The ongoing political crisis affecting large parts of the DRC will continue to weigh on household consumption and foreign aid, slowing growth in the non-mining economy.
This is the view of BMI Research - a unit of the Fitch Group
While an acceleration in mining sector production will boost headline growth, even despite the challenging political climate, growth will remain well below potential.
While headline growth in Democratic Republic of Congo (DRC) will accelerate in the coming quarters, gains will not be equally share across the economy.
Household consumption will remain under severe pressure due to elevated political risk.
Increasing rural violence is driving the dis placement of large numbers of civilians, while President Joseph Kabila’s unwillingness to step down and organise national elections will likely trigger foreign donors to withhold aid, limiting government capital projects.
The large mining sector will act as a bright spot for DRC, especially copper and cobalt production, with several large projects coming online in 2018 and 2019.
Indeed, this underpins our forecast for real GDP growth to come in at 2.8% and 5% in 2018 and 2019 from an estimated 2.9% in 2017.
However, while mining will offer a boos t to headline growth, it remains far below DRC’s potential.
Moreover, the risks are skewed to the downs ide, especially should violence spill over into the still relatively quiet province of Katanga, one of DRC’s major mining region.
Political risk to weigh on consumption and aid
The ongoing political crisis in DRC will offer persistent economic headwinds in the coming quarters, weighing especially on household consumption.
President Kabila’s term was initially due to end in December 2016, but the leader has been unwilling to step down from his role. This has sparked increasing civil unrest in urban centres and mounting insurgencies in DRC’s eastern provinces.
The social turmoil has already led to the displacement of large numbers of civilians in the eastern and central regions of the country.
Indeed, already around three million people have been dis placed by the violence since mid-2016.
The dislocations and economic disruptions stemming from the ongoing unrest will both disrupt the flow of goods throughout the country and reduce consumer demand for these goods.
This will only be exacerbated by a pullback in government aid. Grants amount to around 8.2% of total revenues, however the recent political crisis has soured relations between DRC and many of its largest donors.
We see significant risks that donor countries will reduce or withhold aid due to disagreements with Kabila and given limited alternative sources of financing, this is most likely to translate into a pullback by the government in capital spending.
Mining sector will offer crucial tailwinds…
While much of the economy is poised to remain in the doldrums, mining sector activity is likely to be a bright spot for the DRC, offering crucial tailwinds to headline growth.
The sector is expected to receive a boost from the completion of renovation works at Glencore’s copper and cobalt-producing Katanga mine, which resumed operations in December 2017.
The mine, which is expected to become the largest source of cobalt in the world as it reaches full production in 2019, will sustain a large uptick in exports in the country, contributing to stronger economic activity going forward.
Moreover, technological improvements at Randgold’s Kibali mine will also sustain solid growth in domestic gold production during the next two years.
The Africa-focused gold producer announced that works on automation in the mine’s material handling system, which have been recently completed, will increase production by 22% by the end of this year.
Crucially, DRC not only benefits from a significant natural resource base and rising commodity prices – which we believe are boosting the development of its cobalt and copper – but its mining sector is relatively shielded from the wider instability in the country due to the geographic location of many of the projects.
Indeed, most mining production sites are localised in the south of the country (Katanga province), while insurgencies are mostly concentrated in the Centre and the North-East regions (North and South Kivu provinces).
Moreover, strong security forces from mining producers are able to protect mine sites from insurgents.
…But violence poses downside risks
That said, the risks to our bright view on the mining sector – and thus our view that headline growth will accelerate – are significant.
While we believe Congolese mining sector will be insulated from the social and political unrest in the country insurgencies in the North and Eastern part of DRC could spill over to Katanga province if the situation deteriorates further.
As government security forces become increasingly stretched attempting to contain uprisings in urban centres, we believe the roughly 70 rebel groups that are active within DRC will be able to operate with greater freedom, and capitalise on public dis content to secure new recruits.
While not our core view, should we see these groups increase their influence and power to the Southern parts of the country, potential seizures of key mining production sites will deter investors’ sentiment and disrupt mining sector activity, deteriorating DRC’s economic outlook.