Country Note | Ghana – New sheriff, new approach?

By Rafiq Raji, PhD

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We cut our 2017 growth forecast to 6 percent (from 7 percent). This would still be an improvement on last year’s growth estimate of 4 percent. Our tempered expectations are due to factors beyond the control of the new Akufo-Addo administration. Beside its discovery of careless spending by the immediate past Mahama administration, cocoa (one of its major exports) prices have declined by about 40 percent over the past year. Gold, another major commodity export, has also suffered price declines (about 9 percent to mid-May 2017 from July 2016). Still, there is good reason to believe growth would be better this year. Much of the optimism is driven by an expected increase in crude oil production. The Sankofa and Gye Nyame (SGN) oil fields are expected to add to already producing Jubilee and Tweneboa, Enyenra, Ntomme (TEN) fields by 2018 at the latest. In tandem with rising crude oil prices, increased production would in addition to boosting the government’s coffers also aid power supply. Gas supply from the fields (from SGN especially) would make Ghana no longer reliant on hitherto unreliable foreign supply from neighbouring Nigeria. Ambitious Akufo-Addo promises to cut the budget deficit to 6.5 percent of GDP in 2017 from 8.7 percent in 2016 augur well for the fiscal outlook, albeit it looks somewhat farfetched. But when the quite refreshing commentary emanating from finance minster Ken Ofori-Atta is countenanced, the new administration deserves the benefit of the doubt at least. For instance, at the National Policy Forum (NPF) held in mid-May, Mr Ofori-Atta was insistent on the commitment of the administration to not add new debt to an already worryingly high stock of 72 percent of GDP (2016), which he claimed at the NPF has already declined to 62 percent if the authorities’ 2017 GDP projection is countenanced. Ongoing monetary policy easing should also be supportive of growth, with already slowing inflation likely averaging at 13 percent for 2017, in our view.

Ghana Macro Forecasts 2017 2018 2019
Real GDP, % change 6.0 7.0 7.1
Inflation, % change 12.9 7.2 5.8
Current Account Balance (% GDP) -5.5 -5.0 -4.5
Fiscal Balance (% GDP) 7.0 6.5 4.5
USD:GHS* 4.3 4.1 3.9
Source: Macroafricaintel Research, *year-end

Populist election promises make us cautious about planned fiscal prudence. We see a decrease in the fiscal deficit to 7 percent of GDP in 2017 from 8.7 percent last year. Considering the authorities plan to reduce the fiscal deficit to 6.5 percent of GDP in 2017, our forecast is probably optimistic. Especially, when past target misses by the authorities are considered. In December 2016 (after the 7 December election loss of President John Mahama), former finance minister Seth Terkper revealed the 2016 fiscal deficit target of 5.3 percent would be missed by about 2 percentage points to 7 percent due to weaker than expected tax revenues and low crude oil prices. The new Akufo-Addo administration would later discover a hitherto undisclosed US$1.6 billion hole in the fiscus. New finance minister Ken Ofori-Atta announced the 2016 deficit was actually almost 4 percent of GDP higher at 8.7 percent (relative to the 5.3 percent target) in his 2017 budget speech in March. Thus, the risk to our deficit forecasts is more to the upside. So even as we are encouraged by the authorities’ fiscal consolidation plans, we remain cautiously optimistic, sceptical even. The relatively slight variance in our forecasts and theirs is simply on the need we see for the new administration to be given the benefit of the doubt. But we would not be surprised at all if the fiscal deficit turns out to be above 7 percent of GDP in 2017.

