BMI View: Liberia and Sierra Leone's economies are facing significant challenges as a result of the Ebola crisis that continues to claim lives in the West Africa region. The two countries are struggling to contain the disease, and we have adjusted our real GDP growth forecasts as a result.
The outbreak of the Ebola virus that has been ravaging West Africa has serious implications for regional economies. Liberia and Sierra Leone, the two worst-afflicted countries (Guinea and, to a far lesser extent, Nigeria, have also been struck by the disease) are facing the greatest challenge to their macroeconomic - and, indeed, political and social - stability since the end of their respective civil wars, in 2003 and 2002, and we have revised our 2014 real GDP growth forecasts for the two countries as a result. We now forecast real GDP growth of 4.8% in Liberia and 9.3% in Sierra Leone - far less than the estimated 8.2% and 12.6% recorded in 2013, and markedly below the 5.9% and 14.0% government targets for 2014.
| Ebola Shock |
|Liberia & Sierra Leone - Real GDP Growth, y-o-y|
The Ebola outbreak is impeding trade, draining government resources and forestalling investment, most notably into the iron ore mining sector. While our real GDP expansion projections for the two states are still relatively robust - especially when compared to the sluggish outlook for developed economies in 2014 - risks to our outlook are weighted to the downside, especially given that at the time of writing the death toll was continuing to rise. Further, we believe that the spread of the disease highlights some of the risks involved with investing in such frontier markets where investor companies must contend not only with the challenges of grossly underdeveloped transport infrastructure, but also with the potentially lethal effects of an overburdened, undersupplied, healthcare system. According to Augustine Kpehe Ngafuan, Liberia's minister of foreign affairs, the country entered the outbreak with just 50 doctors for a population of 4mn people.
Struggling To Cope
The most recent World Health Organisation (WHO) update on the Ebola outbreak at the time of writing, dated August 22, gave the total number of Ebola cases of the current crisis as 2,615, of which 1,427 had resulted in fatalities. The majority of these have been in Liberia (1,082 cases, 624 deaths) and Sierra Leone (910 cases, 392 deaths). Guinea has also been badly hit by the disease (607 cases, 406 deaths), while Nigeria has to date had 16 cases and five deaths. The growth in the number of cases has yet to show signs of abating. As BMI had envisaged, the lack of a proven cure for the disease, poor state capacity in the affected countries, and poor public health awareness levels has meant that its spread is not being contained ( see 'Full Impact Of Ebola Yet To Be Felt', August 7).
| Further To Rise |
|West Africa Ebola Outbreak 2014 (LHS) & Ebola Outbreaks 1976-2014 (RHS)|
We expect the death toll to mount still higher. The WHO has declared the outbreak an international health emergency and called for international aid for the four afflicted West African countries. On August 26 the African Development Bank pledged an additional USD150mn towards the struggle against the disease, further to the USD60mn it had already promised. The World Bank has pledged USD200mn. Even this, however, is still short of the USD430mn the WHO has said is needed - itself a figure far greater than its initial call for USD71mn in a plan published at the end of July. The upwards revision of the amount of support needed demonstrates how the capabilities of the authorities, and the virulence of the disease, were initially misjudged.
While waiting for international aid, Sierra Leone and Liberia have been allocating the proceeds from local debt issuances towards funding combative measures against the disease's spread, potentially storing up fiscal difficulties for themselves at a later date - especially given the impact the outbreak will have on government revenues.
Crisis Will Weigh On Growth
Although it must be stressed that the outbreak is not yet an epidemic, there is little doubt that it will weigh heavily on economic output in Liberia and Sierra Leone in 2014, and that real GDP growth will come in markedly below that seen in 2013. Different components of GDP by expenditure will be affected to greater or lesser degrees, and we examine this below. It is worth emphasising that the outbreak began in earnest in June and the implications outlined below apply to H214 and onwards. This limits the effect on FY14 growth.
Private consumption: There are serious challenges to private consumption in Liberia and Sierra Leone in 2014 as a result of the outbreak. Companies have been mothballing operations in a bid to contain the disease, and nonessential civil servants in Liberia have been told to stay at home. Although employees have often been paid in advance, there have been reports of workers promised pay but not then receiving it, which, if wrought on a grand scale, will severely impede consumption growth. The evacuation of foreign workers from sectors such as mining will also affect consumption levels.
| Private Consumption Will Remain Key Growth Driver |
|Liberia - Components of GDP, Percentage Points & Real GDP, y-o-y|
Despite this, we do not see private consumption growth declining, due to the essential nature of most consumption spending in these countries. Liberia and Sierra Leone are among the poorest in the world in terms of GDP per capita and the bulk of consumer spending is directed towards essentials, food in particular. In Liberia, food and non-alcoholic beverages make up 35.5% of the weighting of the consumer price index (CPI), demonstrating its importance in the average consumer's basket. In Liberia we forecast private consumption growth of 4.0% in 2014, compared to an estimated 5.0% in 2013, while in Sierra Leone the forecast is for an expansion of 4.5% this year following an estimated 5.0% in 2013.
That said, the closure of borders by the governments, coupled with the fact that major shipping lines and airlines have ceased calling at the countries' ports and airports, has made the import of food supplies problematic and will lead to higher prices. The mooted closure of public markets in Liberia will exacerbate this problem if carried out, as will food price rises, whether opportunistic or not.
