AFRICANGLOBE – It’s no secret that one of the major drivers of the strong growth that Africa has enjoyed over the last few years has been its connection to China, with its rapid economic growth and powerful thirst for African resources.
Here’s how the story went. As China boomed from the mid-1980s on, its manufacturing and construction sectors developed an almost-insatiable thirst for copper, oil, gas, iron ore, and many other minerals and resources that it does not have domestically. With the Middle-East and Latin America locked down as zones of US influence, China turned to resource-rich Africa as a source of the raw materials it needed.
As the years passed, China poured money into Africa, developing mines, ports, and roads in a bid to build relations and to secure access to needed resources. As the resources flowed eastward, many African countries saw economic growth accelerating, improving the standard of living for many.
Now, however, this happy symbiosis may have turned into a problem for Africa. According to Moody’s Investor Service’s Global Sovereign Outlook (subscription required), lower growth in China may mean that Africa’s close connection to the Middle Kingdom could pose a downside risk to the continent now that economic growth in China is slowing.
“For Africa, downside 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,” says Matt Robinson, Vice President and Senior Credit Officer at Moody’s. “The importance of China for Africa as an export destination has risen to be almost on par with traditional European trading partners, reflecting greater trade integration and a near-doubling in Africa’s share of global trade over the past decade.”
According to a press release, Moody’s expects Chinese growth, one of the drivers of global GDP, to be between 6.5% and 7.5% in 2015 – but a slower than expected expansion would further undermine global economic prospects. Africa could be negatively affected by a sharper-than-expected slowdown in China or further deterioration in commodity prices, resulting from commodity exporters’ significant trade linkages and China’s significant contribution to some African countries’ FDI.
According to Moody’s, “Resource exporters such as Democratic Republic of the Congo, Angola, Zambia, Republic of the Congo and South Africa are the most vulnerable, given their significant trade linkages to China. In addition, countries such as Zambia, Nigeria, Angola and South Africa heavily rely on foreign direct investment contributions from China, albeit these tend to be less volatile than trade or portfolio flows.”
“In contrast, countries with strong intra-regional trade linkages, such as Uganda, Senegal, Kenya and Namibia, or those with trade linkages with Europe, such as Botswana, Ghana and Mozambique, whose export shares to Europe amount to between 50% and 70%, are less directly vulnerable to China-related risks.”
This report from Moody’s underscores the issue of Africa’s continued reliance on commodity exports for its growth. The failure of African countries to develop regional trade and strong domestic markets means that whenever key trading partners – it used to be Europe, now it’s Europe and China – hit a snag, the whole continent feels the pinch.
By: Felicity Duncan