Commodity Slump Clouds Outlook for African Policy Makers

Sliding prices for the commodities that have underpinned Africa’s expansion for more than a decade are threatening to check economic progress in the world’s poorest continent.

African leaders including South Africa’s Jacob Zuma and Nigeria’s Goodluck Jonathan, policy makers and executives of companies such as Microsoft Corp. and Coca-Cola Co. are meeting in Cape Town at the World Economic Forum at a time when slowing global demand curbs a rally in commodities from gold to oil. Talks on ways to diversify African economies and increase investment will top the agenda at the two-day summit that begins tomorrow.

“We are entering a period of sustained uncertainty for commodities,” Claude Baissac, the founder of country-risk consultants Eunomix, said in a May 6 interview from Johannesburg. “Africa is extremely vulnerable. The commodities boom has helped underpin a broader expansion in retail, financial services and telecommunications. A sustained decline in prices could see growth stall across the board.”

The size of sub-Saharan Africa’s economy has more than tripled since 2000 to about $1.33 trillion last year, spurred by increased demand for its minerals and oil from Asia, according to accounting firm Ernst & Young. Growth is forecast to accelerate to 5.6 percent this year, the fastest pace of any region in the world after countries in “emerging Asia,” and reach 6.1 percent in 2014, the International Monetary Fund said on April 16.

Oil Slump

Gold fell 7.8 percent last month, including the biggest two-day drop in more than three decades, while prices of metals ranging from copper to platinum slid. Oil has declined 9.9 percent in London since Feb. 1, while the Standard & Poor’s GSCI Spot Index of 24 commodities is down 6.8 percent over the period.

The spot price of gold was at $1,453.58 an ounce as of 6:40 a.m. in London.

While natural resources accounted for an average 14 percent of sub-Saharan Africa’s gross domestic product between 2000 and 2011, according to the World Bank, economies in countries such as Nigeria, Zambia, Botswana and Angola are dominated by commodities. Oil accounts for about 80 percent of government revenue in Nigeria, while diamonds make up about 40 percent of Botswana’s income.

A sustained slump in gold prices threatens to shut down mines and curb investment in Tanzania, Africa’s fourth-largest producer of the metal, Ally Samaje, the country’s acting mineral commissioner, said on April 16. African Barrick Gold Plc, the biggest producer of the metal in Tanzania, operates four mines in the country, while AngloGold Ashanti Ltd. has one.

Mining Dependents

African mining should survive the metal price slump, provided governments resist adopting a short-term approach of extracting as much as they can from their minerals through taxes, discouraging investment, said Alan Bird, head of Bain Consulting’s global mining practice.

“You have to think long term,” he said in a phone interview from London yesterday. “You can’t just look at what you are getting from mining itself. There are about two or three separate studies that say for every person who is directly employed in mining, you are probably supporting 26 or 27 ancillary workers or dependents.”

Zimbabwe is considering imposing a resource rent tax, a draft of a new minerals policy obtained by Bloomberg this week shows.

Global FDI

Companies and investors are increasingly looking for opportunities in Africa beyond its mineral endowment.

Wal-Mart Stores Inc., the world’s largest retailer, and Carlyle Group LP, the second-largest private-equity firm, are among those who have bought stakes in businesses with potential to tap rising wealth and consumer spending among Africa’s one billion people.

“The opportunities for investment are huge,” South African President Jacob Zuma said in an April 24 interview in Cape Town. “We are opening up massive infrastructure programs that need investment. We are integrating the economic regions and creating a bigger kind of market to operate in.”

South Africa is spending about 800 billion rand on infrastructure including power plants, rail and ports.

Africa is attracting a greater share of global foreign direct investment, amounting to 5.6 percent last year from 3.2 percent in 2007, Ernst & Young said in its 2013 Africa Attractiveness Survey, released on May 6. Companies initiated 764 new projects on the continent last year, down from 867 in 2011, a decline in line with global trends, it said.

“Sub-Saharan Africa’s resilience and growth are not simply a matter of rising commodity exports,” David Lipton, the IMF’s first deputy managing director, said in a May 6 speech in Maputo, Mozambique. “With rising educational standards, young populations increasingly are taking advantage of the new economic opportunities.”

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