Monthly Archives: December 2015

Power shortages may yet weigh on African growth in 2016

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 29 Dec 2015. See link viz. 

Sub-Saharan Africa (SSA) is expected to grow by 4% in 2016, based on International Monetary Fund (IMF) projections in October 2015. Yet again, the sub-continent would be pulling below its weight. And a downward revision is still likely. A persistent power deficit remains a significant constraint. Some of it is due to poor planning. Inadequate investment – in some cases due to misplaced priorities as opposed to a paucity of funds – is also why. The influence of its development partners who favour supposedly environment-friendly power sources may also be a factor. Some of the incremental power shortages in 2015 were weather-related; with much of the sub-continent’s hydropower generation capacity unraveling in the year. Drought-hit countries in southern Africa – Zambia, Namibia, and Botswana – had to resort to expensive electricity imports to bridge the gap. In South Africa, a belated maintenance programme for its ageing coal-fired power plants forced power rationing (“load-shedding”) that likely cut economic growth by at least 1 percent in 2015. For an economy already beset by persistent labour unrest, high interest rates, weak demand from China – its largest trading partner – and negative political events, it did not need this additional headwind. Similarly, Nigeria – which constitutes one-third of SSA’s Gross Domestic Product (GDP) and is Africa’s largest economy – needs to generate 10-13GW of power by the end of the first half of 2016 to meet current needs and incremental demand from new development initiatives. Even the most optimistic scenarios do not see it having that level of generation capacity by end-2016. It currently has less than 4GW functional power generation capacity. Gas and transmission infrastructure are major constraints.

During the course of 2015, about a quarter of South Africa’s 45GW power generation capacity was offline due to compulsory maintenance and repairs. Almost half of the outages were unplanned, a symptom of its ageing power plants. While the state power utility provider has indicated there would be no power cuts until April 2016, load shedding is expected to continue into the first quarter of 2017. Two new coal-fired power stations are expected to add almost 10GW to the country’s grid by 2018. Long-term plans include a 9.6GW nuclear power plant and at least 20GW to be sourced from renewable sources. The country’s coal-dominated energy mix may remain for another 20 years, however. In the Nigerian case, authorities envisage emergency repairs and construction of identified critical gas infrastructure should enable the addition of 2GW generation capacity by the first quarter of 2017. Still, this would be below what the country needs. Additional capacity is planned. With Nigeria and South Africa accounting for more than half of SSA’s US$ 1.7 trillion economy, at least 0.5 percent would again likely be shaved off growth in 2016 on the back of power shortages alone.

An increasingly dogged market-driven approach by African authorities is good reason to be optimistic. South Africa, Ghana, Zambia, and Nigeria increased electricity tariffs in 2015. Upward revisions of hitherto subsidized tariff regimes have been forced by burgeoning revenue gaps, as commodity prices remain low. In Nigeria, workers’ unions are already resisting the move. With the opportunity costs so high, consumers might actually not mind the higher tariffs if stable and reliable power supply can be guaranteed. The alternative – use of standby generators – is prohibitively expensive and inconvenient. In some African countries, tariff hikes have been due to expensive emergency electricity imports to meet supply shortfalls. For instance, emergency power supply measures are expected to cost Zambian authorities at least US$ 1 billion (4% of GDP) in 2016-17. Low water levels at its Kariba dam – which produces almost half of its 2.3GW generation capacity – fell to 21% of capacity in November 2015. Consequently, its power deficit widened to above 40% as the shortfall increased to 1GW from 700MW previously. Authorities of drought-hit Namibia have also sought short-term solutions, as its 1GW Kudu gas-fired power plant is not expected to come on stream before 2019. In the Ghanaian case, ship-mounted power plants berthed off its shores are expected to bridge a current supply deficit of almost 500MW. An additional 1.25GW capacity is also planned for 2016 by Ghanaian authorities.

As the world becomes more environmentally sensitive, there is pressure on African authorities to focus more on renewable power sources as they seek to close their countries’ power supply gaps. Nuclear power has not enjoyed similar endorsements. Safety concerns and skill gaps are popular arguments, weak in one’s view. China plans to build – or has under construction – more than eighty nuclear power reactors. This would be in addition to about twenty it already has operational. At 75%, France has the highest nuclear power share of total power production in the world. French nuclear power stations source uranium from Niger, a country that imports electricity from neighbouring and underpowered Nigeria. There is a heated debate ongoing in South Africa around a circa 10GW nuclear power plant planned by its authorities. Apart from the potential fiscal consequences if not well and transparently planned, a major part of the debate is safety and environment-related. A curious angle in the debate also revolves around technological know-how. This is needless. South Africa already sources 4% of its power needs from nuclear sources, based on International Energy Agency (IEA) data. In any case, automation has reduced the amount of skilled manpower needed for day-to-day operations of new power plants, regardless of the source. With nuclear power plants now so much safer, an accident would practically require an Act of God. And in that case, no amount of caution would matter. With the costs of a longstanding power deficit already so high, it would be unwise for African authorities not to consider all options.

Also published on my company’s website on 30 Dec 2015. See link viz. 

