Bouncing back soon? Opportunities and Challenges for Sub-Saharan Africa after 18 months of Pandemic

September 08, 2021 | Africa

Executive Summary

Africa has been spared the worst so far but economic recovery will be bumpy

  1. The pandemic caused less damage in sub-Saharan Africa than initially feared, but vaccination campaigns are too slow, and potential virus mutations could retard the economic rebound.
     

  2. Politically, the impact of the Covid-19 pandemic has proven particularly disruptive when blending with existing political rifts, as witnessed in South Africa and Senegal.
     

  3. Investors e.g. from the automotive sector should brace for more onerous international environmental, social and corporate governance (ESG) standards, complicating sourcing from the region

Watch out for

  • Africa’s vaccine shortage and rising debt load will be discussed at the G20 Summit in Rome on October 30
     

  • The African Union is expected to conclude outstanding negotiations concerning the African Continental Free Trade Area (AfCFTA) by end-2021
     

  • Germany’s law on supply chains will enter into force by January 2023; it can be superseded by a similar EU law, expected to take effect already in 2022

Key Figures

  • Regional GDP is set to grow at 3.4% in 2021, after contracting by 1.9% last year
     

  • Less than 2% of the continent's population is fully vaccinated against Covid-19
     

  • The number of terrorist attacks in Mali and Niger has increased more than fivefold since 2016, while the recent military coup in Guinea is Africa's third this year
     

  • China has become Africa's largest bilateral creditor, lending nearly $150bn since 2000.

State of Play

A mixed outlook for the road ahead

Sub-Saharan Africa (SSA) has not been hit as hard as other continents by Covid-19. However, the true extent of the pandemic’s spread is grossly underreported in most countries. Persistent vaccine shortages and new variants are putting additional strain on weak health systems. If leaders were forced to abandon the current laissez-faire approach on pandemic management, this can trigger violent protests. Tourism temporarily collapsed, and commodities exports slowed down in many countries. Consequently, state budgets were seriously depleted since mid-2020 when the G20 Debt Service Suspension Initiative (DSSI) was put in place as an emergency measure. This mechanism helped lower the sovereign bond spreads of SSA frontier markets and only Zambia, Ethiopia and Chad have defaulted on their sovereign debt. On the upside, the emerging formation of the 54-country trading block AfCFTA offers medium-term growth prospects. Covid-19 vaccine production will start in South Africa, Senegal and Rwanda in 2022. Yet the trend towards stricter EU-wide ESG reporting standards poses an immediate challenge for companies sourcing from the region, particularly concerning electric car manufacturers.

Key Issues

Covid-19 adds to existing political conflicts

The pandemic has amplified political instability in some sub-Saharan countries. Its economic effects put additional pressure on already strained livelihoods across the region. This is particularly dangerous in places with existing political cleavages. Senegal and South Africa saw violent demonstrations in response to lockdowns. Some governments quickly loosened the measures imposed while others e.g. Uganda and Rwanda stood fast. Social conflict will be further fueled if countries default on their external sovereign debt obligations in the wake of the pandemic. Shortages of foreign currency, inflationary surges and violent demonstrations all have immediate consequences for foreign companies operating on the ground. Debt restructuring negotiations between debtor countries and G20 nations are stalling for various reasons. For one, China has emerged as the continent’s most important bilateral creditor, yet Beijing has no record of writing off debt. Rather, China is suspected to make concessions only in exchange for more control of strategic resources such as Zambian copper. China has enormous clout in these negotiations: e.g. 45% of Ethiopia’s external debt payments in 2021 are due to the Chinese government and state-owned entities. Thus, China can use its leverage to insist that EU-based private creditors will have to take haircuts in return.

 

In addition to economic pressure, several countries face substantial security challenges. Nine months of escalating conflict in Tigray province have severely damaged Ethiopia’s credentials as Africa’s up-and-coming investment destination. The Sahel is in bad shape: the death of Chad’s longtime ruler Idriss Déby in April 2021 added to its instability. Jihadist militant groups from Mali into Burkina Faso, Niger and Côte d’Ivoire keep terrorizing the population and threatening international mining companies through direct assaults on mining sites and staff kidnappings. Mali was further destabilized by a second coup d’état in less than a year, against the background of France’s intention to gradually disengage, with possible consequences for Germany’s military presence. Jihad-based instability in Northern Mozambique has interrupted offshore gas exploration by TotalEnergies. This weekend's coup in Guinea has sent prices for aluminum to new highs, as 20% of the global supply of bauxite, the metal's feedstock, are at risk. On the upside, the DRC is gaining stability as President Tshisekedi managed to sideline his predecessor.

Expect a steady economic recovery in countries with sufficient political stability

SSA economies share a difficult outlook after experiencing the worst year of economic decline on record. While the recession looked much steeper in most OECD countries, SSA’s growth rates fell from considerably higher pre-pandemic levels. The International Monetary Fund (IMF) optimistically expects the region to expand in 2021. Although the region’s recovery will lag behind the world average (6%), SSA’s long term vectors point upwards, despite high fertility rates. The Covid-19 pandemic strengthened policymakers’ resolve around the formation of the AfCFTA trade block. The agreement is one of the best options available to boost the region’s growth perspective over the long-term. Billed as an economic game-changer for the continent, AfCFTA is expected to create a market of 1.2bn people with a combined GDP of $2.5trn. However, the benefits of large-scale tariff liberalizations will only accrue over a 15-year implementation period. Investors setting up shop in the region stand to profit from access to larger markets, underpinned by Africa’s population growth.

 

Regulations aimed at enhancing ESG standards, such as those contained in Germany’s new law on value chains, pose imminent challenges for European companies, in particular in mineral sourcing industries. Adding to the existing EU Conflict Minerals Regulation, which came into full force in 2021, the new rules will renew attention put on the origins of hard commodities. While the EU regulation narrowly focuses on the responsible and conflict-free sourcing of five minerals – tin, tantalum, tungsten, cobalt and gold – the German law expands the scope for such reporting duties to the entire supply chain. For instance, EU companies sourcing gold in West Africa, such as in terror-stricken Niger, will need to prove that their operations do not feed local jihadist militant groups. For car manufacturers and others relying on key ingredients of electronic equipment, this means either doubling down on their efforts to source sustainably in DR Congo, home to the largest shares of the world’s cobalt (72%) and tantalum (27%) production or looking for alternatives in less volatile places.