2024 has been a tough year so far for the Middle East and Africa. Inflation in Africa remains over 10% and looks set to hover around that marker for the rest of this decade. In the Middle East, the Red Sea crisis is forcing trade around the Cape of Good Hope and persistent fears of regional war are creating economic uncertainty. The green transition will be essential to both regions, but a lack of money or political will means progress is slow. Isaac Hanson interviews economists to discuss the current trade climate and suggest what might be in store in the coming months.
Sub-Saharan Africa overview:
- Archbold Macheka, senior economist, S&P Global
- Robert Matthee, economist, S&P Global
- Ronel Oberholzer, head of Sub-Saharan Africa economics, S&P Global
GTR: Inflation rates in Sub-Saharan Africa (SSA) are falling, but slowly, remaining at around 15% for this year according to Statista. What is driving this, and what impact is it having on the African trade balance?
Oberholzer: Our forecast for inflation rates in SSA is 12.2% for 2024, slowing to 9.6% in 2025. Pertinent in SSA are divergent inflation dynamics, especially in the face of headline inflation’s increased volatility, driven by food’s substantial share in the consumer price index basket and the region’s inherent instability of food prices.
Global factors, such as commodity prices essentially moving sideways and supply shortages, compounded by the ongoing Russia-Ukraine war, influence inflation primarily through related constraints on grain and fertiliser exports to SSA.
There are also divergent dynamics in each country. Some countries have experienced large currency devaluations, for instance Nigeria, Kenya and Zambia. These currency devaluations push inflation up, because many countries import a lot of food and energy into SSA.
In addition, India’s ongoing rice trade restrictions affect supplies to countries in East and West Africa. At the same time, the termination of the Black Sea Grain Initiative in July 2023 raised concerns about potential food price hikes, especially in the Horn of Africa, which is still grappling with drought conditions.
Endogenous factors such as climate shocks and conflicts further impact food prices, and the unwinding of fuel subsidies and persistent global oil price volatility add to inflationary pressures.
The outlook on food prices is mixed. The Food and Agriculture Organization’s Food Price Index started to increase again in the last two months, especially for grains.
Collectively, these developments signal potential inflationary pressures across the continent in the next 12 months.
Additionally, the El Niño weather event disrupted the supply chains of many commodities, significantly restricting the supply of agricultural produce. This is likely to create generalised inflation.
Another worry is that inflation is still quite sticky coming down. In fact, it has turned up and this is because of certain grain and oil prices. It will probably stay sticky for quite some time, and that’s been impacting monetary policy, so it’s keeping interest rates higher for longer as well, which will impact on the cost of living across the region.
GTR: Focus on intra-African trade continues to gain momentum, with several multi-million-dollar investments. Is this the year that the African Continental Free Trade Area (AfCFTA) finally gets going? What’s holding it back?
Macheka: Intra-African trade has shown a notable increase, rising by 11% from US$72bn in 2014 to US$80bn in 2023. Chemicals and related products, particularly fertiliser and antibiotics, constitute a significant portion of this trade by value.
Despite this growth in interregional trade, several challenges hinder the full realisation of the AfCFTA. Firstly, the rules of origin remain unresolved, causing substantial delays and complexity in determining product economic nationality. The complexity and lack of finalisation of these rules create barriers to implementing AfCFTA. Secondly, the regulatory environment across member states presents another major challenge. The regulatory frameworks vary greatly among African nations, and aligning these regulations is essential for a unified trading system.
From an operational perspective, six key instruments have been designed to support the implementation of AfCFTA.
However, only four of these are operational and remain at the pilot stage, limiting their full impact.
Oberholzer: A legacy of the African continent is that we are very much reliant on our raw materials. However, a lot of countries have realised this following trade impacts during Covid and the damage that did to economies. If you look at the long-term plans of a lot of these countries, they realise that they need to do input substitution on the one hand, and on the other hand, look at beneficiation of their own materials.
The problem is it’s always been pushed out because it’s quicker to increase your trade by just sticking to what you know and what you have.
We have also seen these countries running into quite high debt levels, and as financing has started to become more expensive and less readily available, they are realising they’ll have to bring in other mechanisms to close that liquidity gap.
In that regard, I think they are more prone to start looking into beneficiation.