East African countries seem to have cracked the Chinese code

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 22 Dec 2015. See link viz.  

Africa can still industrialize. Its relationship with China, if well harnessed, provides it with an opportunity to do so. Labour-intensive manufacturing jobs are leaving China as wages rise. African countries are targeting these. “Industry partnering and industrial capacity cooperation”, a key milestone of the Forum of China-Africa Cooperation (FOCAC) 2016-18 action plan of “The Johannesburg Declaration” is aimed at ensuring the smooth transition of these jobs to the continent. But only a few seem to have the necessary conditions to accommodate them. East African countries – Ethiopia and Kenya in particular – seem better prepared. They have been making significant efforts at ramping up their power generation capacity and electricity grids. The US$ 24 billion China-backed Lamu Port Southern Sudan-Ethiopia Transport (LAPSSET) corridor project being built in Kenya is also gathering pace. Ethiopia, which does not have a sovereign route to the sea, has also partnered rather well with neighbouring Djibouti to overcome this constraint. With Chinese backing, Kenya and Ethiopia have also been building roads and railway lines linking ports. Although China has declared its intention to help other African countries in this regard, these two East African countries seem to have had a good head start. A key commonality they also have is that they are non-resource intensive economies. Their increasing success on the back of China’s help is a counter-argument to well-voiced views of an exploitative intent. That said, China’s interest in Africa is strategic as well as economic. Its continued support for African countries in spite of its economic slowdown buttress this view.

China’s industrial leap came on the back of special economic zones (SEZs). Its “open-door policy” – which started in 1978 – saw it create four (4) SEZs spread across two major provinces by October 1980. More than thirty years later, China would have almost two hundred economic and technological development zones (ETDZs) or industrial parks. Varied countries that have since tried to copy this Chinese model have had mixed results. There is a consistency, however. African countries have performed poorly. Power deficits, corruption and cumbersome bureaucracies have been adduced for why. Within the sub-continent, however, East African countries seem to have done relatively better. Chinese-backed free trade zones can be found in a number of African countries. Prominent ones are the Eastern Industry Zone (EIZ) in Dukem, near Addis Ababa in Ethiopia and the Lekki Free Trade Zone (LFTZ) on the outskirts of Lagos, Nigeria. Although both were approved as “Overseas Economic and Trade Cooperation Zones” by the Chinese commerce and trade ministry in 2007, the former has developed faster it seems.

In November 2015, Ethiopia launched the second of its US$ 475 million Chinese-funded two-line 34km Addis Ababa light railway transport (LRT) system. Under a Build-Operate-Transfer (BOT) contract, construction began by the China Railway Engineering Corporation in December 2011. The current Chinese management is expected to transfer operations to an indigenous team in five years time. An LRT is also being built by the Chinese in Lagos, Nigeria. One of the planned seven lines of the Lagos Urban Rail Network (LURN) – the 27km “blue line” – is expected to be ready before the end of 2016. Construction work, which began in July 2010, is being done by the China Civil Engineering Construction Company (CCECC) under a design and build contract. The project has met with several delays. There is one key difference between the two examples. The former was predominantly Chinese-funded.

There are also interesting contrasts to be made between Kenya’s Mombasa-Nairobi Standard Gauge Railway (SGR) and Nigeria’s Lagos-Kano Railway projects. The China Import and Export (Exim) Bank-funded Mombasa-Nairobi SGR is expected to open commercially in 2017. China’s Exim bank also provided US$ 1 billion part funding for the estimated US$ 8 billion Lagos-Kano railway project. In August 2015, Nigeria’s current president revealed that a substantial part of the loan was diverted to other projects by the preceding administration. The project stalled consequently, albeit the Kaduna-Abuja section has been completed.

There is clearly one key characteristic of the relatively successful East African projects highlighted above. Chinese funding was provided directly to a Chinese company or consortium to build, operate and transfer the projects, thus reducing the risk of diversion or funding shortfalls. Comments by Nigerian officials ahead of the FOCAC summit in December 2015 suggest there was a desire to restructure the country’s infrastructure arrangements with China along these lines as well. In a show of confidence, Kenyan authorities actually secured an additional US$ 1.5 billion Chinese loan at the summit for an extension of the SGR from Nairobi to Naivasha, a rift valley town where industrial parks are planned. The 290MW Olkaria geothermal power plants are located in Naivasha. Other industrial parks are planned along the SGR route by Kenyan authorities. This strategic approach is admirable.

On a trip to China a few years ago, a Chinese man nodded repeatedly during a conversation and one erroneously thought he was showing agreement. It turned out our views couldn’t be more different. Although, the above examples do not qualify as a robust sample, it does seem Chinese-funded projects that are constructed and operated by Chinese companies are completed on target. It is not likely the Chinese would make this point all too clear in negotiations with their African counterparts. Labour on these projects is also largely Chinese, unfortunately. But that is common to almost all Chinese-sponsored projects on the continent. And even as Chinese authorities seek to change this practice, they are entrenched. Thus, progress would likely be slow. In the meantime, African authorities have to make the best of what is clearly not ideal. That pragmatism may be the reason why the East Africans have gained more from their relationship with China.

