Kathy Gibson reports – The Covid-29 pandemic is having a massive effect on the Africa economy.

Isaah Mhlanga, chief economist at Alexander Forbes, points out that the virus has exceeded 124 000 cases across the continent, with the highest level of cases in the bigger economies.

“The trend that we see is that the countries with bigger economies are those that are most affected, in terms of positive cases and also death rates.”

Africa has seen a slower spread of the virus than the rest of the world, possibly because of low testing rates. “So we may see an increase in escalation going forward.”

Economically, we have seen that many economies have experienced significant declines. For instance China dropped in February, although it is picking up now.

The global manufacturing sector has collapsed compared to where it was before, Mhlanga adds.

On the jobs front, the US has wiped out any employment gains from the last few years, and consumer spending is way down.

Worldwide, numbers are not encouraging, underpinned by a collapse in commodity prices. This means many African countries that rely on commodity exports, such as copper and oil, will battle to respond to the crisis.

“The collapse in commodity prices means that many African countries will experience a significant contraction in their economies.”

Lockdowns in Africa have created a massive decline in consumer activity in retail and recreation, grocery and pharmacy, parks, transit stations, and workplaces.

Growth in 2019 was positive in most African countries. But estimates for 2020 show global growth at -3% and -1,6% for sub-Saharan Africa.

The worst impacted countries on the continent, not surprisingly, are those reliant on commodity exports.

In 2021, better growth is expected but still won’t return to 2019 levels. “So there is almost a permanent shock to economies which we will battle to recover from,” Mhlanga Says.

This exacerbates the impact on incomes, with reactions to the pandemic creating higher unemployment and loss of income.

From a macro point of view, it is clear that economies will contract.

Outflows have been severe over the short period of time of the Covid-19 crisis, with capital flowing out of emerging markets.

Over time, many countries have used debt to finance fiscal balances, so portfolio flows have been dominated by debt and less by equity.

So we are likely to see further debt increase across many countries, with the proportion of foreign currency debt the biggest portion – which means servicing it will become expensive.

After Covid-19, the countries that have better debt trajectories will receive portfolio flows from international investors. But as they deal with the virus, they need to generate enough economic growth in future.

A significant portion of foreign currency debt will hamper growth once this crisis is over.

As countries deal with Covid-19, they will increase debt to cushion economies, which means in future we are likely to see higher taxes to service that debt, Mhlanga Explains.

Central banks will introduce policies that lead to financial repression.

Consumer confidence remains low, so spending is not increasing. This is caused by unemployment and by the lockdowns themselves.

Because of a lack of confidence and poor job prospects, as well as safety concerns, confidence is unlikely to recover – so spending will be supressed for some time.

This means inflation is not a short-term concern, although it will rise over time.

We will also see increased deglobalisation, Mhlanga believes.

Trade wars are starting up again, so countries are looking inwardly and trying to localise production.

In Africa, the African Continental Free Trade Agreement could help to open up economies as it facilitates free trade, despite the implementation date being move because of the pandemic.

“This will be a big benefit, especially for those countries that can manufacture.”

We are also seeing an increase in digitalisation. Working from home is driving a need for connectivity, Mhlanga says.

“For Africa, a lack of infrastructure prevents the fast rollout of digital infrastructure in many countries.”

Countries that will come out of Covid-19 will better economic fundamentals will be better positioned going forward.

The risk of running up higher debt means we are likely to see capital flows into better fundamentals and those with worse fundamentals won’t benefit.