Update Country Report Maldives 13 Jul 2020

• Africa will experience a nearly complete synchronised downturn in 2020 driven by multiple headwinds, many of which are linked to policies imposed to contain the coronavirus (Covid-19) pandemic.
• A quick return to growth is in the offing as governments in Africa and around the world ease restrictions, reopen their economies and implement supportive economic policy adjustments.
• The recovery across Africa in 2021 will be tempered by the lingering effects of the coronavirus on travel, trade and investment and by stretched national finances in all parts of the continent.

So far, Africa appears to have escaped the worst of the coronavirus pandemic that has spread rapidly from Asia into the Middle East, Europe and the Americas during the first half of 2020. The public health impact in Africa has been relatively low compared with other major regions, although there remains great uncertainty about the scale and trajectory of the outbreak on the continent and concerns that the transmission of the virus could be accelerating in some countries and that the worst is yet to come. What is much less uncertain, and expected to be severe, is the economic impact of coronavirus-containment policies implemented in Africa and elsewhere. The region looks set to suffer its largest ever recession in 2020, but a quick return to growth is in the offing. The rebound will be modest across the board, and most countries will emerge from the crisis with heavy baggage in the form of large twin deficits, weak currencies and worryingly large stocks of debt.

Synchronised downturn

All but a few African countries will see their economy contract in 2020. The nearly complete synchronised downturn of 2020 will be driven by multiple headwinds such as vastly reduced international travel, trade and investment flows, low energy and non-energy commodity prices, disrupted global value chains and weak demand in major export markets. In addition to this, African states are confronted by the imposition of restrictions on domestic business activity, new barriers to regionalised crossborder travel and trade and adverse environmental effects, such as large swarms of desert locusts that have decimated crops in the Horn of Africa and the wider East Africa region. These factors will weigh heavily on African economies throughout 2020 and produce the largest region-wide recession on record.

The downturn will be felt across all sub-regions but most acutely among the region's major energy and industrial commodity traders of South Africa, Mozambique, Angola and Zambia in Southern Africa, Algeria, Sudan and Morocco in North Africa, Nigeria and Ghana in West Africa and the Republic of the Congo in central Africa.

The economies of Egypt and Tanzania will slow, owing to subdued tourism sectors, disrupted global value chains, weak demand from major trading partners and soft foreign investment flows, but could escape full-year recessions in 2020. Relatively light restrictions on business activity, ongoing large public infrastructure projects and some fast-growing sectors such as telecommunications and new energy investment will continue to support economic growth.

African rebound

A quick return to growth is in the offing as governments in Africa and around the world ease restrictions, reopen their economies and implement supportive economic policy adjustments. Assuming that any acceleration of the coronavirus outbreak is contained or the so-called second wave is avoided, then Africa could quickly rebound, with all but a few African economies posting a return to growth in 2021.

Economies in North Africa could record among the largest rebounds in the region, although this is more to do with the depth of the recession in 2020 rather than the heights of recovery in 2021. Algeria, Sudan and Morocco are expected to grow by 1.5-2.0% in 2021, and Egypt will maintain a low level growth, of just over 1%. The return of goods and services export trade will support a return to growth, driven largely by the slow but steady recovery of demand in Europe. Still-low energy sector commodity prices and the threat posed by civil unrest will dampen and threaten the short-term outlook.

Southern Africa will be the other sub-region hit hardest by the coronavirus crisis, and the return to growth in 2021 could prove modest at best and probably disappoint in South Africa and Mozambique. South Africa will be burdened by tight credit markets and low levels of private investment, high unemployment and labour militancy, and the probable re-emergence of electricity constraints among other factors. Mozambique will benefit from an increase in mining output from currently open and some mothballed sites, while projects advance in the country's nascent energy sector. Angola will remain mired in recession as its energy-dependent economy struggles to regain momentum amid stubbornly low oil prices, falling oil production and weak inflows of foreign investment. Politicians in Southern Africa will face a tough year in 2021 as leaders grapple with weak recoveries combined with the high demand for socioeconomic reforms and better living standards.

East Africa will once again post among the fastest growth rates in Africa during 2021, although these will be well short of pre-coronavirus levels and range-bound between 2%-4% in Uganda, Tanzania, Ethiopia and Kenya. Uganda could benefit from resurgent domestic demand and infrastructure investment in the transport and energy sectors, which will be reflected as the key drivers of growth in Tanzania. Ethiopia's growing network of industrial parks will support increased output from light manufacturing ventures connected to global value chains, especially those targeting Europe and Asia. Furthermore, the ongoing reform process should continue to attract new foreign investment into strategic growth sectors. Kenya will probably lag behind other countries in the region as fiscal constraints, unemployment levels and weak confidence sap momentum from the rebound.

