New Figures Support Robust Growth

The DRC's economy was shattered by a series of civil wars in the 1990s and early 2000s. According to BMI calculations, the economy contracted by almost 50% between 1990 and 2000, and 2012 will be the first year the country regains its pre-war level of economic production. The key driver of this resurgence has been the mining sector, which BMI's analysis suggests has increased in value by an annual average of 68% since the year 2000.

BMI expect s economic expansion to reach 7.1% in 2012 due to successful government reforms, improving net exports, and the relatively minimal impact that violence in the country's violent east is having on the national economy. Over the coming years, however, BMI predicts that growth will slow as falling metal prices dampen investors' interest in the country's mining-based economy.

Growth To Peak, But Stay Robust
DRC - Real GDP Growth (%) & Contributions To Growth (pp)

Expenditure Breakdown:

Private Consumption Outlook: Domestic consumption has not contributed to the DRC ' s economic growth in the way that we have seen in other African countries. Entrenched poverty, poor infrastructure, and a difficult business environment that discourages local business development have all prevented the emergence of a large consuming class. Most Congolese remain poor, and spend money primarily on subsistence goods. The mineral-based economy has produced few jobs for the local workforce, and less than 30% of the population is in formal (salaried) employment. Over half of working-age Congolese people are unemployed, which has depressed consumer spending.

Mineral Wealth, Human Poverty
DRC - Salaried & Unemployed Populations (% Of Workforce)

Another obstacle preventing the DRC ' s population from escaping poverty has been the country's high birth rate and consequently rapidly growing population. This has caused the DRC ' s dependency ratio (the ratio of children and the elderly to the country ' s adult population) to be one of the world ' s highest.

Many People, Few Workers
DRC - Dependency Ratio (Young & Elderly Population As % Of Working Age Population)

Between 1995 and 2005 the country had more children below the age of 15 than it had working-age adults, meaning that its productive labour force was much smaller than the total population figure would suggest. The trend, however, is clearly positive, and we expect that the domestic economy will be boosted in the years to come by an increasing population of potential workers. This is a trend that is common to many African economies, which should see growing workforces as they enjoy a 'demographic dividend'. Precisely the opposite process is underway in many European and Asian economies, which will see their workforces stagnate as their societies age.

For now, though, the DRC has proportionally fewer working-age people in its population than rapidly-aging Japan will have in the 2050s. Such a young population will depress private consumption by keeping wages down, while overburdening state resources.

Public Consumption Outlook: Government spending will represent 34.3% of GDP in 2012, up from only 19.9% in 2003 . Even so, public consumption will make a relatively minor contribution to growth. We believe that real growth in public spending will fall from 8.0% in 2011 to 5.0% in 2012. Spending was boosted in 2011 by the organisation of a general election in November of that year.

We also believe that the inability of the government in Kinshasa to coordinate a policy will prevent any major new spending announcements. The only significant increase in spending will come due to the mobilisation of the national army to deal with the rebellion in North Kivu. This, we expect, will be largely countered by the cancellation of other government spending in the areas over which it has lost control.

Investment Outlook: While the DRC is and looks likely to remain a very difficult place to do business, BMI believes that foreign investment will remain relatively strong. We see fixed investment (most of it foreign) increasing by 6.5% in real terms in 2012.

In 2013, however, we believe growth will slow to 6.1%, and subsequently to 5.5% in 2014. This is due to BMI's bearish view of Chinese import demand, which should depress copper prices and reduce investor interest in the DRC's mining sector. We have previously highlighted that the DRC is one of the African countries most exposed to a slowdown in China (see September 19, 'China & Africa: The End Of The Party?').

Despite rising violence in the province of North Kivu, we believe that the security situation poses a relatively minor risk to the DRC's investment outlook. Mining infrastructure is mostly growing in Katanga, which is relatively far from the unstable Rwandan border. BMI notes that foreign investment into the country was relatively stable even in 2008, when the political situation was much worse than it is now.

Net Export Outlook: BMI believes that net exports will remain the key contributor to growth over the medium term. Exports and imports will both remain high, with relatively minor adjustments to either's growth having an appreciable impact on headline growth.

Copper-Plated Growth
DRC - Copper Production ('000 Tonnes) & Price (US$/Tonne)

The key driver of net exports will be the DRC's mining sector, specifically the copper industry. Surging copper output and historically high prices have supported rapid export growth. According to BMI's Mining analysts, copper production increased by an average of 35.2% annually between 2003 and 2011.

We believe that this period of super-charged growth, however, is coming to an end. BMI predicts that copper production will grow by 28.7% in 2012, but then only 11.2% in 2013 and 6.4% in 2014. Slowing Chinese demand will cause copper prices to fall, decreasing investment in new mines.

On the import side, new figures from the IMF have caused us to revise down our forecast for import growth in 2012. This is the cause of our upward revision in 2012 net exports, and a major cause of faster growth this year. Over the longer term, however, import growth will remain strong as the DRC is dependent on imports for capital goods, fuel, and much of its food.

Risks To Outlook

There are two key risks to this forecast, the spread of political instability from North Kivu to the country as a whole, or a worse-than expected slowdown in developed markets causing commodity prices to fall dramatically. BMI believes that the M23 rebellion along the Rwandan border will remain contained, causing high levels of suffering, but having a minimal impact on headline growth . This forecast is based on BMI 's already bearish view of the Chinese economy, which we doubt will underperform our expectations.

This article is tagged to:
Sector: Country Risk, Mining
Geography: Congo, Congo, Congo, Congo

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