How A Rebalanced China Will Affect Africa

2015 has been a challenging year for much of Africa. Average growth of African economies weakened slightly in 2015 to 3.6% (down from annual 5% enjoyed since 2000). Total financial flows have decreased 12.8% to USD 188.8 billion (using UNCTAD rather than IMF estimates for FDI). Africa’s tax-GDP ratio tumbled to 17.9%, down from 18.7% in 2014. China’s slowdown produced rough headwinds for Africa where the gravity of growth is shifting from the resource rich West to the East. [Today, on 23rd May 2016, the African Economic Outlook (AEO) 2016 will be launched in Lusaka, Zambia. I have been asked to contribute, joint with Robert Kappel and Birte Pfeiffer. This post is a copy of one of our contributions. Please follow the launch event and access the study here from 9h CET.]

The slowing of output growth in major emerging economies has been associated with lower commodity prices. Next to supply factors, the marked decline in investment and (rebalanced) growth in China is depressing commodity prices, particularly in metals and energy. Three key factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Macroeconomic headwinds for Africa’s net commodity exporters may imply that Africa’s second pillar of past performance – external financial inflows – will suffer as well.

While lower commodity prices are providing significant headwinds to Africa’s commodity exporters, the rebalancing of China may also provide backwinds, albeit gradually. The relocation of low-end manufacturing from China might reinforce positive income effects of lower commodity prices in oil-importing countries. The backwinds can be expected to stimulate FDI inflows into Africa. Benefits from reduced fiscal pressures in countries with high fuel shares in imports (Egypt, Ethiopia, Kenya, Mozambique and Tanzania) mirror significant challenges for energy exporters (Angola, Chad, Congo, Gabon and Nigeria) and other commodity exporters (Ghana, South Africa and Zambia) arising from depressed commodity prices.Read more