is forecast to peak at 71.6 per cent by 2023, leading to a sharp increase in debt servicing costs.

The projected budget deficit would be South Africa’s largest since the apartheid era, and its debt servicing costs will be greater than what it spends on health care, Mr. Ashbourne said.

The government’s proposed solution, a US$10-billion cut to the public sector wage bill, is likely to be extremely difficult to impose, since the public service unions are powerful and willing to strike. One union leader has already warned that any wage cuts would be a “declaration of war.”