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Commodity slump hits South Africa, Nigeria

Aug 31, 2016

The global slump in commodity prices and weak demand from the continent’s main export partners have hit Nigeria, Africa’s second-largest oil producer, and South Africa, where mining produce accounts for about half of export earnings, weighing on both economies.


A shortage of foreign currency in Nigeria after the central bank held a currency peg for more than a year, curbed imports, further limiting output, while political uncertainty in South Africa increased in the last week.

“Both countries’ economies are on a declining path,” Manji Cheto, senior vice-president at Teneo Intelligence in London, said by phone. “That’s being led by politics in South Africa, and government policies that are reactive in Nigeria and might not work in the short term.”

Nigeria’s economy probably shrank 1.6 percent in the three months through June, according to the median of 15 economist estimates compiled by Bloomberg, following a 0.4 percent year-on-year contraction in the first quarter. Gross domestic product may decline by 1.8 percent for the year, according to the International Monetary Fund.

Nigeria delayed the approval of its record spending plans of 6.1 trillion naira ($19.4 billion) as President Muhammadu Buhari’s administration haggled with lawmakers over budgetary allocations. Militants have destroyed energy installations in the Niger River delta, cutting the nation’s oil output to an almost three-decade low, and further reducing earnings from an industry hit by a more than 50 percent drop in price since the middle of 2014. Nigeria relies on oil for two thirds of government revenue and 90 percent of foreign-currency earnings.

Commodity prices

“Both countries are adjusting to the decline in commodity prices,” said Sizwe Nxedlana, chief economist at Johannesburg-based First National Bank. “The nice thing about South Africa is that we are significantly more diversified as an economy than Nigeria.”

Nigerian central bank Governor Godwin Emefiele increased borrowing costs by 200 basis points last month to fight inflation that reached 16.5 percent in June and lure investors to help prop up the naira. The currency has lost more than a third of its value against the dollar since the central bank removed a currency peg on June 20.

While South Africa’s rand strengthened more than 10 percent against the dollar between the start of the year and early August, helping the economy to temporarily replace Nigeria as the continent’s largest in dollar-terms, the currency slumped more than 5 percent since reports a week ago that Finance Minister Pravin Gordhan may be arrested. Gordhan, 67, said on August 24 his attorneys received a letter from the Hawks, a special police unit, requesting that he present himself to their office. He did not comply with the request.

“It’s a foregone conclusion that Nigeria is in recession,” Cheto said. “Revenue growth has been positive in South Africa, but if the political situation deteriorates, it will show negatively in the economy.”

Diversified economy

While South Africa’s economy contracted the first quarter due to a slump in farming and mining output, manufacturing, which accounts for about 13 percent of GDP, expanded in the three months through June, retail sales grew and and business confidence improved. The trade account and budget balance recorded surpluses in June as exports increased and the government’s revenue collection rose. The nation’s statistics office will release economic growth data for the second quarter on September 6.

The diversification of South Africa’s economy and strong consumer spending could help it improve next year, according to Kevin Lings, chief economist at Stanlib Asset Management.

“It’s going to be tougher for Nigeria to effect the recovery than for South Africa,” Lings said. “It’s going to have to settle down the extreme movements in the currency and encourage the private sector more broadly.”


* With assistance from Simbarashe Gumbo


- Bloomberg

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