EULER HERMES

Reap what you sow


The Growth divergences that bind

Growth accelerated in the US but started to decelerate elsewhere in 2018. The G3 should exhibit lower growth in 2019. The two main risks are protectionism and debt defaults.

Global trade is expected to decelerate, yet to remain resilient,  to +3.6% in volume in 2019 and to +6.3% in value. Trade growth is continuing despite lowering growth, since it benefits from a substitution effect (trade rather than investment).

Protectionism:  between trade games and trade feud

Global insolvencies: +8% in 2018, +5% in 2019

Africa:The resource curse

AFRICA: trapped in low growth

Growth faded in 2018: South Africa, Angola and Algeria are the main deceptions.

A de-synchronization is visible when looking at the relationship between exchange rates and commodity prices. In our view, commodity prices should have to lower in order to close the gap, weighing on growth.

Africa: learn to live with external deficits

Africa structural financing needs means new problems: Diversification purposes attract foreign investors money but capital flow reversals may have a stronger impact than before.

From 2014, workers remittances no longer matched with the current account deficit. FDI failed to bridge the gap.

Africa : too sensational financing schemes

The ‘Frontier Markets’ story is alive and kicking. 2018 to be the strongest year despite EMs woes. Is this financing well-suited to address the long-term needs?

The Belt and Road Initiative drove USD 280bn to the region since 2013 (2nd destination behind Asia). However, bilateral loans eventually reached too high levels in some economies (e.g. Mozambique, Congo Rep., Angola)

Africa: China Obortunities 

Infrastructure agreements

• Kenya: Standard Gauge Railway connecting Monbasa to Nairobi (approx. USD3.8bn)
• Nigeria: Coastal railway to link Lagos with Calabar, passing through 10 states (USD12bn)
• Congo DRC: Infrastructure for Mines barter deal (USD6bn)  

Swap contracts

•Egypt:  currency swap agreement valued at USD2.7bn
•South Africa:  exchange of local currencies of up to R57bn, valued at USD4.75bn

Loans (from 2011 onwards)

•Angola: USD21.2bn
•Ethiopia: USD12.3bn

…deepening financial relations with largest (Nigeria, South Africa), growth leaders (Kenya, Ethiopia) and strategic countries (Angola)

AFRICA: Debt kept rising

Public debt increased, particularly in small oil exporters, but debt levels are not back to past highs, except in some specific cases

External debt is on the rise, driven by exchange rate depreciations and hard currency issuances

AFRICA: the adjustment dilemma, inflation or deflation

Economic woes were led by inflation in some regions (FX depreciation consequences). Now, the pain is deflation (lower income) for Central Africa CFA zone.

Countries with the poorest liquidity levels are vulnerable to capital flows reversals

Africa: Shape of the future, infrastructure 1/2

Basic infrastructure needs are strong, about USD 1000bn for power generation only in the 15 main African economies: assuming that about one third will be matched still make a USD 330bn opportunity.

Upgrading infrastructure level requires the adequate financing. Too high external deficits and/or too low FDI are endangering East African rapid capital stock accumulation path.

AFRICA: Shape of the future, infrastructure 2/2

Africa will be the land of urbanization: From those already there to those who will come, many opportunities to make in utilities

Governments will need to decrease their subsidies in order to finance investments needed, particularly in highly indebted countries. It should raise purchasing power issues for those with the lowest buffers.

AFRICA: shape of the future, trade

The African Continental Free Trade Area should make winners and losers. Higher net gains expected in manufacturing, food and service exporters.

New trade opportunities to develop if supported by more manageable payment terms: going from cash payments to 30 days DSOs should free up USD 33.5bn.

Africa: shape of the future, leapfrogging

Overcoming the weak government issue is needed in order to finance long-term needs. E-government techniques should be used to build the Leviathan.

Low access to banking services is inhibiting growth. Mobile banking is likely to be used, e.g. in Kenya, Ghana or Mauritius

AFRICA: Country topics

Morocco: significant growth but beware payment terms

In 2017, 4% growth was driven by agricultural output recovery. In 2018, 3% growth to be more driven by manufacturing activities.

Manufactured exports are taking the lead: Automotive and aeronautics are now key forces, along with chemicals and agrifood. Textile is weakening.

Payment terms remains high in Morocco. In 2017, it was stable at 83 days. Sectors with a corporate orientation have the longer DSOs.

Algeria: Try to live without high oil price

The growth impact of the lower oil price was felt with some delay.

The fiscal deficit helped to delay this growth impact. This deficit was financed through Central Bank financing, as well as public debt increase.

Corporates suffer from the evidence that DSOs widened a bit. Automotive, construction and capital goods among the deteriorations observed.

Tunisia: liquidity, inflation and debt worsen

Despite IMF support, no real improvement of the liquidity, and a trend depreciation of the Dinar

Inflation increased fast and monetary policy rates did not react as well

Public and external debt on the rise. The fiscal deficit did not really decrease (-6.1% of GDP in 2017) and dinar depreciation had an impact on the external debt ratio.

South AFRICA: headwinds to limit the recovery

Private consumption was the front-runner in 2017, driving a muted growth recovery. However, this recovery faded.

After a rough pause in 2017, the decline of the mining sector is back. A broad trend (gold, palladium…) difficult to reverse.

Attractiveness for foreign investment remains an issue. South Africa is 143rd in the Trading across borders item of the Doing Business ranking: SOEs and the labor market (strikes, high unemployment) are the main issues p>  

Africa: west coast

Côte d’Ivoire: Public debt at about 50% of GDP allowed to smooth the growth cycle. For how long? Growth should weaken to its lowest level in A. Ouattara’s presidency (difficult period for cocoa exporters)

Senegal: A simple that works. Growth has reached the 7% threshold in 2017 as a result of the 5-year Emerging Senegal Plan. Financing is the trickiest issue, since the country runs heavy current account deficits (-8% of GDP in 2018) and FDI inflows makes only 25% of the financing.

Burkina Faso: The (gold) mining boom has driven growth higher. However, social discontent is quite vibrant, including against the CFA. A resource curse in the making?

Africa: east coast

Kenya: The growth momentum recovered suddenly post-election and low inflation is also supportive. Growth should accelerate to +6.5% in 2018. Downside risks can be triggered by fiscal plans in order to reduce the fiscal deficit.

Tanzania: Growth is set to be quite stable around 7% per year. However, the quality of the financing deteriorates. Less FDI, means more willingness to use debt instead in order to finance the current account deficit.

Uganda: The growth momentum is favorable in the short-run. However, growth is increasingly financed through foreign currency external debt. This kind of financing is not be sustainable in the long-run.

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Euler Hermes est le leader mondial des solutions d’assurance-crédit et un spécialiste reconnu dans les domaines du recouvrement et de la caution. Avec plus de 100 années d’expérience, Euler Hermes offre une gamme complète de services pour la gestion du poste clients. Son réseau international de surveillance permet d’analyser la stabilité financière de PME et de grands groupes actifs dans des marchés représentant 92% du PIB global. Basée à Paris, la société est présente dans plus de 50 pays avec plus de 6.000 employés. Membre du groupe Allianz, Euler Hermes est coté à NYSE Euronext Paris (ELE.PA). Le groupe est noté AA- par Standard & Poor’s et Dagong. La société a enregistré un chiffre d’affaires consolidé de 2,5 milliards d’euros en 2013 et garantissait pour 789 milliards d’euros de transactions commerciales dans le monde fin 2013. Plus d’information: www.eulerhermes.com, LinkedIn ou Twitter @eulerhermes.

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