With continuing global economic uncertainty in 2023, there’s been precious little to cheer about for Africa. However, China’s recent reopening after lengthy Covid-19 restrictions has sparked enthusiasm around a demand-led stimulus to the global economy, boosting Africa’s bleak prospects.
The fallout from Russia’s invasion of Ukraine, ongoing fears of a global recession and a general ‘risk off’ environment have dominated the outlook. Most African countries also have had to contend with higher interest rates and a strong dollar driving up their borrowing costs, an energy crisis in Europe and China’s mishandling of its zero-Covid-19 policy. These realities have driven up inflation, impacting public balances, financial markets, trade and investment significantly in 2022.
But can China provide the get-out-of-jail-free card that many African sovereigns desperately seek? The jury is still out.
A sustained reopening will likely be positive for Africa. China’s most direct influence is through commodities. The Economist notes that it consumes almost one-fifth of the world’s oil, over half of refined copper, nickel and zinc, and more than three-fifths of iron ore. This will be a boon for commodity exporters and hurt importers. Oil and metal prices and trade volumes are expected to surge, benefitting balance sheets in Angola, South Africa, Zambia and the Democratic Republic of the Congo.
There are other benefits too. With China being a major contributor to global tourism, a lift in outbound tourism will see more holiday and business visitors to Africa. Supply chain bottlenecks could also ease, says Samantha Singh-Jami, Africa Analyst at Rand Merchant Bank. ‘Some countries that are more closely linked to China’s manufacturing supply chain may be given a boost, as well as those that benefit from the role China plays in the continent’s supply chain development.’
However it’s not a given that China’s grand reopening will be smooth sailing. There could be significant delays before pre-pandemic levels and consumption patterns are achieved and normalised. Moreover, the chaotic reopening has unleashed a tsunami of Covid-19 infections in China, overwhelming some hospitals and disrupting business.
There are also Covid-19 resurgence and closure risks. The possibility of new variants being exported (due to a resumption in outward tourism) has raised alarm bells, and it’s difficult to predict China’s infection trends and responses. So it would be wise to guard against excessive optimism, given the uncertainties around the nature of the opening.
There is also the risk of China exporting inflation, which may compromise rather than boost growth. Although the current inflation surge is largely supply-driven, the prospect of demand pull inflation may add another complication. Policymakers globally are already straddling a fine line between over- and under-tightening and battling with the appropriate fiscal response.
Since Covid-19 there’s also been a shift in China’s diplomatic outreach because of a more insular foreign policy and greater domestic focus. This, the Economist Intelligence Unit says, signals an end of an era of mega projects and state-backed loans. African states that gained from this benevolence have had to adjust to this recalibrated relationship.
This has led to concerns among African policymakers around China’s commitment to the Belt and Road Initiative and other geostrategic aims that place African countries at their epicentre.
During this period, Beijing has also suffered reputational damage due to its poor Covid-19 management, continued allegations of debt trap diplomacy (which have been hotly denied), and racism towards African students.
Against this backdrop, China’s new Foreign Minister Qin Gang undertook a weeklong trip to five African countries (Ethiopia, Gabon, Angola, Benin and Egypt) last week. The tour was perceived as a subtle shift in strategy and a bid to cement Beijing’s influence on the continent. Paul Nantulya, a Research Associate at the Africa Center for Strategic Studies, says the choice of countries reflected China’s diversity of interests in Africa, spanning security, diplomatic and commercial arenas.
Although China’s January visit to Africa is a long-standing tradition, this year’s took on added significance. The charm offensive comes on the back of the recent United States-Africa Leaders Summit in December, and aggressive efforts by global powers such as France, Germany and Russia to woo African states.
Beijing now needs to straddle rehabilitating its image in Africa and protecting its commercial interests, according to Chatham House. The think-tank argues that: ‘China faces a critical dilemma of how to protect the value of its investments in Africa, while simultaneously defending its strategic interests and maintaining its self-image as a partner, not a predator.’
Given this landscape, how should African countries read the tea leaves?
First, they should be realistic. While the resumption of the Chinese growth story (due to reopening) could be a significant tailwind, it isn’t a silver bullet. There may be benefits – namely a recovery in market sentiment and access, improvements in supply chains, a potentially weaker dollar and a fillip to commodity demand.
But China’s reopening must be viewed alongside other major global risks, notably the US and European interest rate environment – where any policy missteps risk sending African economies into another tailspin.
Unfortunately for Africa, growth and liquidity dynamics in these markets have a significant impact, particularly when it comes to financial market access. Last year saw African states locked out of international capital markets and Eurobond borrowing costs soaring to 15-year highs. Current market consensus is for the Federal Reserve to slow its rate hikes, which is arguably a bigger factor to consider, particularly with the rising prospect of debt defaults.
But conversely, any hiccups in the Fed’s tightening path or a wobble in China’s growth outlook will again put African economies on the back foot. Africa cannot afford to be complacent. With the external environment likely to remain volatile, governments should continue prioritising what they can control: regional integration, industrialisation and innovation. Alongside diversifying geopolitical models and partners, and attracting foreign direct investment, these should remain the cornerstones of effective policymaking.
China’s reopening might lead to less economic damage this year than was initially feared. But economic conditions remain fragile and significant risks remain. The Chinese dragon may well breathe life into Africa’s struggling economies, but policymakers should remain cautiously constructive rather than irrationally exuberant.
Written by Ronak Gopaldas, ISS Consultant, Director, Signal Risk and Faculty at the Gordon Institute of Business Science