Matthee: One example of this changing rhetoric is Namibia. Last year, it announced a ban on a number of critical minerals that it was exporting, which is something that we’ve never seen from
its government when it comes to trade policy. The reason it announced this was because it wanted to see increased local content beneficiation and more value-added services.
GTR: Last year, GTR reported on the role of African nations in extracting natural gas, but both Mozambique and Tanzania’s project sites have been plagued by delays and reports of broken promises to local people. What’s been holding these plants back, and is Africa’s status as a gas exporter likely to improve?
Matthee: Mozambique faces significant security challenges from the ongoing insurgency in the Cabo Delgado region. On May 19, Rwanda announced it would send an additional 2,500 troops to counter the increasing frequency and coordination of insurgent attacks. Subsequently, TotalEnergies, the primary investor in the Mozambique LNG project, announced that it expects work to resume soon despite funding delays from key financiers like the Export-Import Bank of the United States, which are withholding funds until security around the project area and supply chain route is assured.
Meanwhile, in Tanzania, long-delayed negotiations between Equinor, Shell and the Tanzanian government regarding the host government agreement (HGA) resumed in November 2021 and reached a deal in May 2023. However, energy minister Doto Biteko revealed in February 2024 that the HGA is still under negotiation, indicating a potential re-evaluation by the new minister. Tanzania’s unique mining taxation model, based on an ‘equitable sharing principle’, requires the government and mining companies to share economic benefits, but the lack of clear legal guidelines raises risks of corruption and unfavourable deal terms.
I would also add that whilst those are the two countries where the LNG potential is highest in Africa, you should not forget the Greater Tortue Ahmeyim, which is an offshore gas project at the border of Mauritania and Senegal. It’s a mega project and has seen long delays, similar to what we’ve seen in other projects across the continent. However, it seems like things are starting to move in the right direction, so much so that we might see early LNG exports by the fourth quarter of 2024. I think it’s a move in the right direction for the continent as a whole.
GTR: In its 2024 economic outlook, the African Development Bank (AfDB) estimates Africa’s financing gap for investment in key SDG areas – such as education, energy, transport infrastructure and productivity-enhancing technology – at US$402bn annually until 2030. Where might this money come from? What is the role of international institutions like the International Bank for Reconstruction and Development and the AfDB in achieving this financing?
Matthee: A combination of domestic resources, private investment, international institutions and other targeted financing mechanisms can help bridge this financing gap.
Domestically, governments will need to continue to provide some of this funding. However, domestic funds will likely remain insufficient considering weak economic growth prospects and other challenging headwinds like high unemployment and poverty levels, which constrain revenue mobilisation through higher taxes.
Unfortunately, when it comes to financing from the domestic banking sector on the continent, it remains shallow. Based on a study done by our market intelligence analysts in 2022, data from 18 African countries revealed that only two had a credit-to-GDP ratio higher than 50%: South Africa (82.7%) and Namibia (55.9%), which shows a low degree of financial intermediation. In many African countries the domestic banking sector is small, with limited capacity to finance major infrastructure projects.
This is in part because a lot of countries might use reserve requirement ratios (RRRs) as a monetary policy tool. They increase commercial bank RRRs to control money supply and as a measure to bring down inflation, most notably in two economies, Mozambique and Angola.
Mozambique in particular has used that tool very aggressively. Banks in the country need to hold 39.5% of their foreign currency liabilities as reserves, which constrains credit to the economy but is very effective in bringing in funds. Their number one priority is, ‘let’s just bring inflation down to the target into single digits, and then we’ll care about the repercussions later’. I think that’s maybe sometimes what happens in the domestic banking space.
The private sector can also participate in infrastructure financing in Africa. However, there is perceived high risk in financing African infrastructure compared to other regions, emanating from fragile political and regulatory environment, governance and other factors. As a result, the continent experiences more challenges attracting private sector investment.
A stable and transparent regulatory environment is key for long-term planning and investment decisions given the long-term nature of infrastructure financing. Public-private partnerships, which ensure private sector investors and government entities share the risks and rewards of infrastructure projects, may therefore be an attractive option.
Multilateral and regional development banks will also remain key sources of infrastructure funding. Chinese public financing institutions and bilateral financiers like in Russia, Japan, the US, Italy, Germany, France and other G20 nations, have also previously provided funding towards infrastructure projects in Africa.
