The Coronavirus (COVID-19) has resulted in mass production shutdowns and supply chain disruptions due to port closures in China, causing global ripple effects across all economic sectors in a rare “twin supply-demand shock”.
With South Africa having just reported its first cases of COVID-19, Africa is beginning to feel its full impact and plans to control and manage the humanitarian challenges of the virus are underway across the continent.
Economically, the effects have already been felt – demand for Africa’s raw materials and commodities in China have declined and Africa’s access to industrial components and manufactured goods from the region has been hampered. This is causing further uncertainty in a continent already grappling with widespread geopolitical and economic instability.
The number of cases is reportedly slowing down in China, increasing expectations that it will eventually reach a plateau and be brought under control. However, in early March the Organisation for Economic Co-operation and Development noted that “annual global GDP growth is projected to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020″, and global markets plunging in the days thereafter.
Although Chinese growth will fall in the short term, it is expected to rebound quickly, some suggesting this could even happen in the second quarter of 2020 when the virus will hopefully be contained.
In the meantime, central banks are implementing measures to mitigate the effects of the virus on the economy, cutting interest rates and injecting liquidity into the banking systems in some countries.
In early March, the World Bank announced it would commit US$ 12 billion in aid to developing countries to help them to deal with the impact of the virus and limit its spread. The Bank said it would prioritise the most at-risk countries. The World Bank also introduced a pandemic bond in 2017, which, as part of the Pandemic Emergency Finance Facility intended to provide money to help developing countries in the event of a pandemic reaching certain thresholds and conditions.
So far, these criteria have not been met and the bond has not paid out.
Uncertainty regarding the spread of COVID-19 is high and its impact on Africa is expected to be serious, given the continent’s exposure to China. So far, cases have been reported in Algeria, Burkina Faso, Cameroon, DRC, Egypt, Morocco, Nigeria, Senegal, South Africa, Togo and Tunisia. If there is a widespread outbreak of COVID-19 in Africa it could overwhelm already weak healthcare systems in the region.
According to ratings agency, Fitch, the Coronavirus outbreak will have a downside risk for short term growth for sub-Saharan African growth, particularly in Ghana, Angola, Congo, Equatorial Guinea, Zambia, South Africa, Gabon and Nigeria – all countries that export large amounts of commodities to China.
Impact on Infrastructure Development
China has long been a
key partner in Africa’s infrastructure development. Baker McKenzie Research with IJGlobal, “A Changing World: New Trends
in Emerging Market Infrastructure” showed that China has targeted sub-Saharan
Africa in recent years, both in the context of its need for natural resources
and as part of the Belt and Road Initiative (BRI). Chinese policy banks loaned
USD 19 billion to energy and infrastructure projects in the region from 2014-2017, almost half of which
was in 2017.
The effects of Coronavirus have already impacted activity around China’s BRI, a multi-billion dollar plan to link Asia, Europe and Africa. According to a new report by Baker McKenzie and Economist Corporate Network, sustainability must be at the heart of China’s Belt and Road Initiative if it is to remain a major force in global infrastructure development. The report notes that with immediate term setbacks and delays due to the on-going spread of COVID-19 around the world, the definition of BRI sustainability is also by necessity growing to encompass a focus on protecting the health of those involved in BRI projects, including both workers and the wider local populations where projects are underway.
According to Ben Simpfendorfer, CEO, Silk Road Associates, the BRI will remain a priority for China, but the Chinese government’s short-term and long-term response to COVID-19, shortfalls in China’s health sector, and the economic fallout for the country’s financially challenged SME sector, will divert official attention and resources away from BRI over the 12 months and potentially longer.
“This may mean a reduced investment in BRI’s smaller, less critical markets where the opportunities to connect such investments to the global supply are limited. Central Asia, Sub-Saharan Africa, and Eastern Europe will accordingly see a short-term dip in BRI related activity, relative to Southeast Asia. The exception to this view is where China seeks to share its valuable experience of battling COVID-19 with other BRI countries. Strengthening the health systems of low-income countries is a priority even if focused on soft processes rather than hard infrastructure. If so, China is likely to link these efforts as being part of the BRI;” said Simpfendorfer.
Impact on the Energy and Mining Sectors in Africa
China appears to have been more interested than any other big economy in investing in the African mining sector. According to China Mining 2018, in 2011, China investors controlled only about 10 mining operations on the continent and this figure rose to at least 24 in 2018.
China’s interest in mineral resources in the African continent has been motivated, on the one hand, by its strong growth in power, construction and industrial manufacturing sectors, and on the other, by its declining internal mining production capacity year-on-year, due to declining ore grades, increasing labour costs and a more stringent regulatory environment. In return, China has one of the strongest infrastructure construction capabilities in the world and is arguably best placed to help Africa to address its vast infrastructure gap.
As such, the African mining industry faces an inevitable hit from China’s COVID-19 outbreak, although there is still much uncertainty as to how much and for how long the sector will be impacted. Reuters reported that China produced nearly 1 billion tons of steel in 2019 and consumed around 900 million tons due mainly to consumption in its infrastructure and construction sectors. Shutdowns have resulted in a decline in demand for steel and iron ore. African mining companies producing lithium, cobalt, copper and iron ore have already noted decreasing demand from China caused by production shutdowns and global supply chain disruptions.
Port closures, travel restrictions and manufacturing shutdowns are decreasing demand, causing oil importers in China to cancel purchases of African oil, forcing sellers to divert cargoes as they seek new buyers often at discounted prices. This week OPEC+ failed to agree on terms related to oil supply cuts to deal with demand challenges brought about by COVID-19, starting an oil price war and causing oil prices plunge further.
Demand has also decreased for Liquefied Natural Gas (LNG), with much of China’s total imports of the gas at risk of cancellation. China is the world’s second largest consumer of oil and one of the largest importers of LNG. However, it is also expected that once China has recovered, this could lead to an increase in demand for raw materials. In addition, significant outbreaks of COVID-19 in mining regions in Africa could affect workforce productivity, the availability of skilled technicians to travel from affected areas and the capacity of labour-intensive mining operations to produce raw materials. Mining companies in the region will be planning carefully to avoid such a scenario and ensure that they can effectively mitigate the spread of the virus.