Also published on my company’s website accessible via the link viz. 

Domestic factors may trump US Fed rate hike risks for key African economies

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 15 Dec 2015. See link viz.   

After almost a decade of extraordinarily accommodative monetary policy, which started during and in the aftermath of the financial crisis in 2007, the US Federal Reserve (“Fed”) – the central bank of the United States – is set to start normalizing policy in December 2015. That is, raising its short-term benchmark rate to more normal levels from near zero percent since 2008. Up until late 2014, it pumped an unprecedented amount of money into the American economy over a period of six years to shock it out of a recession. This is popularly referred to as its “quantitative easing” or “QE” programme. As at the end of October 2014 when QE ended, the Fed had added as much as US$ 3.5 trillion of cheap money into its economy. A significant portion of these funds found its way into so-called Emerging Market (EM) countries where yields are relatively higher. African countries have been major beneficiaries. Eurobond issuances by some African countries were oversubscribed by as much as 16 times during this period, Zambia’s 2012 US$ 750 million issuance for instance. African countries have also sold more than US$ 8 billion of Eurobonds in each of the past two years. Hitherto lacklustre equity and fixed income markets also enjoyed frenzied interests from foreign investors. A bullish international commodities market also enabled the continent’s central banks to ensure stable exchange rates.

Since the Fed’s signaled in 2013 that it planned to start reducing the amount of bonds it buys to shore up the US economy, market participants have been gearing up for the “new normal”. The process dubbed “QE tapering” also coincided with a bearish turn in the global commodities markets as it became increasingly obvious that slowing demand in China was likely a permanent shift. Lower commodity prices have made it very difficult for key African central banks to manage their mostly US dollar-pegged exchange rates as their foreign exchange (FX) reserves dwindled. Some have adjusted better than others. Prudent ones devalued their currencies as their continued support proved futile. South Africa, which operates a free-floating exchange rate regime and relies on foreign capital flows to manage its current account deficit tightened monetary policy. The Nigerian central bank adopted FX restriction measures, albeit mostly to protect the Naira against negative market reaction to its own policies. In addition to hiking interest rates, the Kenyan central bank sought a cautionary US$ 687 million International Monetary Fund (IMF) facility and non-concessional foreign loans to beef up it FX reserves. In Uganda, the central bank is set to continue its current tightening cycle into 2016 as its currency continues to weaken and inflation remains above target.

However, recent and anticipated events in some African countries may matter more than the imminent Fed hike on 16 December. In the week ahead of the 15-16 December US Fed federal open market committee (FOMC) meeting and while still smarting from a credit ratings downgrade, South Africa’s president fired his highly regarded finance minister, Mr Nhlanhla Nene. The move was widely perceived as politically motivated and poorly received by market participants. Much more significantly, market participants couldn’t fathom the wisdom behind the appointment of an inexperienced replacement. The markets reacted sharply with the South African Rand plunging to record lows. South African bond and equity markets also reacted swiftly as it became shockingly clear to them the economy was about to take a significantly negative turn. Inflation is now set to rise even more in 2016 especially as drought-induced food price pressures accelerate even more. With electricity prices likely to increase as well, inflation expectations have been raised significantly. Thus, the Fed’s likely rate hike in December may actually now be of little concern to the South African Reserve Bank (SARB).

In Uganda, its 2016 presidential elections and El Nino effects are bigger factors. Ugandans go to the polls in February in what is reckoned to be its most competitive presidential elections yet. Foreign investors have taken precautions, packing their funds out of the country. Much more potentially damaging for the Ugandan economy, however, is the anticipated ramped-up discretionary spending by authorities ahead of the elections. In 2011, election-related spending saw Ugandan inflation rise to above 30%. In addition to reduced net foreign capital inflows, pressure on the Ugandan Shilling has been driven by the authorities’ ambitious infrastructure programme, which requires significant capital goods imports. Thus, the potential effects of the upcoming Fed hike may actually be marginal.

Irrespective of where one stands on the unorthodox policy stance of the Central Bank of Nigeria (CBN), one thing is almost certain. The expected December 2015 Fed rate hike will likely have minimal impact on its markets. This is because short-term foreign capital already left on the back of its own policies. That said, the ambitious spending programme planned for 2016 by its fiscal authorities suggest the CBN may need to ease current FX restrictions to restore investor confidence. With oil prices likely to remain low for longer, Nigeria would need foreign portfolio inflows to achieve its 2016 budget goals.

In any case, most market participants long took precautions ahead of a potential US Fed rate move that they have had at least 2 years to prepare for. As is usually the case with markets, however, some knee-jerk reaction should be expected. One’s view is that after the initial rate hike in December 2015, global market players would re-adjust their portfolios in favour of emerging and select African markets. Policy divergence between the US Fed and other key global central banks suggest there would still be ample cheap funds looking for alpha returns. Some moderation relative to the QE-induced hyper activity of recent years is nonetheless expected. This should not be surprising, however.

Also published on my company’s website accessible via the link viz.