Throughout the past three years, the frontier market economies of sub-Saharan Africa have received growing amounts of portfolio capital flows.1 During the 2000s, sub-Saharan African frontier markets garnered growing interest from foreign investors, but heightened risk aversion from the Great Recession temporarily caused investors to retreat. Since 2010, continued positive macroeconomic performance, coupled with unprecedented accommodative monetary policies in advanced economies, renewed foreign investors’ interest on a much larger scale, resulting in sub-Saharan African frontier markets becoming more integrated with international capital markets. The number of sub-Saharan African countries with international credit ratings has increased, a large number of countries issued sovereign bonds—many of them for the first time—and foreign investors have become active players in some domestic bond and equity markets.
The October 2013 Regional Economic Outlook: Sub-Saharan Africa provides a comprehensive report on the prospects for growth in the region, as well as the major risks to the outlook. Generally, growth is expected to remain strong despite a downward revision since the May 2013 report. The report analyzes drivers of growth in nonresource-rich sub-Saharan African countries, and examines the risks to frontier market economies of volatile capital flows as they become more integrated with international capital markets.
Softening and increasingly volatile global economic conditions are expected to have only a moderate downward impact on sub-Saharan Africa this year and next. Growth is projected to remain robust at about 5 percent in 2013 and 6 percent in 2014, backed by continuing investment in infrastructure and productive capacity. This outlook is not as strong as portrayed in the May 2013 edition of this publication,1 reflecting, in part, a more adverse external environment—characterized by rising financing costs, less dynamic emerging market economies, and less favorable commodity prices—as well as diverse domestic factors. However, the magnitude of the revisions is modest (–0.7 percent of GDP on average in 2013 and −0.1 percent in 2014).
Africa’s growth takeoff since the mid-1990s is more than a commodity story. Several countries have achieved sustained high growth rates without that growth being driven by the exploitation of natural resource wealth. Reviewing the experiences of the six nonresource-intensive low-income countries (LICs) that registered the highest growth rates over the period 1995–2010 reveals a number of common characteristics that accompanied this growth success. Many of these characteristics have been previously identified as critical in the growth literature and help generate a virtuous circle of growth: improved macroeconomic management, stronger institutions, increased aid, and higher investment in both physical and human capital. Given that these countries started their growth takeoffs with similar or worse initial conditions than the group of low-growth, nonresource-intensive LICs and even some of the countries currently classified as fragile, their success holds important lessons for the rest of the region.
Sub-Saharan Africa continues to record strong economic growth, despite the weaker global economic environment. Regional output rose by 5 percent in 2011, with growth set to increase slightly in 2012, helped by still-strong commodity prices, new resource exploitation, and the improved domestic conditions that have underpinned several years of solid trend growth in the region’s low-income countries. But there is variation in performance across the region, with output in middle-income countries tracking more closely the global slowdown and with some sub-regions adversely affected, at least temporarily, by drought. Threats to the outlook include the risk of intensified financial stresses in the euro area spilling over into a further slowing of the global economy and the possibility of an oil price surge triggered by rising geopolitical tensions.
In the last few years, the world has experienced three episodes of global financial stress. The most significant took place after the collapse of the U.S. investment bank Lehman Brothers in late 2008. The other episodes, in mid-2010 and late 2011, have involved the deterioration of European public finances and financial conditions. The theme that runs through these three episodes is a generalized increase in global risk aversion (Figure 2.1). This chapter explores the channels through which global financial stress affects sub-Saharan African banking systems,1 reviewing the effects of the 2008–09 financial turmoil and the recent European crisis.
Exhaustible natural resources account for a large share of output and export earnings in many sub-Saharan African (SSA) countries. Rising world commodity prices, coupled with new resource discoveries, have stimulated growth in these economies during the past decade. Several additional countries in the region are also poised to become significant resource exporters in the near future. This chapter examines the region’s natural resource exporters and the policies that can help them make effective use of these resources to support economic development.1
Fiscal balances weakened in most sub-Saharan African countries with the onset of the global economic crisis, with increases in deficits in the early stages of the crisis being partly offset by consolidation efforts as growth rebounded in 2010–12. Concern has been frequently expressed that governments may now be more constrained in their ability to provide fiscal support for economic activity in the event of adverse shocks.1
Energy subsidy reform1 has been a long-standing policy challenge for both advanced and developing countries. In sub-Saharan Africa, the fiscal cost of subsidising energy is estimated at about 3 percent of GDP, equivalent to total public spending on health care. For many countries, explicit and implicit subsidies continue to crowd out more efficient spending on much-needed social and infrastructure projects. Moreover, energy subsidies are often poorly targeted, with the bulk of the benefits accruing to the better-off. Finally, pervasive energy subsidies have discouraged investment and maintenance in the energy sector in many countries in sub-Saharan Africa, leading to costly and inadequate energy supply that is increasingly a bottleneck for economic growth. This note explores why policymakers have found energy subsidy reform so difficult and draws lessons from global experience in designing a successful energy reform strategy.
Growth in sub-Saharan Africa has remained generally robust and is expected to gradually pick up in the coming years. Although near-term risks to the global economy have receded, recovery in the advanced economies is likely to be gradual and differentiated, acting as a drag on global growth, which is set to increase slowly from a trough in 2012. The factors that have supported growth in sub-Saharan Africa through the Great Recession—strong investment, favorable commodity prices, generally prudent macroeconomic management—remain in place, while supply-side developments should be generally favorable. Macroeconomic policy requirements differ across countries, but rebuilding policy buffers to handle adverse external shocks remains a priority in many countries.