Posted on January 28, 2018

Sub Saharan Africa (SSA) is set to continue on a recovery path over the coming year underpinned by higher commodity prices, robust global growth and the lagged benefits of policy adjustment in earlier years. Growth is forecast to accelerate to 3.4% in 2018 from an estimated 2.6% in 2017. This in turn should result in robust demand among global investors for high yielding SSA government debt.

Sub-Sahara Africa has been through a difficult economic adjustment over the last few years, weighed down by the decline in commodity prices that began in 2014. Commodity exporters such as Nigeria (oil), South Africa (platinum, iron ore, coal) saw their exchange rates come under pressure, inflation rise and budget deficits widen. In response central banks tightened monetary policy, and growth in government spending slowed to address rising government budget deficits. GDP growth on the continent reached a low of 1.4% in 2016. The International Monetary Fund (IMF) estimates that growth picked up to 2.6% in 2017 and is forecasting an acceleration to 3.4% in 2018.

The ongoing economic recovery in 2018 reflects three main factors. First, modest gains in commodity prices continue to underpin an improvement in export earnings, fiscal revenues and commodity production. Second, as inflation eases and exchange rates stabilise central banks in the region should have additional room to cut policy rates to support growth. Third, external demand is set to remain robust in 2018. Global growth prospects remain solid and provide a solid backdrop for SSA exports. The IMF forecasts global growth to pickup to 3.7% in 2018 from 3.6% in 2017, which would be the strongest since 2011.

To a large extent the headline growth number for SSA will depend on developments in South Africa and Nigeria which together account for almost 50% of the continent’s GDP. Nigerian oil production should rebound in 2018 driven by a better political and security environment in the Niger Delta region. In South Africa, the election of a new leader of the African National Congress is likely to usher in a new business friendly direction for economic policy and underpin business and consumer confidence. This should in turn boost consumer and investment spending in the economy.

As a result of the main factors driving growth across the continent and country specific drivers in the largest SSA economies, the growth recovery should gather pace in 2018. Against a backdrop of improving economic fundamentals in the region and a robust global growth outlook, investors are likely to continue to show strong interest in debt issued by SSA governments.  This will help keep a lid on interest rates paid by sovereign debt issuers thereby lowering debt service costs. A potential risk to this outlook is the upward trajectory of US interest rates in combination with lower policy rates in SSA. However, so long as inflation continues on a downward path, real interest rate levels in SSA will remain compelling and sufficient to attract foreign capital flows to the region. Higher policy rates in the US are unlikely to be a significant headwind to capital inflows so long as the US Federal Reserve continues to telegraph a path of very gradual interest rate hikes.

Overall, the growth outlook for SSA is the best it has been for several years.