Publications

Source: The pink sheet, World Bank

Present in the African subsoil, iron ore, whose price has jumped by more than 70%, and cobalt, which literally soared at the end of 2016 and the first half of 2017 due to bullish speculative movements, are both among the big winners in 2016. This has clearly been good news for African producer countries, whose economic growth and public finances have been hit hard by the 2014 and 2015 market collapse. The high levels reached in 2010 after the major setback fueled by the 2008 financial crisis are, indeed, still very far off.

Figure 2: Price change in African-origin metals

Source: Quandl.com

Agricultural products, on the other hand, overall have not enjoyed the same fortune: behind the 7% increase in the World Bank's agricultural price index, there is a considerable heterogeneity. In particular, cocoa prices fell after the peaks reached in 2015. During the 2016 calendar year, the ton of beans lost 22% of its value on the London Stock Exchange and 34% in New York, which had an impact on the economies of Ivory Coast and Ghana, the world's largest and second largest cocoa producers, respectively. The world cereal production from the 2015-2016 and 2016-2017 seasons were characterized by low prices. The price of American soft wheat (soft red winter –US SRW) dropped from an average value of $191.70 per metric ton (MT) in January 2016 to $161.10/MT in December 2016, while corn fell to $152.44/MT at the end of 2016 compared to $161 in the previous January. As a point of reference, the US SRW and corn were at $215.60 and $178.70/MT respectively in December 2014. In this context of global abundance of grain, Africa experienced two successive years of poor harvests in 2015-2016 and 2016-2017, in different regions. This is due to a severe drought in the northern part of the continent in 2015, and in the east in 2016. For coffee on the other hand, however, the composite index of the International Coffee Organization (ICO) went from 155.26 cents (cts) per pound (lb) in 2014, to 124.67 cts / lb in 2015, to reach 127.31 cts / lb in 2016. Cotton prices also rose during 2016 and early 2017. The Cotlook index, which quotes a variety of cotton from various origins (including Benin, Burkina Faso, Cameroon, Ivory Coast, Mali, Tanzania, Chad, Zambia and Zimbabwe) based on cost insurance freight (CIF), noted that Far East rose from 151.56 cts/kg in January 2016 to 175.26 cts/kg in December 2016, which is an increase of over 15% during the year (World Bank).

Macroeconomic heterogeneity persisted in 2016

The relative price improvement observed for most commodities took place within a very dull macroeconomic context. Global growth has been at 3%, and 2017 is not expected to significantly change this reality even though positive signals could be identified during the last months in 2016. Penalized by the dollar’s strength and by the decline in oil prices, US economic growth was only 1.6% in 2016. In economic terms, however, everything was not disappointing. Two and a half million jobs were created in the market economy, bringing the country's unemployment level below 5% and, for the first time since the 2008 crisis, bringing down tension in the job market as well; A situation that can be linked to the decision to raise the US Federal Bank Reserve (Fed) key rates. China, for its part, managed to keep its economic growth above 6.5%, and achieved this thanks to public investment and an accommodative monetary policy. Thus, while the central question of the impact of the transformation of China’s economy remains unanswered, it must be acknowledged that China has, from this standpoint, provided reassurance. The argument is not only a macroeconomic one, in light of Donald Trump’s protectionism and the United States’ withdrawal from the Paris climate agreements, Xi JinPin has affirmed himself as both a free trade advocate and a guarantor of his country's environmental commitments. However, these affirmations cannot discount the reality of the Chinese steel and aluminum sectors nor the consequent existence of trade disputes between China and the rest of the world in this area.

Strong heterogeneities have naturally been observed throughout the world, and the African continent has not escaped this reality. According to the latest International Monetary Fund (IMF) statistics, real GDP growth in Sub-Saharan Africa stood at 1.4% in 2016, far from previous years’ performance (Table 1).

Table 1: Economic growth in Africa (In real GDP growth rate)

Source: Regional economic perspectives, IMF

Behind this general number are hidden very different macroeconomic performances with, on the one hand, Ivory Coast, Ethiopia, Kenya, Senegal and Tanzania, whose economic growth has equaled or surpassed 6%, and on the other hand Equatorial Guinea or South Sudan, whose economic activity has fallen sharply (Figure 2). Unsurprisingly, African countries exporting non-renewable resources, especially oil, have suffered the most from a macroeconomic perspective. On average, their growth has been halved and the relevance of their macroeconomic management has been undermined by rising imbalances and indebtedness. Moreover, these exporting economies have very often experienced a weakening of their currency resulting in rising inflation and greater difficulties in capturing external financing.

