The African region that sourcing executives are paying the most attention to is still struggling to get its economy going.
In its latest Regional Economic Outlook for Sub-Saharan Africa, the International Monetary Fund said growth in the region has fallen to its lowest level in more than 20 years.
Two-thirds of the countries in Sub-Saharan Africa (which includes nations Ethiopia, Kenya, Lesotho, Madagascar and Mauritius—pegged as up-and-coming sourcing locales), or 83 percent of GDP, faced a slowdown in growth to just 1.4%.
So why has growth slowed?
Commodity price shock, for one. Low oil prices plagued countries like Angola and Nigeria, and delayed policy adjustments served to exacerbate the issues and force further economic damage. Droughts and pests plaguing crops haven’t helped the situation either. Though commodity prices have gone up a touch recently, the IMF said it likely wouldn’t provide the region much relief.
“Recent improvements in commodity prices, while providing welcome breathing space, will not be sufficient to address the existing imbalances in resource-intensive countries,” the IMF report noted. “The prospect of monetary policy normalization in the United States could further tighten external financing conditions, which places even greater emphasis on appropriate national policy frameworks.”
Looking more closely at the countries where sourcing has become more prevalent, like Kenya and Ethiopia, growth has been a bit higher, but there have been other setbacks.
“While budget deficits have remained elevated for a number of years as governments rightly sought to address social and infrastructure gaps, vulnerabilities are now starting to emerge in some of these countries,” according to the report. To make the matter worse, public debt is increasing, international reserves are declining and pressures on financial systems are adding stress to private sector activity.
How this slow growth could affect sourcing
Growth in Sub-Saharan Africa is expected to see a modest recovery to 2.6% this year, which Abebe Aemro Selassie, director of the IMF’s African Department, said will “barely” put the region back on track toward rising per capita income.
“The uptick will be largely driven by one-off factors in the three largest countries—a recovery in oil production in Nigeria, higher public spending in Angola, and fading of drought effects in South Africa,” Selassie said. “But for other countries, the outlook remains shrouded in substantial uncertainties, including a possible further appreciation of the U.S. dollar, a tightening of global financing conditions—especially for countries where fundamentals have deteriorated.”
Though companies like PVH and H&M are making major moves to source in the region, Sub-Saharan Africa still needs structural reforms, like greater exchange rate flexibility and fiscal consolidation, to start.
“While the expansionary fiscal stance has been appropriate so far, with debt and borrowing costs rising, now is the time to shift the fiscal stance toward gradual fiscal consolidation. Delaying this shift would raise the risk of a rapid slowdown in growth down the road,” IMF said. “Likewise, fast-growing countries in East Africa need to ensure that the scaling up of public investment, which has led to rapidly rising debt, is steadily trimmed to normal levels consistent with continued fiscal and external sustainability.”
The outlook for Sub-Saharan Africa in the near-term is “subdued,” according to the IMF, and that could quickly turn into a sharp slump if some of the things dragging on the economy aren’t corrected in short order. And if the United States’ still uncertain monetary policy and protectionism gets in the way, that won’t be good for the region—or the companies trying to source from it.
“A broad shift toward inward-looking policies [in the U.S.], including protectionism, could impede global growth by reducing trade, migration, and cross-border investment flows, and negatively impact commodity prices and exports from the region.”