Franklin Templeton: COVID-19 Challenges in African Economies

There is a growing risk that the spread of the coronavirus could still escalate to unmanageable levels, in our view. This is due to some additional challenges facing many African countries.

• Fastest-Growing Continent in the World. Africa has a young population, and by 2050, over half of the world’s population growth is expected to happen in Africa.2 While employment opportunities in major cities may attract more migration from rural areas, the level of urbanization is still low compared to many other frontier and emerging markets. However, urbanization has actually been growing fast off a low base, resulting in high-density informal communities in larger cities. The nature of these living conditions makes social distancing measures almost impossible to follow in a government-ordered lockdown.
   
• Health Care Resources Are Constrained. Facilities in many parts of Africa generally lack necessary equipment such as ventilators and intensive care unit (ICU) beds to deal with a mass volume of patients that could become infected. Most would consider the health care capacity quite low—Africa has 1.4 beds per 1,000 people; China, for example, has four beds per 1,000 people.3 Additionally, laboratory capacity is low, suggesting there may not be enough testing to collate a true gauge of the rate of infection. Genomic sequencing of the virus in Africa is also extremely low. There is a risk that Africa may not be well represented in a potential vaccine—these are typically developed on large and varied pools of sequencing data that require a vast representation of strains that may have mutated.
   
• Cash Flow Is Critical. Much of the economic activity on the continent is driven by informal businesses that are typically small in nature. A hard lockdown would force many businesses to close, leaving staff and business owners without income. There is also not much to rely on in terms of savings pools, while insurance or fiscal support for loss of income is negligible. In the developed world and in many parts of Asia, governments announced COVID-19- related fiscal support for citizens and businesses amounting to 7%-10% of their respective gross domestic product (GDP). These support programs far exceed the measures enacted during the global financial crisis. This quantum (relative to GDP) of support is not possible in Africa due to existing fiscal pressures. While the IMF and World Bank have disbursed crisis funding to help with health care and related costs, African economies could continue to struggle amid hard lockdowns and a lack of broad fiscal support.

In our view, extended hard lockdowns in African countries are likely to have a heavier impact in comparison to the rest of the world. The challenges many African governments face preclude them from adopting some of the measures that have been employed elsewhere.

Global Examples on Fighting Back

Finding a balance between containing the virus and maintaining a semblance of economic activity will likely require a different approach for African countries. While many African governments may not have the fiscal capacity to rapidly increase hospital and equipment capacity, they can increase widespread testing at a lower cost to gain a true sense of the rate of infection.

Patients that are filtered at the initial screening stage as part of a multi-level testing strategy could distinguish between those that require immediate care and those that don’t. This, together with mobile operators, can introduce a form of smart contact tracing and awareness using mobile phones. As the level of cases would initially be low, infected patients who do not require a high level of care can be housed in basic isolation centers. This approach could help alleviate pressure on hospitals and reduce the virus’ reproduction rate, given it is hard to isolate in high density informal areas.

Other soft lockdown measures—such as border control and social distancing measures where possible—might help flatten the curve. Most importantly, confidence around widespread testing and tracking will likely create more timely data on active cases and recoveries and assist in identifying hot-spot areas that could then be considered for targeted lockdowns rather than national hard lockdowns. It can also allow economic activity to remain in some form, allowing many informal businesses to continue to operate and provide much-needed income to large parts of the populace that have no social safety net in any form.

What Are the Risks?

All investments involve risks, including possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

ENDNOTES

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