The Changing Economic Landscape of Africa: Enter China Karanta Kalley Regional Managing Director, Africa Group October 8, 2007
Highlights Recent developments and Outlook Changes in the Economic Landscape China s Economic Engagement with Africa and its impact Conclusion 10/11/2007 2
Recent Developments: Growth Real GDP growth remained robust at 5.5% in 2006 after posting a high of 5.1% in 2004 and 5.4% in 2005. High commodity prices and improvement in macroeconomic management are the underlying factors. All but one country in Africa recorded a positive growth rate in 2006. 10/11/2007 3
Sub-regional variations exist North Africa leads the pack on the back of higher oil prices. Southern Africa performed well due largely to economic recovery in Malawi and Lesotho and sustained good performance in other parts of the region. In East Africa, weather conditions and commodity export prices remained favorable despite some drought conditions in the Horn of Africa. Growth in Central Africa was driven by higher oil prices. West Africa recorded the largest deceleration due to a decline in growth in Nigeria, a result of social unrest in the Niger Delta. 10/11/2007 4
Excessive dependence on export of primary commodities is a common feature in the region 7.0% 160 6.0% 144 5.0% 129 y/y % change 4.0% 3.0% 2.0% 1.0% 113 98 82 67 Index (2000=100) 0.0% 51-1.0% -2.0% Africa real GDP Growth CRB Commodity price Index (2000=100) 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 36 20 Sources: IMF WEO, April 2007. CRB 10/11/2007 5
Oil Producing vs. Non-Oil Producing GDP Growth 7.0% 5.9% 6.1% 6.1% 6.0% 5.2% 5.0% 4.1% 4.6% y/y % Change 4.0% 3.0% 2.0% 1.0% 0.0% 2004 2005 2006 Oil Producers Non-oil Producers Source: UN 10/11/2007 6
Recent Developments: Inflation CPI inflation decelerated for the fourth straight year in 2006 on the back of prudent macroeconomic management and good harvest. About three-quarters of the countries in sub-saharan Africa saw inflation decline between 2005 and 2006. On average, CPI inflation remains lowest in CFA-zone countries. Zimbabwe at 7000% remains the outlier. 10/11/2007 7
Inflation: CPI Recent Developments 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2003 2004 2005 2006 AFRICA 8.3 7.8 5.9 6.1 SUB-SAHARAN AFRICA 11.9 9.3 7.5 7.0 10/11/2007 8
Recent Developments: CPI Inflation (%) 25.0 20.0 15.0 10.0 5.0 0.0 2000 2001 2002 2003 2004 2005 2006 Sub-Saharan Africa Africa (North plus Sub-Saharan) North Africa 10/11/2007 9
Recent Developments: Investment FDI flows to Africa surged to record high levels in 2006. Africa has seen an improvement in its share of world FDI flows. New Entrants, China and India, have shown increased investment in Africa. 10/11/2007 10
Recent Developments: FDI Africa (billions US$) 50.0 40.0 30.0 30.7 38.8 20.0 10.0 13.0 18.5 17.2 0.0 2002 2003 2004 2005 2006e Source: UNCTAD FDI Database 10/11/2007 11
Recent Developments: Sub-Saharan Africa External Environment Global commodity demand helped strengthen external balances. External debt continued to decline in 2006. Sixteen countries plus Nigeria received substantial debt relief. Eight more could qualify for MDRI once they reach the HIPC completion point. 10/11/2007 12
Outlook: Real GDP Growth (%) - Sub-Saharan Africa Growth prospects for the medium term remain upbeat. Net oil exporters will outperform net oil importers. Robust demand for non-oil commodities will allow for steady growth in oil importing countries. 10/11/2007 13
Growth: Real GDP Growth Projections 7.0 6.0 5.0 Africa 4.0 3.0 2.0 1.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 Year AFRICA SUB-SAHARAN AFRICA 10/11/2007 14
Outlook: Inflation Sub-Saharan Africa Excluding Zimbabwe, inflation in the region will remain in single digits. Improved food situation and prudent macroeconomic policy will be the underlying factors. The CFA-zone will register the region s lowest inflation rate. 10/11/2007 15
Inflation: CPI Projections 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2003 2004 2005 2006 2007 2008 2009 2010 AFRICA 8.3 7.8 5.9 6.1 7.0 5.8 5.3 5.1 SUB-SAHARAN AFRICA 11.9 9.3 7.5 7.0 8.5 7.1 6.4 5.9 10/11/2007 16
Outlook: External Environment Sub-Saharan Africa External balances will come under pressure in the medium term. Relatively lower commodity prices will be the primary reason. Impact will vary between net oil exporters and net oil importers. 10/11/2007 17
Changes in the Economic Landscape: A Summary Strong growth, initially driven by external demand, but infrastructure investment is becoming a major driver. Sound macroeconomic management has led to price stability in many countries in the region. External and fiscal accounts have improved substantially. Countries in the region have pilled up a sizeable amount of FX reserves and external debt declined as a result of MDRI debt relief. 10/11/2007 18
