Africa Infrastructure Standstill: The “Red” Impact of COVID-19 in the African continent
May 13, 2020
2 min read
What's going on here?
According to African economic thinktank NKC African Economics, Africa will soon feel a knock to economic growth, with GDP growth shaved from 3.8% to 2.8% following the first wave of reported COVID-19 cases announced in early March.
What does this mean?
The proliferation of COVID-19 has resulted in the shutdown of African factories and severe, worldwide supply chain disruption. The demand for African raw materials and commodities in China is declining and conversely, Africa’s access to industrial components and manufactured goods from China is hampered.
The continent’s three largest economies, South Africa, Nigeria and Egypt, collectively accounting for about 60% of Africa’s GDP, will be particularly hard hit. For minerals-rich South Africa, a slowdown of its ore exports market, reliant on Chinese buyers, will deepen the country’s long-term recession.
For oil-dependent Nigeria, the recent collapse of the international oil prices will leave a marked impact. This is because lower oil prices result in tighter FX liquidity (an indicator measuring a currency’s ability to be bought and sold without significant change in its exchange rate), rising inflation and falling interest from investors. For Egypt, the suspension of flights to and from the nation has frozen its vital tourism and travel sector, which brings in $1bn in revenue each month and constitutes 12% of its annual GDP.
What's the big picture effect?
Prior to the pandemic, high growth was predicted in Africa in three key sectors: infrastructure, trade and technology, media and telecommunications (TMT). Both City and AmLaw firms service clients in these sectors in Africa and they will need to guide these fledgling markets through uncertain times. Those clients that survive stand to benefit in the medium-term when Chinese investment resumes, with infrastructure schemes like the lucrative Belt-and-Road Initiative.
For the trade sector, the majority of African exports are focused on natural resources and industrial commodities like oil, iron and copper. Hence, a reduction of demand in African commodities raises a real risk in a decrease of manufactured goods from its main trading partner, China. For the TMT sector, the uncertainty caused by COVID-19 has stalled the expansion of infrastructure led by telecom companies that aims to harness a booming e-commerce market. While supply chain frailties persist, construction projects will be mothballed until trading with key Chinese partners can resume.
Much of African’s growth and economic prosperity is dependent on Chinese investment. Fortunately or unfortunately, the continent’s rapid growth may not materialise until they feel confident in resuming trade. Given that China appears to be recovering from coronavirus, it is very possible that Africa’s trading activities resume shortly – so long as they can cope with the virus in the meantime!
Report written by Roslyn Lai
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