macroafricaintel | African central banks have opportunity to ease policy

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

South Africa
Worrying about the possibility of credit rating downgrades and inflation risks, the monetary policy committee (MPC) of the South African Reserve Bank (SARB) decided by a substantial majority vote to hold its benchmark interest rate at 6.75 percent in January. As the consensus amongst economists was for a hold decision, this was not totally surprising. As the inflation outlook is relatively benign, my view was that a rate cut would have been appropriate at this time; by 25 basis points to 6.5 pecent, say. Hitherto, political uncertainty was a major constraint. With deputy president Cyril Ramaphosa increasingly asserting himself since his accession to the ruling African National Congress (ANC) party’s presidency, much of those worries have subsided. Already, President Jacob Zuma has instituted a much sought after judicial inquiry into state corruption. Mr Zuma has also been agreeable to punitive measures against his erstwhile acolytes, the so-called Guptas (wealthy Indian immigrants accused of using their close relationship with Mr Zuma to overly influence his government). In a nutshell, risks of negative outcomes on the inflation and political fronts are relatively balanced or skewed towards more positive outcomes than negative ones. So why did the SARB choose to hold? It is typical central bank behaviour. The committee could not afford to take the risk that policy uncertainty would be similarly assuaged in due course, likely choosing instead to wait till after upcoming credit rating reviews and the 2018 budget presentation by finance minister Malusi Gigaba in February. Despite assurances by Mr Gigaba, it is not all too clear how the fiscal authorities plan to fund the sudden free education policy of Mr Zuma, for instance. If rating downgrade fears turn out to be misplaced, the SARB might be more comfortable easing policy thereafter. Should there be a downgrade by any of the rating agencies and/or Mr Gigaba’s budget speech disappoints, the central bank might look back in coming months and realise they missed an opportunity to stimulate what is still a weak economy. With annual consumer inflation likely to be closer to the lower bound of the SARB’s inflation target band of 3-6 percent for most of 2018 (it was 4.6 percent in November and would likely be lower for December), the monetary policy committee should not hesitate to seize the opportunity to ease policy at its next meeting when data and events hitherto would likely support such a move.

As the newly appointed members of the MPC of the Central Bank of Nigeria (CBN) are yet to be vetted by the Nigerian Senate, the committee would not be meeting in January. Otherwise, the expectation was that it would keep the monetary policy rate unchanged at 14 percent. This much CBN Governor Godwin Emefiele has signaled. An opportunity to ease policy would probably present itself towards the end of the second quarter of the year, though. By then, it is expected that headline inflation should either already be in the high single-digits or imminently so. This is not a farfetched expectation. Annual consumer inflation slowed for the eleventh consecutive time (since February 2017) to 15.4 percent in December from 15.9 percent the month before. Food inflation remains stubbornly high at 19.4 percent, however; albeit it is slowing as well. My forecasts put the headline at about 9 percent by mid-year and 7 percent by year-end. Foreign exchange (FX) reserves have also been accreting, breaching the $40 billion mark much earlier than anticipated in early January. The positive outlook for international crude oil prices with Brent futures likely within the $60-$70 range for most of the year suggest there is likely to be even more reserves accumulation. Unsurprisingly, the naira has been steady, with the outlook suggesting likely appreciation in due course. This is not necessarily because of the support of the central bank; even though, that is a major factor. Foreign market participants are increasingly comfortable with the special market-driven FX window made available to investors and exporters; evident by its buoyant transaction volumes. The stock market has been a major beneficiary, churning some of the world’s best equity returns lately. With monetary policy likely in good stead and fiscal policy not overly disruptive, the real risks in the Nigerian space are mostly political. As the Muhammadu Buhari administration is already in re-election mode, negative events have been on the rise. First there was the artificial fuel scarcity in late December. Thereafter, pastoralist-led violence in the agricultural belt ramped up in early January. And lately, agitators in the oil-rich Niger Delta region have again started issuing threats to bomb oil and gas infrastructure. Inevitably, they pose risks to the inflation and growth outlook.

Much lower single-digit inflation rates are likely on the horizon. Most recently in December, annual consumer inflation was about 4.5 percent; well within the Central Bank of Kenya’s (CBK) inflation target band of 2.5-7.5 percent. My expectation is that headline inflation could be as low as 2 percent by mid-2018 but would likely rise to about 4 percent by year-end. After proving quite resilient to political shocks from a prolonged election season in the fourth quarter of 2017, the risks in that sphere have largely diminished. An economic boycott called for by the main opposition party has been a failure. By and large, normalcy has returned. The authorities’ burgeoning debt burden is a concern, though. At more than half of GDP in 2017, public debt would likely rise further in 2018 with debt servicing costs in tandem. A $2 billion eurobond could be issued in the first quarter of 2018, for instance; after a call for bids in late 2017. An interest rate cap has also been stifling private sector credit extension. Put together, however, risks are skewed towards more positive outcomes than negative ones. The CBK thus has an opportunity to resume its easing cycle, after it was forced to take a pause from late 2016; having last cut its benchmark rate by 50 basis points to 10 percent in September 2016. Drought-induced price effects held its hand at first. When that subsided, heightened political risks thereafter, during what was perhaps the country’s longest election season yet, necessitated caution. Now, conditions are just right for the CBK to take some risks for the economy. Three rate cuts of about 1 percent in each of this year’s quarters would not be farfetched by my reckoning. Thus, the bank rate could be as low as 7 percent by year-end.

Ghana’s economy has shown tremendous improvements just one year into the Nana Akufo-Addo administration. Real GDP growth was 9.3 percent in the third quarter of 2017, more than twice the rate in the same period a year earlier. Consumer inflation has also been easing. In December, annual consumer inflation came out at 11.8 percent from 15.6 percent a year earlier. The cedi exchange rate for the US dollar has also been largely stable within a 4.4-4.5 range thus far this year; albeit weaker than levels seen for most of 2017. Fiscal policy also appears to be more disciplined now, despite some of the authorities’ populist programmes. Almost a quarter of payments owed contractors was paid in January, for instance. Also, public debt for 2017 was about 68.3 percent of GDP; lower than the set target of 71 percent. After earlier resistance to extending an ongoing $918 million IMF programme when it expired in April 2018, the authorities eventually did the sensible thing by agreeing to allow it run for another year to April 2019. Amidst this background, the Bank of Ghana cut its policy rate by 100 basis points to 20 percent in November. With conditions remaining favourable, the central bank has another opportunity to ease policy further in early 2018.

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