Slowdown in China economy could hurt Africa - Moody’s

A slowdown in China’s economy in 2015 could negatively affect sub-Saharan Africa, global rating agency Moody’s has said.

Moody’s expects Chinese growth, one of the drivers of global GDP, to be between 6.5 and 7.5 per cent in 2015. China, which accounts for 13 per cent of the world’s GDP, has recorded a deceleration in growth.

The global rating agency said the deterioration in commodity prices in China, and the country’s significant contribution to some African countries’ foreign direct investment could hurt economies that are dependent on the Asian giant.

Many countries on the continent have “looked East” for cheap loans to power infrastructure projects.

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“For sub-Saharan Africa, risks emerge from its links to China’s economy, with sovereigns demonstrating strong regional trade links facing lower risk than those that rely on commodity exports,” said Matt Robinson, vice president and senior credit officer at Moody’s.

In its annual Global Sovereign Outlook, the agency said Kenya, Uganda, Mozambique, Botswana, Ghana, Namibia and Senegal are less directly vulnerable to the China economic meltdown, mostly because of their trade links with Europe. These countries’ exports to Europe are between 50 and 70 per cent.

Mr Robinson said the importance of China to sub-Saharan Africa as an export destination has risen and is almost at par with traditional European trading partners. This has resulted in greater trade integration and a near-doubling in sub-Saharan Africa’s share of global trade over the past decade.

“Resource exporters such as Democratic Republic of Congo, Angola, Zambia, Congo and South Africa are the most vulnerable,” said Mr Robinson.

For decades, China has been contributing to Africa’s economic growth, both in trade and infrastructure. Throughout the continent, China is involved in various multibillion-dollar developments in roads, railways, ports, and airports, replacing Western donors who have shied away from funding the projects.

In May, while addressing the African Union in Addis Ababa, Chinese Premier Li Keqiang announced that his country would increase its loans to African countries by $10 billion, bringing the total to $30 billion. China also said that it would raise the China-Africa development fund by $2 billion, to $5 billion.

China is now Africa’s largest trading partner, with China-Africa trade reaching $166 billion in 2011, $198 billion in 2012 and $210 billion in 2013.

READ: China-Africa trade surpassed $200 billion in 2013

In 2013, Chinese direct investment in Africa was $3.5 billion, with a year-on-year growth rate of 20.3 per cent. China’s cumulative direct investment in Africa is expected to hit $100 billion by 2020.

Odhiambo Ramogi, managing consultant at Elim Consulting, said African countries should diversify their economies as much as possible away from supplying unprocessed natural resources to China.

“From the Moody’s outlook report, we need to make our economies less dependent on the vagaries of the Chinese economy. Despite China insulating most African economies from the full impact of the 2008 financial crisis, a balance is required,” Mr Ramogi said.

China is the largest foreign direct investment source for Kenya, and the second largest trading partner after Uganda.

According to China’s Customs authorities, bilateral trade volume was $2.4 billion in 2011 and $2.8 billion in 2012. Last year, trade volumes rose to $3.27 billion, with a year-on-year growth rate of 15 per cent.

Last year, Chinese direct investment in Kenya was $537 million, with a year-on-year growth rate of 14 per cent. The investment covers manufacturing, energy, construction, real estate development, tourism and trade.

In Uganda, bilateral trade with China reached $538 million in 2013, a 35 per cent increase from 2012, of which China’s exports were $546.01 million and imports $29.49 million.

In 2013, Tanzania’s trading volume with China reached $3.7 billion; Chinese investment in the country was $2.5 billion.

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Last year, at an EY discussion on Africa’s infrastructure deficit and opportunities, the chief executive of South Africa’s Public Investment Corporation, Elias Masilela, said Africa was becoming too dependent on China, and that this would have serious consequences.

“We have seen in certain countries where the Chinese come in and dictate terms and conditions of their operations and funding. This is a huge risk that Africa countries are undertaking. African countries need to bring together their resources to depend on their own capital and cushion themselves from shocks emanating from economic giants,” Mr Masilela said.

The African Development Bank said China’s annual foreign aid to Africa is about $14 billion, and loans to the continent are $30 billion. The loans are mainly channelled through finances provided by China’s Export-Import Bank.

Standard Chartered regional research head for Africa Razia Khan said the continent’s trade with China was not expanding fast enough to benefit African countries.

“Given the volume of trade between Africa and China, it is disappointing that we don’t see larger gains for Africa. Since 2009, Chinese imports from Africa have been increasing, and yet Africa has failed to capitalise on the growth boom across its borders. It is symptomatic of a deeper lack of competitiveness and external focus in its economy,” she said.

Economics lecturer Francis Kadwera said despite the positive effects that China has brought through competition and a new interest in the region, the long term implications of the partnership could hurt African economies.