Friday, 28 August 2015

African survey data point to robust growth

Amid all the carnage, in emerging markets and developed ones, it is nice to discover some good news. At least it is if it can genuinely be believed. Figures out on Monday suggested Africa’s headline sales managers’ index, broadly analogous to the purchasing managers’ indices widely followed elsewhere, rose to a 28-month high in August. The index ticked up to 60.2, from 59.3 in July, on a scale where 50 is the dividing line between an increase or a decrease in activity, the highest rate since May 2013 (see the first chart).

The service sector led the way, with an SMI of 61.1, but manufacturing was not far behind, at 58.1. All of the five sub-components that feed into the headline figure were also positive, notably the business confidence index, which measures how sales managers expect the economy to perform over the coming months, which came in at a punchy 75.6.

Wonderful news, of course. But then we also know that Africa is far from immune to the economic and financial chaos sweeping the planet. China’s imports from Africa have slumped more than 40 per cent from their peak, in value terms at least, as the prices of oil and other commodities have collapsed (see the second chart). That Africa’s imports from China have also started to fall suggests this weakness has fed through to consumer spending.

Many African economies are running down their foreign exchange reserves as they battle to stem, or at least slow, the falls in their currencies. This pressure is also forcing central banks to maintain tighter monetary policy than their domestic situations would merit.

Admittedly, the IMF hailed the “resilience” of sub-Saharan Africa when it produced its latest World Economic Outlook document in April. But even at that point, before the current rout really kicked in, the IMF foresaw economic growth slowing to 4.5 per cent this year, from 5 per cent in 2014. For major north African countries, such as Egypt and Algeria, projected growth was weaker still, at 4 per cent and 2.6 per cent respectively.

So how much store, if any, should one put on the SMI index? It would appear to have a decent pedigree, being produced by World Economics, whose parent company Information Sciences developed the European and Asian PMI indices, now owned by Markit.

However, the breadth of its African product is rather limited, based on activity in just four countries: South Africa, Nigeria, Egypt and Algeria, although this quartet does provide a reasonably broad mix.

Of these four countries, Nigeria currently has the highest SMI reading, 66.3, followed by Egypt (64.2), Algeria (58.9) and South Africa (53.6). Perhaps more tellingly, the index appears to be more than a little obscure. Even Jan Dehn, head of research at Ashmore Investment Management and an old African hand, says he has not heard of it.

Is its upbeat message credible? Here opinion differs. Joseph Rohm, an African equity portfolio manager at Investec Asset Management, suggests possibly so. “That it reflects the manufacturing and service sectors, it is to some degree plausible,” says Mr Rohm, who argues these arenas have remained robust, even as commodity exports have tumbled.
He points to Nigeria, an oil exporter that has enjoyed strong growth over the past decade. Even there, Mr Rohm says, “the growth has come in the manufacturing and service sectors,” with the oil industry pretty much “stagnating” over the past decade.

In countries such as Nigeria and Kenya that have rebased their gross domestic product calculations, it was service industries such as telecoms and media, as well as manufacturing that were found to be larger than expected. “In a world where emerging market growth is falling and commodity prices are under pressure, I believe there are some really healthy underpinnings. The cost of labour has become cheaper and cheaper relative to China, for example, [so] low-skilled assembly plants are being constructed,” says Mr Rohm, who points to investment by Chinese shoemakers in Ethiopia and Asian multinationals such as Honda, LG and Nissan in Nigeria.

“I don’t think what we are seeing in the emerging market world has really affected that to any degree,” he adds, pointing instead to beneficiaries from the wider market crash, such as the countries and companies in east Africa that are gaining from low oil prices. Moreover, despite data such as that above showing the slump in Africa’s trade with China, Mr Rohm believes intra-African trade is rising, albeit from a low base, amid efforts to remove barriers to such activity.

“Intra-African trade today is 5 per cent of GDP, in Europe it is 40 per cent,” he says. “In South Africa trade north of the border was insignificant going back 10 years. Now every single corporate has a strategy to increase its trade north of the border.”

Others are not convinced, however. “Our view is that growth in Africa is slowing pretty sharply,” says William Jackson, senior emerging market economist at Capital Economics. “I find it pretty surprising that some of the survey-based data is pointing to some improvement.”

Mr Jackson accepts that the export-led commodity sectors are bearing the brunt of the pain, but says in turn that this is eroding many governments’ foreign currency earnings, putting pressure on them to cut public spending.
He predicts that South African GDP data, due on Tuesday, will show growth has slowed to just 0.4 per cent annualised, quarter on quarter, while Nigerian data, which may also come on Tuesday, will show year-on-year growth falling from 3.9 to 3.5 per cent.

As for Egypt and Algeria, he believes the former’s economy has slowed due to restrictions on access to foreign currency that have hit manufacturers, while the latter has been damaged by its reliance on oil and gas exports.
Mr Dehn also points to the “major macroeconomic adjustments” being faced by exporters of oil and other hard commodities, leading him to expect a slowdown. But he does believe some countries, such as exporters of food and other agricultural produce, are less affected.

Yet he does hold out hope that the sell-off, in bond markets at least, may be overdone. “Lowly rated African bonds are the first to be cut by market makers due to regulatory rules. Hence, liquidity, and therefore prices, falls more rapidly than justified by fundamentals,” Mr Dehn says.


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