How China’s slowdown may impact African companies

As the coronavirus pandemic continues to spread globally, Africa has so far been spared the high infection rates seen in China, Italy, Iran, and elsewhere. However, experts are warning that the Chinese economic slowdown is already impacting African countries where growth has been fragile for some time.

In South Africa, for example, which slipped into a recession in 2019, supply chain disruption related to COVID-19 will further dampen growth in key sectors. South African President Cyril Ramaphosa declared a national state of disaster in response to the pandemic — closing the country’s borders and shutting down 35 land ports and two seaports on 16 March. He announced a 21-day countrywide lockdown on Monday evening. Starting 26 March, individuals will not be allowed to leave their residences except to buy food or medical supplies, and, except for pharmacies, food stores, and a few other categories, businesses will close.

“In terms of African exports of commodities into the Chinese market, we are going to see a decimation in these figures and a collapse in prices in Q1,” said Martyn Davies, managing director of emerging markets and Africa at advisory firm Deloitte & Touche. “The impact of slowing demand from China will be dire and will negatively impact on growth for the whole [Africa] region.” 

In line with this sentiment, ratings agency Fitch noted that the pandemic will “see downside risks to the short-term growth outlook in a number of sub-Saharan African (SSA) markets”, particularly in Ghana, Angola, Congo, Equatorial Guinea, Zambia, South Africa, Gabon, and Nigeria.

Hitches to China’s fate

Since 2009, China has been Africa’s single largest trading partner. For South Africa and Angola, for example, China is their top trading partner — with South Africa mainly exporting ores and metals to China while Angola’s primary export is crude petroleum.

With the explosive rise in manufacturing output in China over the past two decades, Davies said that many African economies have hitched their own GDP growth to the Chinese growth train without real thought around the possibility of China derailing. 

“In South Africa’s case, roughly 60%–65% of our export value is in commodities,” he added. “In many other African countries, this figure is even higher and often close to 100%. There is an acute overdependence on China, for both exports and imports in the region.”

Automotive sector taking a hit

In South Africa, Davies said that the automotive industry could be particularly disrupted by the Chinese slowdown. Key auto manufacturers operating in South Africa include Toyota, Volkswagen, Ford, Nissan, Mercedes-Benz, Isuzu, and BMW. South Africa has produced iconic cars such as the VW Citi Golf, the Mercedes-Benz AMG C 63, and the BMW 333i. According to the National Association of Automobile Manufacturers of South Africa, vehicles and components are exported to 155 international markets.

“Automobile manufacturers in South Africa have stock for a few short weeks, so they will soon start running out of certain components that are supplied not just from China but other countries,” Davies said. “This will have a major impact, as the automotive value chain contributes around 7% to South Africa’s GDP — the most significant of any industry in the country.”

Kevin Lings, chief economist at Stanlib, a South African asset manager, echoed this sentiment and noted: “The [automotive] industry might have to scale down output quite aggressively, particularly at a time when demand is depressed anyway.”

This scenario is likely to unfold across many other sectors in African markets that have become overly reliant on Chinese supply chains.

“China is an important supplier [to Africa] of intermediary components in production,” explained Jannie Rossouw, professor of economics and head of the School of Economic and Business Sciences at the University of the Witwatersrand, South Africa. “As the supply lines from China have been interrupted, there will be production delays in many markets.”

Davies pointed to anecdotal evidence of major supply chain disruptions within various sectors in South Africa, including logistics, retail, agriculture, etc. 

“One of our clients cannot get feedstock for chemical production within their manufacturing plant,” he added.

Acute stock shortages

South Africa is also a major importer of products from China, and Lings noted that the inevitable stock shortages will put many businesses under pressure.

“This will span from general retailers to large manufacturers, and we expect to see the effects of shortages become more evident in the coming weeks,” he said.

According to Rossouw, many local producers might now rethink production techniques going forward.

“With new insight into the risks of just-in-time delivery, many producers will be rethinking production technology … and might start carrying larger production stock to mitigate the risks,” he explained.

Mining companies vulnerable

As uncertainty prevails in global markets, large mining companies including Kumba Iron Ore have warned stakeholders about the possible disruption of commodity prices due to the coronavirus outbreak.

“Mining companies might struggle more in terms of earning revenue and meeting their costs, and we could see a dampener on mining activity,” said Stanlib’s Lings.

According to law firm Baker McKenzie, industrial shutdowns in China have resulted in a decline in demand for steel and iron ore.

“African mining companies producing lithium, cobalt, copper, and iron ore have already noted decreasing demand from China caused by production shutdowns and global supply chain disruptions,” the firm noted.

Lings also pointed out that mining is a particularly vulnerable industry in terms of possible coronavirus infections.

“There is lots of communal living in the mining sector, with hostels, etc., and if there is an outbreak there, it would likely lead to a shutdown in mining activity,” he explained.

Major knock to tourism

As China is both a significant investor and trading partner for many African countries, Lings explained that there is a great deal of “rotational” Chinese employment in Africa and, as such, frequent travel.

“We have now seen a significant slowdown in the number of people visiting these markets from China, and while current investments remain, there is definite moderation in certain areas of business,” he said. “While it is still too early to suggest any longer-term implications around Chinese investment into Africa, the bigger issue now is around slowing tourism from China — which is very meaningful for various African economies.”

In early March, the UN World Tourism Organisation (UNWTO) revised its 2020 prospects for international tourist arrivals to a negative growth of 1% to 3%, translating into an estimated loss of $30 billion to $50 billion in international tourism receipts. Prior to the global COVID-19 outbreak, UNWTO predicted positive growth of 3% to 4% for this year.

According to the World Travel and Tourism Council, China is ranked the seventh-largest origin of foreign visitors to South Africa with 97,000 tourists visiting the country in 2018.

With regard to Chinese investment, Rossouw pointed to a direct, long-term impact on growth for a number of African countries.

“With Chinese growth slowing, it will have less capacity to invest abroad, and investment into Africa will dip,” he said.

For more news and reporting on the coronavirus and how management accountants can handle challenges related to the outbreak, visit FM’s coronavirus resources page.

— Jessica Hubbard is a freelance writer based in South Africa. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.