China's shift to consumption-led growth will have mixed credit implications for African sovereigns, flattening the trade volumes of oil and ferrous metal exporters, while benefitting some exporters and tourist destinations, Moody's Investors Service said in a recent report.
"China is now Africa's largest trading partner, with trade totalling $114 billion in 2016 that accounted for around 14% of the continent's total exports," says Colin Ellis, Moody's Chief Credit Officer EMEA and co-author of the report - "Sovereigns -- Africa, Closer trade and investment ties with China present challenges and opportunities.”
"But as commodity demand softens and international competition increases, Africa's oil and ferrous metal exporters are likely to see trade volumes level off. That said, growing Chinese investment in Africa is likely to narrow the continent's infrastructure gap and help to boost potential growth in some cases."
Economic growth of around 6.5% forecast in China over the next two years should support a modest resurgence in demand for some commodities. However, the Chinese economy is shifting from investment towards consumption which will partially mitigate the upside.
In addition, competition from other international commodity producers like US shale oil producers and mining companies from Australia and Brazil is likely to intensify and erode market shares for African exporters.
Although the recovery in oil prices lately could lead to strong growth in value terms this year, the price effect would likely diminish based on Moody's medium term oil price estimates. As a result, Angola, Republic of Congo and Nigeria are likely to face slower demand for their exports to China than in the past decade.
Good news for non-ferrous metals though
By contrast, Moody's expects Chinese demand for commodities like copper, cobalt and aluminium to remain strong. These non-ferrous metals are widely used to produce cars, home electronics and transport that are likely to benefit from rising Chinese incomes.
The Democratic Republic of the Congo and Zambia are likely to benefit most given that their copper exports to China account for more than half of their Chinese exports. Rising food exports to China will benefit agricultural exporting countries such as Senegal and Ethiopia.
China's rising income levels could also lead to a rise in tourism to Africa. Although the share of Chinese tourists to Africa remains small - 1.5% of total outbound Chinese tourists - they have risen 30% annually since 2012, the fastest rate globally.
South Africa, Mauritius, Morocco, Egypt, Kenya, Namibia, Cape Verde, Botswana, Tunisia and Tanzania are Africa's most competitive tourist destinations and are most likely to benefit from increased numbers of visitors from China.
Chinese investment has grown to 5% of Africa's total foreign direct investment in 2016 from just 2% in 2010, and if investment growth persists at half of current rates, China's investment position would reach $100 billion by 2020.
As 70% of Chinese investment between 2000 and 2015 was focused on infrastructure, this could help to address the continent's growing infrastructure deficit, especially in energy and transport, and boost potential growth in some circumstances.
The report is available on www.moodys.com.