Other non-traditional sources of funding include foreign direct investment and climate finance. Across the region, governments will likely continue seeking climate finance to advance the availability of green energy. In addition, innovative debt-based financing instruments, such as debt-for-nature swaps which are becoming increasingly popular, may also be great sources of funding.
Mena overview:
- Rebecca Harding, founder and CEO, Rebeccanomics
- Hamish Kinnear, senior analyst, Middle East and North Africa, Verisk Maplecroft
- Torbjorn Soltvedt, associate director, global risk insight, Verisk Maplecroft
GTR: The World Bank’s 2024 Mena economic update expects a 2.7% growth rate in the region this year, 1.4% lower than in other emerging markets. At the same time, the growth rate difference between oil-exporting and oil-importing nations has fallen to just 0.9%. Which factors do you see as the main contributors to the relatively poor performance of the region’s oil-exporting nations this year? The World Bank also warns that oil-importing countries are facing extremely high sovereign debt-GDP ratios, and yet they continue to weather the geopolitical storm. How scary is this debt?
Soltvedt: It’s clear from the data that the gap is narrowing, especially if you look at the big oil producers. In the Gulf, the Organization of the Petroleum Exporting Countries (Opec) cuts are still ongoing, which is a big factor in that performance. Opec is sticking to its cuts a lot more than it used to. In the past, you often had a problem where if one country in Opec was underproducing then another country somewhere else within Opec would pick up that slack so the overall production level would stay on target. Now, we quite often end up with production below the overall quota, making Opec a lot more efficient, but meaning that countries like Saudi Arabia and the UAE are producing a lot less than they could have otherwise.
If you look at the Gulf states, the UAE stands out as performing relatively well in terms of the forecasted growth levels this year. That is more or less a function of the UAE just being that little bit more diversified than Qatar or Saudi Arabia, for instance.
Kinnear: For the non-Gulf states, the key risk was Egypt, which was essentially too big to fail. It had a massive, multi-billion-dollar bailout earlier this year, which will tide it over for at least a couple of years. The question is whether it actually follows through with the reforms it promised the IMF it would do. We’ve had this back and forth with the IMF ever since 2013/14 when President Abdel Fattah El-Sisi came to power. Because of the wider chaos in the Middle East, the last thing Europe and the Gulf powers wanted was Egypt collapsing into mass protests or not being able to service this debt, which was a key factor in the bailout.
Jordan was also struggling, but it has received some assistance from the IMF recently. It just had a review, and this dispersed US$130mn. In a lot of cases, you have countries that do have debt issues, but they’re able to tick along by leaning on that external help, because they have good relations with Western powers. There are exceptions. Tunisia, for example had a bailout package organised, but President Kais Saied essentially referred to the IMF reforms that were required in return as diktats, and it’s been sitting on the shelf since. Tunisia has benefited from a few things, though, including the rapid rise of olive oil prices, and that’s essentially been one of the key factors that’s kept Tunisia afloat.
Harding: A key point is sanctions. You no doubt have looked at the Russian dark fleets and how they are sitting off the coasts of various places, and the free zones in UAE are well known for being places where activity can be hidden. After Russia invaded Ukraine, a lot of the smaller banks and smaller shipping organisations were able to shift their businesses to the Gulf, and the region has done incredibly well. As a result of sanctions against Russia, we are seeing trade diverted. We’re also seeing it hidden in terms of trading with smaller partners that get down into tier-three or tier-four of supply chains and therefore become almost impossible to trace.
But if you look at the trade data, the Middle East has benefited since 2014 from greater trade with Russia, and it went up exponentially after 2020. So de facto, is this happening? Yes. Who’s doing it? Who can say. These are things that Western policymakers are fairly exercised about, but if you are a large global trade finance bank and you see a deal that’s worth a lot of money, and you can see a way of structuring it so it’s legal and compliant, if that’s in Dubai, you’ll do it in Dubai.
It might well be that there is some kind of smurfing going on, or transactions are being broken up so some of it is sanctioned oil and some of it isn’t.
GTR: Relatedly, Opec+ have announced that oil production cuts are likely to remain throughout 2025. How will this impact the region’s exports?
