Africa’s recovery likely to be faster than expected

Africa is likely to pull out of the global economic recession faster than expected, owing to a steady resurgence in commodity prices.

With a majority of African countries relying on mining and agri-based commodities for foreign exchange earnings, competitive prices in the global trade arena stand to benefit fragile economies facing a decline in export receipts.

According to Mr Tony De Castro, the chief executive of investment banking group African Alliance, a recovery of commodity prices is in the offing and augurs well for Africa’s economies.

“Commodity prices have started to rise again and will continue doing so. Maybe not the record highs witnessed last year, but the levels will be good,” he said.

In the last one year prices for most commodities have fallen 40-50 per cent from their midyear peaks back in 2008.

The global economic slump has cast a pall on most markets and, while net cash income is projected at high levels relative to historical averages, economists say there remains much uncertainty. But this is gradually changing.

Coffee for instance, which is a key export earner for Kenya, is enjoying attractive prices in the global markets.

At the local auction, Arabica coffee futures closed at an eight-month high on Tuesday, as fund buying returned to the market, and investors and day traders were forced to cover their short positions.

Tea which is the country’s second biggest foreign exchange earner after horticulture is also gaining traction as global demand rises. The prospects for Horticulture remain bright since it is unlikely that the demand for vegetable foods in target markets such as the European Union will fall.

But even as commodity prices rise, African economies are still expected to feel the heat of the global economic downturn. Economists say Africa’s growth is expected to slow down to 2.8 per cent in 2009. Down from 5.7 per cent in 2008 and 6.1 per cent in 2007.

From an overall current account surplus position of 3.5 per cent of GDP in 2008, the continent will face a deficit of 3.8 per cent of GDP in 2009.

The vulnerability is becoming more apparent as private capital inflows into the region contract, resulting in increased foreign exchange liquidity drought.

Even as commodity prices show signs of improving, export volumes in individual economies are coming under pressure as constricting trade finance lines become a major concern for policy makers in African countries.

A weakness in some commodity prices also bodes well for a number of African economies — such as Kenya- which has managed to diversify foreign exchange revenue lines but is still bogged down by a huge import bill.

Economists at Standard Chartered Bank have posed the argument that while much analysis has focused on the impact of weaker commodity prices on African exports, the degree of causation may be overdone.

“As a region, Africa is diverse. Many of its key markets are oil importers and almost all import food. African countries stand to benefit from commodity price weakness” argues Razia Khan, Standard Chartered Bank’s regional head of research for Africa.

Ms Khan surmises that while commodities have been a contributing factor to the continent’s recent growth, the commodity boom that overheated last year was not the most important factor.

The fact that the continent’s resource rich and non-resource rich countries all recorded growth in the same period points to the fact that there were other drivers to the growth in African economies.

Even then, one fact remains certain, that while commodities are unlikely to regain frothy peaks recorded in the first half of this year, the normal recovery pattern makes it quite conceivable they will regain the relatively high levels reported in 2006 and 2007 — crude oil prices of $60-100 per barrel — in the next four years.

As the world turns towards domestic demand in both China and India — the world’s two most populous countries — a rise in commodity prices is expected as the two countries rush to satiate the appetites of their local industries.