Sub-Saharan African businesses are optimistic about 2021

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PURCHASING Managers Index (PMI) reports released by IHS Markit in the first week of December shows that sub-Saharan African companies are optimistic about the improvement in business activity during 2021.

PwC expects the sub-Saharan African economy to return to growth in 2021 as the pandemic abates and global trade improves as lockdowns ease. Lullu Krugel, chief economist for PwC Strategy& Africa, and Christie Viljoen, PwC Strategy& economist, unpack why.

The regional economy is projected to grow by more than 3 percent following the 2020 recession.

The PMI reports indicate that, after African private sector companies experienced significant declines in their activity during the second quarter of 2020, these negative trends slowed during the third quarter.

By November, many sub-Saharan African countries were again seeing growth in their respective private sector economies. The November PMI readings were in many cases slightly softer than the highs seen in October – largely as a result of reduced exports to Europe, which is experiencing a second wave of Covid-19 infections.

Nonetheless, positive growth continued as the calendar year neared its end, and sub-Saharan African business are expressing optimism about 2021.

West Africa benefitting from improved operating environments

The IMF said in October that it expects the ECOWAS region to see real GDP growth of 3 percent in 2021 following a recession of 2.5 percent this year. IHS Markit surveys indicate that around three-quarters of Ghanaian firms forecast an increase in output during 2021 based on expectations of the pandemic dissipating by this time next year.

In Nigeria, private sector companies also see a rise in output over the next 12 months.

Uyi Akpata, regional senior partner for PwC West Africa, expects business conditions in the region to improve on the back of a variety of factors.

‘The West Africa region is seeing improving business environments, improved governance – for example, another peaceful election in Ghana – and increasing economic integration, particularly within Francophone Africa. Nigeria, representing more than half of ECOWAS population, has seen a number of key structural changes that will bear fruit in 2021, including eliminating gas and electricity subsidies, further movement to a unified exchange rate, much more emphasis on sub-national development, improved tax collection through the use of technology, and a real commitment to diversification.’

East Africa set for quicker bounce back

The IMF expects the East Africa Community (EAC) economy to grow by 4.5 percent in 2021 compared to an expansion of only 1 percent this year – while the 2020 number was positive, it was significantly lower than an average of 6.1 percent per annum seen over the preceding four years.

Most Kenyan firms responding to IHS Markit questionnaires are neutral on the outlook for 2021 while one in four predicts their activity to increase.

While worries over a rise in Covid-19 cases and new curfew measures resulted in weaker growth prospects, many businesses in Kenya still reported plans for expansion next year. Ugandan firms are confident that business activity would increase during 2021 on expectations that new order volumes would continue to improve.

Peter Ngahu, regional senior partner for PwC East Africa, expects business conditions in the region to improve over the coming quarters due to the strong economic ties between East African economies. ‘Non-resource intensive African countries – in East Africa, these include Burundi, Kenya, Rwanda and Uganda – are expected to see the quickest recovery from the 2020 economic shock.

‘The EAC includes some of the fastest growing economies on the continent and has benefited greatly from regional economic integration. This has made East African economies more reliant on trade with each other and less dependent on trade with the rest of the world.’

Southern Africa looking for job-rich growth

The IMF expects the Southern African Development Community (SADC) economy to expand by 3.3 percent in 2021 following a contraction of 5.5 percent in the preceding year. IHS Markit data shows that companies in Mozambique expect higher output next year linked to new investments and expectations of an end to the pandemic.

Zambian enterprises also hope that business conditions and activity will improve over the coming year as the pandemic passes. South African businesses are basing expectations of an economic recovery in 2021 on the availability of a Covid-19 vaccine.

Shirley Machaba, regional senior partner for PwC Southern Africa, expects business conditions in the region to improve in 2021 and for companies to create new jobs. “Southern African businesses are currently under pressure from economic recessions in 2020 but have the potential to regain some lost ground in 2021.

‘We have seen companies in the region – both big and small – react with innovative and agile strategies to weather the challenges of 2020. With a return to positive economic growth forecast for 2021, private sector companies have the opportunity to build a “new normal” for their production and employment.

‘Job-rich growth is an important part of the post-2020 recovery considering that the southern Africa region has amongst the highest unemployment rates in the world.’

AfCFTA ‘becomes the driver of Africa’s recovery’

Some African businesses are also placing their 2021 recovery hopes on the launch of the African Continental Free Trade Area (AfCFTA).

The continental scheme is set to be implemented in January 2021 after Covid-19 delayed the launch from an originally planned July 2020.

AfCFTA Secretary General Wamkele Mene recently commented: ‘The only [post-Covid-19] economic recovery tool that we have collectively as Africans is implementation of this agreement, so that trade becomes the driver of Africa’s recovery.’

As PwC recently noted, the free trade area will be the largest in the world in terms of participating countries since the establishment of the World Trade Organisation. To date, some 30 African countries have met domestic conditions for AfCFTA ratification, with 28 of these depositing their necessary ratification instruments.

PwC believes that, through the AfCFTA, Africa has an opportunity to reconfigure its supply chains, to reduce its dependence on external partners, and to speed up the establishment of regional value chains that will boost intra-African trade.

By doing this, African economies can improve their GDP by domestic value addition on processed imports within the region that can be exported within or outside the continent. Maximising the potential of the AfCFTA will be an effective shock absorber if the global economy remains depressed by the pandemic and its uncertainty. It will also make Africa an attractive proposition when the global economy turns around.

In a report combining the November PMI results from 45 countries, IHS Markit commented that a rebound in demand has led to a more positive outlook for global business activity over the coming year.

PwC expects global GDP to expand by at 4.7 percent in 2021 following the Covid-19 recession in 2020. The G7 developed countries (Canada, France, Germany, Italy, Japan, the UK and the US) are forecast to grow by a combined 3.7 percent while the E7 group of developing economies (China, India, Brazil, Russia, Indonesia, Mexico, and Turkey) is projected to expand by 6.8 percent.

The world continues to grapple with the most serious global health emergency for a generation. And with lockdown, social distancing and restrictions on the movement of goods and people, has come severe economic upheaval. PwC has also warned that the trajectory and duration of economic recovery in 2021 are still uncertain and are likely to vary by market and sector.

Much hinges on both a medical solution to the virus and companies’ ability to adapt to the new environment.

Further drivers of demand and growth include people’s comfort with, and ability to, travel. The pandemic also looks set to accelerate longer term shifts in the global economy, including wealth asymmetry, technological disruption, demographic pressure, political polarisation, and declining levels of trust.

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