Slow Recovery for Ebola Affected Nations

2014 has proved a challenging year for West African nations, with a decrease in exports and a slowdown of GDP growth rates since March 2014, in line with the Ebola epidemic. While the road to recovery seems challenging, Delta Economics forecasts long-term growth in particular export markets, which will be welcome news to the countries that have been worst affected by the disaster.

Ebola has had significant effects on economic growth in West Africa, particularly Liberia, Sierra Leone, and Guinea. The infectious nature of the virus means that countries have ground to a halt, with significant economic effects due to travel restrictions; the closing of shops and markets; local migration; disturbance of agricultural activities; a decrease in tourism; withdrawal of industry personnel; deferred new investment; and a general decrease in numerous operations across the region.

The epidemic has strained government finance and slowed GDP growth, with Liberia, Sierra Leone, and Guinea each auctioning off 91-day and 364-day bills, taking gross debt to 30%, 33%, and 38% of GDP respectively. Liberia’s 2014 GDP growth is only 2.2%, compared with growth of 5.9% pre-crisis and a real growth rate of 8.10% in 2013. Growth is forecast at 4% in Sierra Leone in 2014, down from 13.3% in 2013 and 11.3% before the crisis. In Guinea, GDP growth is only 0.5%, contrasting a rate of 2.9% in 2013 and 4.5% pre-crisis. In 2015, Liberia’s growth is forecast at 3%, whereas both Sierra Leone and Guinea’s economies are expected to reduce by 2% and 0.2% respectively. The World Bank estimated in October 2014 that containment of the disease by the end of the year would affect GDP in West Africa by USD 3.8billion by year end 2015.

News in early 2015 provides a mixed picture: Guinea’s infection rates are fluctuating, while Sierra Leone’s rate appears to be levelling off and Liberia’s indicating low infection levels. The WHO reports less than 10 confirmed new cases in Liberia in the first week of January, contrasting over 80 reported cases per day in September 2014. No cases have been reported in Ghana, Nigeria, or Senegal since the latter two were reported Ebola-free in October.

Certain sectors face a difficult recovery, particularly the agricultural sector, given that 80% of the population in Guinea and two-thirds in Sierra Leone are involved in subsistence agriculture. Yet, the abundance of natural resources in the region and many countries’ comparative advantages in primary products may prove a key mode to aid economic recovery. Operations, investment, and expansion remain halted, yet commodity exports might be significant in reinvigorating these sluggish economies. An increase in mining activity and exports can drive growth; for example, Sierra Leone’s output grew strongly by 20% in 2013, but it was only 5.5% excluding iron ore mining.

Commodity exports have fallen in 2014, with a year-on-year decline of trade in West Africa of 8%. There will be repercussions felt on export growth in 2015 and 2016. Alongside halted production in West Africa, this is partially due to general falling commodity prices and a dip in demand for commodities, including iron ore. In the case of iron ore, a dwindling demand for steel in China’s property sector has impacted prices, which have dropped almost 50% in 2014 from USD 135.79 in December 2013 to USD 73.13 in November 2014. As the top export for Sierra Leone and the second for Liberia (Figure 1), the ninth largest trading partner with China among African nations, this will hamper economic recovery.

 

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Figure 1 |  Top Exports and Top Export Destinations for Guinea, Liberia, and Sierra Leone
Source  |  Observatory of Economic Complexity

 

China’s demand for raw materials also has the potential to sustain new markets and revive flagging ones. The proportion of China-Africa trade as a part of Africa’s total foreign trade volume increased from 3.82% in 2000 to 16.13% in 2012. China’s economy consumes a quarter of the world’s aluminium production. In light of this demand, along with Guinea’s position as the second largest exporter of aluminium ore worldwide, Chinese aluminium imports from Guinea are expected to expand in 2017 and 2018, but only after a slow recovery based on a drop in production of 2014 and modest estimates for general world trade growth in 2015 (Figure 2).

 

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Figure 2 |  Guinea’s Exports of Aluminium Ore
Source  |  Delta Economics

Significant damages will be felt in economic terms in both the short- and middle-term for the countries worst affected by Ebola, in terms of lost GDP and expenditure on health care and social systems. Investment in the trade of raw materials may encourage struggling economies, if both the world demand for commodities and commodity prices increase. Consistent and growing trade with partners such as China, therefore, may offer some relief from the devastating economic effects of the Ebola epidemic.

 

Slow Recovery for Ebola Affected Nations  |  Author  |  Jenny Ung Loh  |  Research Analyst

What goes up…

Why markets should recover but uncertainty will remain |  For almost all of this year, Delta Economics has been arguing that global equities are long overdue a correction. The reason for this is simple: there is a high correlation between trade values and the global markets (68% for the FTSE and S&P 500 and 85% for the Dax). There is an even higher correlation between trade and emerging market equities at over 90% for the Kospi. If the Delta Economics forecast for trade growth is flat, then it should stand to reason that markets will also underperform.