Enter China: China s economic relations with Africa have accelerated since 2000: Imports Exports Infrastructure investment Debt relief 10/11/2007 19
Enter China: While EU s share of Africa s trade remains dominant, China s share rose to 12.8% in 2006 from 0.6% in 1990. 10/11/2007 20
Enter China: Trade with Africa accelerated in 2000. Africa s exports to China rose to $28.8b in 2006 from $4.8b in 2001. 10/11/2007 21
Enter China: Africa s exports to China dominated by fuels. Africa's Exports to China 17% 8% 13% 62% Fuel Crude materials (excluding fuel) Manufactured goods Other 10/11/2007 22
Enter China: Imports from China are dominated by manufactured goods and equipment. Africa's Imports from China 24% 45% 31% Manufactured goods Machinery and transport equipment Other 10/11/2007 23
Enter China: China s Imports by Source 10/11/2007 24
Enter China: China s Export by Destination 10/11/2007 25
Enter China: While Only 3% of SINOSURE s shortterm insurance was for Africa in 2006 10/11/2007 26
Enter China: SINOSURE s insurance for medium and long term for Africa rose to 29%, only second to Asia 10/11/2007 27
Enter China: Summary of Economic relationship Summary of Africa-China Economic Relations: Trade, Aid, and FDI, 2006 (Billions of US dollars) Total Trade1 55.5 African exports 28.8 African imports 26.7 ODA and debt relief 2.3 ODA2 1.0 Debt relief3 1.3 Foreign direct investment4 0.9 Contracted projects 9.5 ¹China Customs Statistics ²2005, IMF estimate ³2005, based on debt relief announced by the Chinese government in November 2006 42004, ECOWAS-SWAC/OECD 10/11/2007 28
Enter China: Highlights of economic relationship Focus of economic relationship: Trade and investment Increasingly dominated by commercial ties than aid considerations China s private sector becoming a major player 10/11/2007 29
Enter China: What is driving China s recent engagement with Africa? Chinese government policies Growing markets for each other s exports Africa s demand for infrastructure Changes in China s approach to financing 10/11/2007 30
Enter China: Some common concerns Not paying much attention to human rights issues Fear that Africa may be underselling itself Africa may be gearing for another debt crisis China may be dumping cheap goods on Africa 10/11/2007 31
Enter China: Some upside developments China s emergence as a global economic power seen as a plus for Africa s exports Great opportunity for development of Africa s infrastructure Chance to help correct chronic undervaluation of Africa by investors. 10/11/2007 32
Is China s entry the panacea for Africa s problems? Positive developments: Acceleration of growth Infrastructure growth in the right direction Slowing CPI Declining external debt Improving fiscal and external balances Strong commodity prices Improved political environment 10/11/2007 33
Is China s entry the panacea for Africa s problems? Risks: Poor infrastructure, though improving, is still weak Growth, though increasing, still remains insufficient Excessive reliance on primary commodity exports External debt still remains high and private capital flows are insufficient Disbursements of external development financing fall short of commitments Domestic savings as a percent of GDP remains low Growing risk of global slowdown Political risk, though declining, remains high 10/11/2007 34
Is China s entry the panacea for Africa s problems? Significant downside risks remain However, some major developments point to a positive direction A favorable global environment, prudent economic policies, good governance and political stability will bode well for the rebound Outcome will largely depend on the way both sides manage the relationship 10/11/2007 35
Data Sources IMF: Direction of trade IMF: International Financial Statistics UNcomtrade China Exim Bank National Bureau of Statistics of China Annual Report of the Export-Import Bank of China, 2003 2006 SINOSURE Annual Report, 2006 10/11/2007 36
References Broadman, Harry G., 2007, Africa s Silk Road: China and India s New Economic Frontier (Washington: World Bank). Alden, Chris, 2005, China in Africa, Survival, Vol. 47 (No. 3), pp. 147 64. Center for Chinese Study [CFCS], 2006, China s Interest and Activity in Africa s Construction and Infrastructure Sectors (South Africa: Stellenbosch University). He, Wenping, 2006, China-Africa Relations Moving into an Era of Rapid Development, in: Africa Institute of South Africa, Inside AISA, Oct./Dec., pp. 3 6. 10/11/2007 37