Harare – Investment and capital inflows into sub-Saharan Africa will likely continue to slow down as European banks start to look to Asia for lending activities, according to the World Bank.
The global lender cut the region’s growth outlook down to 2.5%, highlighting that headwinds in Nigeria and South Africa will have a compounding effect.
The slowdown in investment inflows will be compounded further by low commodity prices, political unrest and worsening economic conditions from the drought that has hammered the region in the past year. Currency depreciation in key markets such as SA and Nigeria is also seen as muzzling growth.
In South Africa, which is now the continent’s third-largest economy, “low business confidence will slow investment growth, while high unemployment and tight monetary policy will limit” consumption and productivity.
According to the World Bank, “activity is expected to remain weak in the region’s three largest economies in 2016”. Zambia is expected to grow by 3.4%, Zimbabwe by 1.4% and Nigeria by 1.8%.
Owing to foreign exchange restrictions in Nigeria, the region’s biggest economy, “fuel shortages, and oil output disruptions will weigh on economic activity” and exacerbate the effects of low oil prices.
“Overall, capital inflows to the region fell from their record level in 2014, led by a decline in cross-border bank lending. European banks have increasingly deleveraged and oriented their lending activities toward developing Asia,” the World Bank said in its Global Economic Prospects: Divergences and Risks June 2016 report.
It explained that the re-balancing in China, lower commodity prices and deteriorating growth prospects in many commodity exporters would result in further declines in foreign direct investment (FDI).
During the first quarter of the current year, FDI inflows into Nigeria had declined by about 48% compared to the same period in the prior year period.
Unfavourable domestic policies were also seen “weighing on private investment” after Nigeria's central bank foreign exchange control rules “tightened credit conditions and curtailed private investment” inflows.
“In South Africa, economic sentiment is showing signs of stabilisation. However, political uncertainty, coupled with deficient electricity supply, could hold back private investment,” the World Bank said.
It cut the economic growth outlook for SA, the most industrialised economy in Africa, to 0.6%. However, SA had received some respite from a decision not to downgrade its credit rating status by both Standard and Poor's and Fitch rating agencies.
“Cross-border bank lending fell and bond issuance softened from their record 2014 levels. The deterioration of the current account balances across countries increased the region’s external debt.”