But, as Figure 1 shows, what goes up appears to be going up forever. Since the bull-run began, trade has been relatively flat while markets have reached unprecedented heights. Even the putative crisis in emerging markets at the beginning of 2014 failed to have a lasting impact on equities generally despite ever-more negative news about trade.

 

 

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Figure 1  |  Value of World Trade (USDbn) vs S&P 500, Last Price Monthly, June 2001-Dec 2014
Source  |  DeltaMetrics, 2014, Bloomberg

 

As markets do not consider trade data as market-leading, this should not be a surprise. What appeared to happen during the second week of October was that market analysts reacted to suspicions that interest rates might rise and that Quantitative Easing might stop in October. Simultaneously they realised that the Ebola crisis in Africa could have an economic impact while tumbling oil prices raised a spectre of disinflation and poor German data put the Eurozone crisis back in the spotlight.

So is this the moment where Delta Economics steps back and says, “We told you so”? The short answer is no, not yet. We are expecting markets to continue to recover their lost ground in October, but for volatility to remain high. We are forecasting a seasonal pick-up in trade, which means that Purchasing Managers’ Indices may well show some sign of recovery at the end of the month. This could spur equities if not to new heights, then at least to reverse the correction earlier this month (Figure 2).

 

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Figure 2  |  Eurozone PMI (normalised value) versus Eurozone Delta Trade Corridor Index (Sentiment) change (June 2001-Dec 2014)
Source  |  Delta Economics analysis

 

The Delta Trade Corridor Index-Sentiment (TCI-S) measures the change in a country’s or region’s trade against its PMI. For the Eurozone, the correlation is 86% thus the slight pick-up we expect to see in trade this month is likely to be accompanied by a similar increase in the value of the Eurozone’s PMI. Similarly, we expect the PMI to improve for China and the US as well.

This is nothing more than a seasonal fluctuation and it is always a mistake to react to one month of data. Instead, it is more useful to look at the macroeconomic momentum. This is precisely what the TCI-S measures: the way in which trade is changing over time. What is clear from Figure 2 is that the Eurozone trend is downwards; the same is the case for the Global Manufacturing PMI, as measured in Figure 3.

 

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Figure 3  |  Global manufacturing PMI normalised values vs Global Delta TCI-S change
Source  |  Delta Economics analysis

 

Figure 3 presents a more worrying picture of momentum: that well into Q2 next year will be the earliest we see any pick-up in our TCI-S or trade more generally. After an increase this month, the next five are likely to be weaker with the TCI-S turning negative.

The reason for this has as much to do the uncertainty caused by geopolitical risks as it does with macroeconomics; these risks will affect emerging markets in particular. While conditions remain uncertain, investment will be held back and it is likely that Africa will suffer first. Since March 2014 we have seen a year-on-year decline of 8% in West Africa’s trade. Further, we are expecting Chinese imports from West Africa to halve (from over 16% to 8% growth) in 2014. With falling oil and commodity prices generally, this represents a perfect storm for investment in Africa.

 

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Second, Turkey is likely to suffer substantial economic fallout from the Iraq crisis. Turkey’s trade with Iraq alone is worth some USD11.6bn. Much of this trade is in oil and, although Iraq’s oil reserves are largely in the South rather than the ISIS-controlled North, we are still forecasting a 21% reduction in its imports from Iraq to January 2015. We also expect a 23% reduction in its trade with Syria over the same period.

Finally, oil prices have not risen as a result of the crises in the Middle East or in Ukraine although this may have been expected. Instead, prices have fallen as Saudi Arabia has increased its oil supply and as the USA, now the world’s largest oil producer has loosened its restrictions on exports. Trade values and oil prices are 94% correlated and our forecast of 0.56% trade growth in 2014 suggests that oil prices are set to fall further (Figure 4).

 

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Figure 4  |  Value of world trade (USDbn) vs NYSE ARCA oil spot, Last Price Monthly, June 2001-Dec 2014
Source  |  DeltaMetrics, 2014, Bloomberg

 

The falling price of oil is a double-edged sword: while it lowers costs, it also raises the spectre of deflation, which is increasingly causing concern amongst analysts. If prices turn negative then it threatens global economic growth – as witnessed in the latest downgrading of IMF economic and trade forecasts.

Delta Economics is of the view that the IMF and WTO forecasts for trade growth, at over 3.1%, have still not sufficiently factored in the effects of falling oil prices. Based on data produced by the CPB Netherlands Bureau’s World Trade Monitor, the Delta Economics forecast still appears to be closer to actual trade than that of either the IMF or the WTO (Figure 5).

 

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Figure 5  |  World Trade Organisation and Delta Economics World Trade Forecasts versus actual
Source  |  Delta Economics analysis

 

We are expecting a temporary increase in world trade in October that could well boost markets for the remainder of the month. However, we are also expecting trade to drop back considerably into the first quarter of 2015. The immediate reaction to the return of volatility in the early part of August must surely have been, “What goes up must come down” and over the longer term, we expect continued uncertainty to fuel volatility in markets. The potential for a major correction before the year end cannot be discounted. However, in the very short term, the reverse might well be the case: what goes down must surely come up again.