Soltvedt: There will be a limit on growth, and it boils down to the point that I made earlier, that they are sticking to their quotas very strictly. The only exception to that could be if something like tensions between the UAE and Saudi Arabia worsen; there have been some disagreements over quotas. The UAE would like to produce more than it is at the moment, but most of the big producers have realised they value this Opec cohesion more than the potential benefit of increasing exports slightly. As long as that cohesion holds, and it has for the last few years, then that is going to be a key factor in limiting growth, although the forecasts for next year look a little bit better.
Heightened interstate tensions have also impacted the economies and trade flows in the region. For the Gulf states this is going to be an ongoing issue. On the one hand, they have managed to keep the war in Gaza at arm’s length; they’re obviously being very careful. The UAE and Saudi Arabia decided not to join the US-led maritime initiative in the Red Sea, and they’re putting restrictions on the use of bases in the UAE when it comes to the US targeting Iran-backed groups in the region. They are very much trying to shield themselves from the regional fallout.
Where there has been a bit of an impact is when it comes to things like oil and gas trade, especially with LNG. In the last few years, it has become more of an international market with exports not being restricted to pipelines so much anymore. Qatar is a huge LNG exporter in the region, and the UAE and Saudi Arabia are also trying to do more with natural gas and LNG. However, as tankers are having to avoid the Red Sea and take the long routes around Africa, there’s more of an incentive for exporters in the region to export to Asia, as opposed to Europe. We’ve already seen a big shift in the centre of gravity of oil and gas exports towards Asia, but the crisis in the Red Sea has reinforced that. We’re seeing a more fragmented global LNG market, which is an interesting trend to keep an eye on.
Another important factor is what is happening with foreign direct investment (FDI). Saudi Arabia is the obvious example of where we’ve seen FDI really fall short of ambitious targets, and the difficult climate in the region at the moment doesn’t help. Because of that shortfall in FDI, and because we’re not seeing a huge degree of increase in the contribution of the private sector in a lot of Gulf states, we’re seeing very high levels of borrowing.
Saudi Arabia is now set to be the biggest lender in emerging markets this year, overtaking China. There aren’t any immediate concerns about the kind of sustainability of that debt, but Saudi Arabia has added around US$33bn in debt just in the first half of 2024. If they continue on this trajectory it would start to become a bit of a concern. Because of the lack of FDI and all these huge infrastructure projects there’s a decision to be made: either cut back on some of these projects or continue to borrow at really high levels. That is a big dilemma at the moment, especially for Saudi Arabia.
GTR: Cop28 was plagued by accusations of greenwashing, including the revelation that the UAE industry minister and advanced technology sultan Ahmed Al Jaber tried to lobby on oil and gas deals during meetings. Do the Gulf states have a serious long-term plan for transitioning away from fossil fuels at a time when prices are consistently falling?
Harding: We’ve started to see this Jekyll and Hyde-type trend that’s going on. Yes, the region’s been accused of greenwashing. The optics around Cop28 weren’t great, and it failed as a result of those optics. I think a lot of credibility was lost because of the optics around oil trade and lobbyists. But around 75% of the banks in the region have ESG policies, so progress is being driven by the private sector to a large extent. The UAE does have quite stringent regulations on net zero and is beginning to develop mechanisms and systems for implementing sustainability policies, and making them mandatory.
The other thing for the private sector in the region is that if they are trading with Europe, which an awful lot of them will be, or if they are exposed to the US Securities and Exchange Commission in any way, which again an awful lot of them will be, then they have to comply with the guidelines and regulations they have. So is there greenwashing around Cop, absolutely. But is the region trying to do something? Yes.
If you look at ESG policy in and of itself, that’s the way the region is going to be able to diversify. It is mineral rich. There is obviously solar power within the region. It’s a way of diversifying the economies in the region, but also a way of managing their own environmental risk.
GTR: In February, Verisk Maplecroft listed the risk of regional war as one of the five most important risks in the Mena region, with 11 of the 20 countries it monitors classed as having a very high risk on its exposure to regional conflict index. What impact has conflict had on economies in the region, particularly with regard to trade flows?
Kinnear: The war has obviously had a big impact on the Palestinian territories themselves. It’s called off a lot of economic activity in Gaza, because it’s an active war zone, but it extends to the West Bank because there have been things like Israel not granting visas to Palestinian workers based there. That was a big source of work which is now gone. In Israel, there was a sharp short-term impact in the wake of the October 7 attack, but Israel has been ticking along since then through strategic interventions from the central bank and massive government spending. That’s not to say there hasn’t been a huge impact from the war; the country’s fiscal deficit has widened significantly and there’s a lot of lost growth opportunity, and there’s also the impact on the labour force because you had reservists being called up and Palestinian workers not being able to come into Israel to work as well. In the long term, though, it’s going to have quite a heavy impact on growth in Israel itself.
