Africa In 2009: Don’t Rely On China
As I discussed in yesterday’s post, the world has to get comfortable with the idea of a rapidly slowing Chinese economy and the potential risk of a concomitant, sharp decline in Chinese overseas investment. While China has splashed out around the globe, I would argue that no other region has benefited more from Chinese FDI than sub-Saharan Africa (SSA) over the past few years. The problem is that this has also created a high dependence on Chinese cash, and the withdrawal symptoms could prove very painful in light of global economic turmoil.
Indeed, data provided by the National Bureau of Statistics of China (NBS) showed that Chinese FDI to SSA came in at US$1.2bn in 2006 (up from US$0.3bn in 2005), which accounted for about 7.5% of total FDI inflows to the region. Yet I reckon that this percentage is likely to be significantly higher. As pointed out by the IMF, China’s official statistics are likely to understate actual levels of outbound FDI, as in many cases Chinese companies depend on informal arrangements to finance their investments abroad. Regarding the years 2007 and 2008, no concrete Chinese FDI data for Africa are available. Yet given China’s strong involvement in the region and its much-publicised thirst for African raw materials, I believe that China’s share of total SSA FDI could have significantly surpassed the 30% or 40% mark by the end of 2008.
With such a high dependence on Chinese foreign capital, a sudden slump could prove detrimental for many countries in SSA. It would be speculative to come up with concrete growth scenarios in the event of a sharp decline in Chinese capital flows. This is because the most recent FDI levels remain unknown, and for many countries the exact impact of foreign investment on growth is unclear. However, what I can say is the absence of Chinese capital would significantly worsen the growth prospects for several SSA countries. Given the already sharp decline in commodity prices and collapse in external demand, many SSA nations’ external accounts and public finances would like come under significantly higher pressure, potentially resulting in greater currency depreciation than expected. Moreover, several SSA economies could face a recession, and regional cross border investment would also be at risk of coming to a standstill.
Perhaps more importantly, with central governments weakened by slumping revenues, SSA countries could be exposed to a resurgence of militant activity. The DRC is a case in point: I would argue that the attack of the rebel National Congress for the Defence of the People (CNDP) in the Kivu provinces came at a time when the militants felt the authorities in Kinshasa were vulnerable. Although the DRC is an extreme example, other countries in SSA could face similar scenarios, especially at a time when slowing growth is likely to lead to job losses and increasing hardship. Remember, the food riots in H108 clearly demonstrated that many SSA governments are highly vulnerable to popular uprising and could experience significant instability. I should highlight that the possible shortfall in Chinese FDI or loans is unlikely to be the determining factor for collapsing growth, social unrest or potential coups. Thus, waning Chinese support could have a profound impact on SSA and exacerbate economic and political distress.