Figure 3: Macroeconomic performance of selected African countries in 2016 (real GDP growth rate)

 Source: Regional economic perspectives, IMF

The continent's three main economic drivers, Nigeria, South Africa and Angola, were particularly lackluster in 2016. According to the International Monetary Fund (IMF, 2017) statistics, the Nigerian economy entered into recession and contracted by 1.5% for the first time in two decades. The South African economy recorded its weakest growth since 2009 at 0.3%, while that of Angola was zero in 2016. In Nigeria, the drop in oil prices, on which the economy is 70% dependent on, led to a negative external current balance in 2015 (-3.2% of GDP) for the first time in a decade (0.6% in 2016). The budget deficit decreased to -4.4% of GDP in 2016 (-3.5% in 2015), despite adjustments to current expenditure. Angola, on the other hand, responded more quickly to falling prices by revising the 2016 budget in July to limit public spending, which amounted to 23.7% of GDP in 2016. Public debt has nevertheless more than doubled since 2013, representing almost 71.9% of GDP in 2016. The current account has improved considerably but remains negative at -4.3% of GDP. South Africa also experienced difficult years in 2015 and 2016 due not only to the low price of gemstones, minerals and metals, while they comprise about 50% of the country's exports, but also from external demand, particularly from China. In addition, strikes and the decline in the competitiveness of the mining industry, a (still) difficult supply of electricity, anemic household consumption, and droughts have contributed to low growth of national income. On the other hand, inflation is still high, with a logical depreciation of the rand as a backdrop. A tense political climate compounded this difficult situation.

2017 is expected to offer a slightly more favorable macroeconomic outlook for the African continent, due in particular to the improvement in the price of commodities. However, this is insufficient for significant improvement of the public accounts of countries that would not change their fiscal policy accordingly. The stakes are high because the gradual normalization of US monetary policy following renewed inflation could weigh on the external financing of the African continent and thus constrain its economic rebalancing. The increase in the Fed's key rates naturally raises the question of its impacts on the US economy as well as on the conditions for granting international financing.

2016: a year of (geo)politics

A macroeconomic approach is insufficient for conducting a cyclical analysis of the links between Africa and the world commodity markets. From the surprise election of Donald Trump as President of the United States to the European Brexit earthquake, whose outcome is even more uncertain since the British parliamentary elections in June 2017, many major political events have taken place in 2016, let alone the global geopolitical developments particularly in the Middle East. Within the commodities sector, the most visible event in 2016 was probably the agreement reached by members of the Organization of Petroleum Exporting Countries (OPEC) in December to reduce production of 1.8 million barrels per day (mb / d), thus encouraging price recovery. There was urgency since Brent, the reference for crude oil, had begun in 2016 at levels below $38/bbl and then dropped further during the first weeks of the year to reach a floor price of $28.70/bbl on January 20, 2016. It subsequently picked up a bullish path despite significant downward movements. On November 30, 2016, by endorsing the tentative agreement reached in September, OPEC allowed oil to average $55/bbl above average levels between mid-December 2016 and mid-March 2017. While oil inventories have declined, the upsurge in US non-conventional oil production, fueled by this price increase, once again pushed crude below the $50 threshold at the beginning of May 2017. Not surprisingly, on May 25, 2017 OPEC decided to renew this agreement until March 2018.

Figure 4: Change in oil prices (2016-2017, FOB spot price, in USD/bbl)

Source: US Energy Information Agency (IEA)

West African crude prices have logically followed the general market trend with a significant increase in prices since November as a result of this OPEC agreement. Nevertheless, the increases were lower for Nigeria (Cabinda) than for Angola (Girassol). Two key factors explain this differentiation, which are, first, the abundance of light crudes in world markets due to US production and the uncertainties surrounding oil exports from Nigeria (that were penalized by the attacks by various armed groups against oil installations) and second, infrastructures in the Niger Delta region.

While oil obviously occupies a key role in the international economic and political scene, it must be noted that political decisions have driven the large minerals and metals sector - this time the impetus is related to consumer and/or importing countries instead of the producer countries. There is, thus, little doubt that the American and Chinese political authorities have buoyed a number of raw materials produced by African countries. As a candidate, Trump promised to spend billions of dollars on infrastructure projects and, speculatively the price of copper increased by over 28% between October 24 and November 28 to reach $5,935, its highest level in a 21-month period. The same observation applies to China where billions of yuan were injected into infrastructure projects, while the persistence of cheap credit and the lifting of rules restricting real estate transactions have boosted real estate investments and indirectly supported many industrial sectors. These measures are favorable to steel and aluminum in particular, and have in turn benefited iron ore and bauxite, of which South Africa and Guinea are respectively major producers on the continent. Guinea, the leading African bauxite producer and holder of over a quarter of the world's ore reserves, according to the United States Geological Survey (USGS), enjoyed a very favorable year in 2016 with exports to China up sharply. It must be noted, however, that export restrictions on unprocessed ore by Indonesia and later by Malaysia have less impacted international competition.