Beyond Israel and the Palestinian territories specifically, the fighting hasn’t necessarily had a direct negative impact on trade other than perceptions of the region. Lebanon is to an extent involved in the conflict because we’ve had the Israel-Hezbollah clashes at the border. Clashes have extended beyond the border region since February; there isn’t the full-scale war that you had in 2006 for example, but it is quite high intensity, nonetheless.
Harding: I would say that conflict, to a very large extent, is priced in in the region. Saudi Arabia, the UAE, Qatar and others get involved with conflicts in North Africa and Israel to a lesser extent than one would expect. They are involved, but it’s behind the scenes. Conflict in the region affects them in terms of supply chain routes, like the Suez Canal and the Red Sea and so on. This makes the region seem riskier than it actually is, and that’s an important point to make because the biggest risk in the region, reputationally, is less the political risk and conflict in the region than it is compliance with international sanctions.
The UAE and Saudi Arabia in particular have a somewhat dualist approach to the sanctions that have been implemented. It’s very difficult to get banks or organisations to speak explicitly about the role of those sanctions. They’re certainly making it complicated within the region, and outside of the region it’s done two things. First of all, it has created a degree of wariness, but because the UAE and Saudi Arabia in particular are holding an awful lot of power at the moment, you find that Western governments are being quite forgiving in terms of sanctions issues.
Shipping in the Red Sea carries some physical risks, but these are more a function of general economic conditions and uncertainty than political risk directly associated with the region. Political risk is baked into oil prices at the moment.
GTR: How has the war changed trade relations with Abraham Accords countries, if at all?
Kinnear: The Abraham Accords are a mixed picture. There’s not been any overall damage to the framework; that’s very much still in place. If you could point to a specific impact of the war, it would be that you no longer have these big set piece investment announcements from UAE investment vehicles into the Israeli economy that you had back in 2021 and 2022, in the wake of the accords being signed.
There’s still bilateral talking going on behind the scenes, but the UAE, for its own reputational sake, is preferring to keep that out of the headlines. The overall framework is still in place, but no one wants to make a song or dance about it at the moment.
Egypt and Jordan are two key countries when it comes to their relationship with Israel, and they’ve been very publicly critical of the Israeli government. Events in Gaza have sparked protests on the streets of Amman and Cairo since the start of the war. The worry for leaders in those countries is that the protests stop being just about the Gaza issue and actually start to focus on domestic issues, which happened to an extent in both countries. In terms of taking more practical measures against Israel, they have their hands tied to an extent. They don’t really have any means to and ultimately, are reliant on US economic aid and military support.
If they took a stronger position in Israel, they would put that at risk. Increasingly, both Egypt and Jordan are more reliant on Israeli gas. Originally, Egypt was exporting gas to Israel, but now the tables have completely turned, and Israel is producing healthy amounts of gas. It goes to Egypt, and then it’s rerouted through the Arab gas pipeline to Jordan. Egypt also has underutilised liquefaction facilities at Edku and Damietta, so Israeli gas ends up being exported from there as well. Egypt, particularly with these very hot summers, is increasingly reliant on Israeli gas for its domestic energy requirements, as is Jordan to a lesser extent. Gas is almost the regional glue in this situation.
GTR: Are there any other factors you’re currently focused on in terms of Mena trade and export flows, and the impact on trade finance?
Harding: I think wealth for the Gulf states comes in the first instance from the primary sector. It comes from physical goods. But the whole way in which the world trades is changing, and the services sector is incredibly important within all of that. If you look at the UAE, its financial services sector is really dominant, and business services are also very important. The problem is that we can’t say this is how the economies are diversifying, because we don’t have enough information about it.
When I’ve put together numbers on the services sector, it does look like it is growing significantly, particularly in Saudi Arabia and the UAE. Qatar also has a big services sector. They have to diversify in some ways, but ultimately, the region’s advantage is a symbiosis between the services sector and the goods trade sector, as the region continues to rely on soft and hard commodities.