Government Consumption: Government consumption is likely to be boosted by the crisis, and we forecast greater growth in 2014 than in 2013 for both Liberia and Sierra Leone. As noted above, Treasury Bills have been issued with the proceeds directed towards fighting the outbreak, and the ramp-up in spending on health care will be complemented by increased spending on security in a bid to contain the social upheaval caused by the disease. Security forces in Liberia have been called in to quell a riot after a 21-day quarantine period (the time it takes for the disease to incubate) was imposed on a Monrovia slum. Increased security spending in Liberia was already expected to boost government consumption in 2014 given the continued drawdown of UN peacekeeping forces, which have been present in the country since the end of the civil war.
However, although we expect that government consumption will be boosted, it will not be by a significant margin, as the money used to combat Ebola will in part have been taken from funds earmarked for other projects and obligations. This will be most stark in healthcare. The effect of focusing on Ebola has already been in part responsible for the spread of a cholera outbreak in northern Cameroon as resources are focused on Ebola checks at borders, and other health services in Liberia and Sierra Leone will have been similarly neglected.
Investment: Investment will be significantly affected in both countries. Both Liberia and Sierra Leone are benefitting from a regional boom in iron ore mining following the discovery of significant reserves in recent years. Gross fixed capital formation in Liberia expanded by 12.3% in 2012, and by an estimated 15.0% in 2013. In Sierra Leone investment grew by 11.8% and 8.5% in the same years. However, as a result of the virus, in 2014 we forecast growth of just 5.0% in Sierra Leone and 4.0% in Liberia.
Mining companies active in the two countries, which include ArcelorMittal, London Mining, African Minerals and Vedanta, have all pulled staff from their mines, and expansion plans have been put on hold. In August ArcelorMittal was forced to postpone expansions for its iron ore mining operations after its contractors announced force majeure and withdrew staff from the country.
| Iron Ore Boom |
|Liberia & Sierra Leone - Minnig Industry Value, USDbn, & % y-o-y|
The negative impact of Ebola on investment levels is likely even stronger in Guinea than in Liberia and Sierra Leone. Falling iron ore prices had already led major iron ore miners such as Rio Tinto to pull back planned investment, and to concentrate their efforts on more established markets such as Australia. In this regard Liberia and Sierra Leone are fortunate that their mines are being developed by second-tier miners such as African Minerals with limited other markets on which to rely. The iron ore deposits in the countries are also of a high grade, meaning that the break-even costs are lower than in some other markets.
Net exports: The closure of borders and ports and airports will weigh on both imports and exports, while exports will be dealt a major blow by the lack of mining activity. Exports from the two countries have been impacted severely since the spread of the disease escalated. Sierra Leone's deputy minister of mineral resources, Abdul Ignosis Koroma said that the country will miss its target of USD200mn of diamond exports as miners are scared to go to the alluvial mines, while tougher border controls were also curbing the trade. The decision by major airlines such as Air France to cease flights will also impact diamond exports. The impact of the Ebola crisis on the iron ore mining sectors in Liberia and Sierra Leone, outlined above, will also be felt in the countries' net exports. The firms involved in the sector have not yet issued revised guidance, but with staff sent home from some mines and operations on hold, growth in exports of the ore will be lower than previously anticipated. The boom in iron ore mining has led to a massive pickup in exports in the two countries over the past two years. In 2012 Liberian exports in real terms expanded by 10.6% and gross tonnage throughput at the port of Monrovia doubled, while in Sierra Leone export growth was a massive 263.8%. We estimate double digit growth in both countries in 2013.
| Robust Start To The Year |
|Liberia - Exports, USDmn, January-April|
In 2014 we forecast real export growth of 5.0% in Liberia and 15.0% in Sierra Leone. It is worth reiterating that there were a number of months of disruption-free economic activity at the start of the year; in Liberia, nominal exports to the end of April were up 29.5% year-on-year, which will help mitigate the negative effects of the later Ebola disruption.
In terms of imports, we forecast real growth of 5.0% in Liberia, and 8.0% in Sierra Leone, compared to an estimated 3.9% and 12.0% in 2013. We believe that government imports of healthcare equipment in particular will serve to keep imports growth positive, though the risks to these forecasts are weighted to the downside. In Liberia, the four months to April saw a 10.1% decline in nominal imports, and the closure of borders. The blacklisting by major airlines and shipping firms will serve to constrain growth in imports as much as it will exports.
Looking Beyond 2014
It is impossible to say when the outbreak will be container, though with increasing pledges of international support and growth of awareness the hope is that the death rate will start to fall rapidly. Provided that Ebola has been contained by 2015, we believe that the two countries will begin to bounce back. We forecast real GDP growth of 7.6% in Liberia and 10.6% in Sierra Leone in 2015, in part due to base effects as delayed investment and export volumes make themselves felt.
That said, the spread of the disease has raised many issues with regards to investment in West Africa, highlighting the frontier nature of these markets. Any companies previously unaware of the potential pitfalls could now be deterred. Nevertheless, we expect that the iron ore boom will serve to keep real GDP growth in both Liberia and Sierra Leone robust over the medium term.