Structural challenges to be overcome

An analysis of commodity market conditions cannot, of course, fully account for the links between Africa and the renewable and non-renewable resources that it produces and exports. The Arcadia 2017 report therefore focuses on analyzing the major challenges facing the continent, such as improving the attractiveness of extractive industries (especially mining), promoting electricity generation capacity through renewable energies (i.e. solar, hydroelectric), enhancing food security and promoting a specific model of agricultural development, and enhancing the capacity of nations and businesses to raise funds efficiently, in particular on international markets, in the form of both debt and equity.

Improving the attractiveness of the African extractive sector

Africa has considerable mineral resources but has relatively low exploratory investments per km² compared to other mining regions such as those found in Australia or Canada. It is therefore legitimate that the socio-economic development of this exceptional geological heritage is among the priorities of the countries in question. Since their independence, African countries with mineral resources have adopted foreign investment laws and have developed mining and oil codes. The particular characteristic of each extractive project has, moreover, led to the completion of these codes through agreements signed between the State and the private operator in order to reconcile the interests of the State, the investor, and the local populations while taking into account the economic realities and infrastructures available or to be built. Given the legal complexity of this effort and the importance of the strategic issues that the extractive sector implies, many African States have also joined forces to develop standards applicable at regional and international level. This was the case for the West African Economic and Monetary Union (UEMOA) in 2003 and for the Economic Community of West African States (ECOWAS) in 2009 and 2012.

The most recent reforms of the national codes for mining activities contain many common principles inspired by these various regional initiatives, which generally aim to increase the direct and indirect profits of States. The general idea of these codes is to adopt a less liberal approach and to strive for a better redistribution of wealth, in particular by increasing state capital participation, revising tax exemptions or increasing taxes. The year 2016 was marked by numerous reforms in the extractive sector: in the DRC, Gabon, Ghana, Rwanda and Congo-Brazzaville for the hydrocarbon sector; and Djibouti, Burkina Faso, Senegal, Cameroon and Morocco for the mining sector. In the course of 2016, discussions were also held between the various stakeholders on draft mining codes in Zambia, Madagascar, the Republic of Congo and the DRC. Despite the singularities of some of these reforms and the divergences in the economic, political, geographical and geological realities of the different States in question, common trends can be observed regardless of geological resources exploited or to be exploited. For example, the increase in government take (mining royalties, taxes / exemptions on extractive sector companies, government participation in the capital of an operating company), national content, standards for the Extractive Industries Transparency Initiative (EITI), as well as environmental and societal requirements.

On the subject of the "government share," it is clear that the decision to revise a mining or oil code sometimes depends on political agendas that do not always take account of changes in the price of raw materials, which may jeopardize the necessary balance between the attractiveness threshold acceptable to the State and the tolerance threshold of investors. When a price increase occurs, like that observed until 2012, many states are tempted to make legislative and regulatory changes in order to capture the additional revenue generated without always understanding the cyclical dynamics of long-term commodity prices. This may have the effect of discouraging investors. The current reforms of mining codes have also sometimes limited the negotiation leverage under mining agreements and have not always taken into account the realities of each country. Beyond reforming the mining codes, it seems necessary to harmonize all the legislation applicable to the mining sector (environmental, labor, taxation, etc.). Sectoral reform would make sense, as it would enable achievement of the desired stakeholder objectives by clarifying the commitments and obligations of economic operators who are, in practice, often confronted with interpreting the contradictions and divergences of the provisions stipulated in the mining codes and in the other codes and legislation.

Responding to the continent's electrification demand challenges

This is now evident: infrastructure development is a sine qua non for African economic development, whether it be transport infrastructure (road, rail or port) allowing the export of extracted or produced resources, or energy infrastructure for generation of electricity. For the energy infrastructure, the associated stakes are enormous in terms of both economic growth and human development. The average electrification rate in sub-Saharan Africa is 31%, which is the lowest level in developing regions, while some 633 million Africans currently live without electricity. Africa's electricity needs are expected to explode due to the continent's demographic growth and its anticipated industrialization. The question of production and consumption within Africa, however, is limited in scale due to the extent of disparities. In terms of consumption, disparities are found at four main levels which can be found in the country, the household income level, the location of the household (whether in rural or urban areas), and more subjectively, how private households perceive both reliable access to the electricity grid and the urgency of their situation. These disparities are also observed in the production sector due to the strong economic differences between African countries (and therefore differences in the degree of electrification of their territories) and the nature of the resources available to each country for electricity generation. For example, South Africa, Africa's largest economy, accounted for more than 33% of Africa's electricity in 2014, with coal generating over 92% of its electricity. Egypt produced 20.70% of the continent's electricity and used gas (74%) and oil (17%) for this purpose. For many other African countries of more modest economic size, the share of hydroelectricity in total electricity production in the country was over 70%.

Table 2: Access to electricity in the developing world