West Africa will return to growth amid stronger export trade and despite weak domestic demand and stretched national finances. Senegal is a new frontier energy market, and postponed developments in 2020 could gain traction in 2021, while agricultural commodity trade could benefit from improved supply and demand conditions. Nigeria will return to growth but will be constrained by low international energy prices, exchange-rate volatility and high inflation that undermine confidence and spending among many households, businesses and investors. Government debt-servicing costs will prove to be a major drag on public finances. Côte d'Ivoire and Ghana could benefit from improved export trade flows and international prices for agricultural commodities in 2021, although the overall recovery will be dampened by stretched national finances and weak domestic demand.

Central Africa will return to leveraging its natural resource potential as stalled investment comes through. New energy sector production and delayed infrastructure projects will support a return to growth in Cameroon. Gabon and the Republic of the Congo will see their recoveries stifled by still-bearish energy markets, although both countries will pull out of deep recessions in 2020. The Democratic Republic of the Congo's crucial mining sector could ramp up production at existing mines and new investments as demand conditions improve, while business trading conditions in major cities return to a sense of normality.

Returning with extra baggage

The recovery across Africa in 2021 will be tempered by the lingering effects of the coronavirus on international travel, trade and investment flows, still-subdued commodity prices and volatility in financial markets, where lenders could become much more selective and more costly to engage. Africa will emerge from the crisis of 2020 but with large fiscal and current-account deficits, as well as bloated debt-servicing costs. Almost every major economy in Africa will have twin deficits, and in some cases these will contribute to major liquidity and even potential solvency issues in some countries, most notably Angola, Mozambique, Sudan and Zambia.

Overcoming the debt hurdle

African countries will continue to push the boundaries of their capacity to borrow from international capital markets, although in the current climate this is linked more to necessity than desire. The stock of total external debt accrued across Africa will surpass US$900bn by the end of 2020 and could reach almost US$1trn by the end of 2021. Total foreign debt service payments made up of principal repayments and interest payments could reach US$100bn in 2021 and present a major hurdle for some countries in the years ahead.

External debt-servicing burdens have escalated as countries contend with the economic fallout from the coronavirus pandemic and dedicate extra financial resources to propping their up economies. Bloated twin deficits need financing, while weak currencies will add to external debt-servicing costs at a time when debt rollover is less guaranteed and more costly than before. Relief in the form of debt write-offs and a suspension of servicing costs are on offer for most African states from the IMF, multilateral development banks and G20 creditors. However, many countries have been reluctant to take up the offer amid concerns that this could affect their future creditworthiness.

Debt-servicing hurdles are high and even higher when considering total (domestic and external) outstanding debt. For instance, Nigeria faces the tricky situation of relatively low but rising external debt but elevated total debt. The stock of external debt will be about 15% of GDP in 2021, and related servicing will cost less than 10% of earnings from exports, income payments or transfers on its current account. Furthermore, Nigeria's twin deficits are relatively small compared with the ratio to GDP of most other African countries. However, Nigeria has a much higher domestic debt burden, which means that total public-sector debt repayments absorb about two-thirds of federal government revenue. The Nigerian government could seek to settle its debt by printing more money but is reluctant to do so, given the implications for even higher inflation, while debt write-offs are an unsavoury option as most creditors are banks, pension funds and other institutions in Nigeria. This is a tricky situation indeed, especially given the subdued outlook for global energy markets over the next 12 to 18 months. Similarly, South Africa has high levels of debt held by the government, state-owned enterprises and corporates and nervous investors, as well as a weak currency and rising borrowing costs.

Steady as she goes

Africa could well lose several years' worth of economic and financial development gains in 2020 as almost all economies contract, currencies weaken, and national wealth shrinks. The continent could quickly return to growth in 2021 and beyond, driven largely by relaxed restrictions and the reopening of businesses, together with supportive economic policy. The recovery will help to ease the immediate pain, but the loss of wealth will take several years to fully recover. Furthermore, governments will face difficult policy decisions in the years ahead as large economic imbalances, stretched national finances and high unemployment levels weigh heavily on growth prospects for most countries.