Some of the constaints (power supply, for example) that bogged down the erstwhile Mahama administration might not be as trying under the new Akufo-Addo government, however. But the itch to spend may remain, probably even more so. Mr Akufo-Addo has reiterated his one dam for every village, one factory for every district campaign promise since assuming office. True to type, allocations were made for these in the 2017 budget. Under the Infrastructure for Poverty Eradication Project (IPEP) initiative for instance, each constitutency would get U$1 million. And the ‘one district, one factory’ programme was specially mentioned. This is one of the reasons why we are a little sceptical about the government’s planned fiscal consolidation. There are indications, however, that the authorities may succeed in re-negotiating better terms on the $918 million IMF programme. Besides, the new government would probably change its mind about not extending the programme beyond April 2018. In this regard, the IMF ‘suggested’ in May that the authorities seriously consider this. Considering the government also insists it would wean itself of the eurobond market for the foreseeable future, we are not ruling out the possibility that it might also change its mind on this. Nonetheless, Mr Ofori-Atta revealed in early March that the government would only borrow from multilateral institutions going forward. And more longer-tenored domestic debt issuances are planned. Authorities already showcase cost savings from its debt reprofiling (on the back of US$2.5 billion in new debt). Still, when juxtaposed against the background of 2016 public indebtedness of about 72 percent of GDP (authorities said in May that the debt stock has already decreased to 62 percent of GDP, mostly due to an expected wider GDP base this year from expected higher growth), a term restructuring primarily around local currency but longer-tenored debt would probably still be inadequate. Besides, state-owned enterprises alone have a debt stock of about US$2.4 billion (more than 6 percent of GDP), according to the IMF in April. So, some nuanced approach would probably be more ideal. Thus, irrespective of the nomenclature (debt ‘reprofiling’ or ‘restructuring’), the new administration may still be forced to retain some of the foreign elements of the previous administration’s plan. Of course, should any new foreign debt be concessionary as the administration insists, that would be a significant positive. We would be positively surprised, however, if the authorities do not yet again go to the eurobond market.

Expansionary monetary policy stance to remain on course. Inflation has started slowing and would likely continue to do so, probably ending the year around 12 percent (authorities target 11.2 percent). Annual consumer inflation was 13.0 percent in April from 13.3 percent in January. The decline in the headline figure masks a significant monthly acceleration to 1.3 and 1.6 percent in March and April respectively, after a much slower pace of 0.7 percent in February from 2.7 percent in January. Higher transportation costs on the back of a petrol price hike was attributed for the latest monthly uptick. Even so, the annual inflation headline would likely trend downwards (except for base-related upticks in August and September) for the remainder of the year. Considering this leaves room for further policy easing by the Bank of Ghana – after a 200 basis point policy rate cut to 23.5 percent in March, we expect a cut of 150 basis points to 22 percent in May and another 400 basis point cut to 18 percent before year-end.

Ghana Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 22.0 20.0 18.0 16.0
Source: Macroafricaintel Research

Country Note | Nigeria – Exiting recession

By Rafiq Raji, PhD

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Economy likely out of recession in Q1
Growth was -1.5 percent in 2016, same as our forecast.[1] More importantly, it vindicates our view that the economy would not linger in recession for too long.[2] Our reckoning is that the economy would show positive growth in the first quarter of 2017. The assumption behind this discountenances any stimulation efforts by the government. Considering the negative turn that led to the recession was policy-induced, the lower base for the same period last year suggests a ‘normal’ outcome should push the growth headline into positive territory in Q1. Our forecast may turn out to be conservative, we reckon: if the extraordinary measures aimed at boosting agricultural and industrial production are considered, it is not farfetched to expect an even more positive surprise. Yes, just like last year, there has been another budgetary holdup. As the 2016 budget would run long enough till this year’s is passed (as far as June if need be), which could be any moment now, the delay has not proved to be similarly devastating. Base effects aside, there are other considerations. Crude oil production suffered for the most part of 2016 due to resurgent militant attacks by resource control agitators in the oil-producing areas. Scarcity of all sorts were also the rage; at first due to foreign exchange scarcity, which then caused fuel shortages as importers could not find enough hard currency, and subsequently, food as well; which apart from paucity of FX for staples like rice and so on was also due to bans imposed by the customs and monetary authorities. And there was a stubbornly resilient insurgency in the northeastern part of the country.

The Buhari administration, which though floundered initially on the economy, has been quite successful in quelling the terrorist menace. Joint operations with Cameroon and Niger have been particularly effective. And the government has since reversed its position on stopping amnesty payments to repentant Niger Delta militants, with the budget for the programme almost tripled in early May. Additional overtures since then suggest the peace may be sustained, boosting oil production. Incidentally, crude oil prices which earlier rebounded, after production cuts were agreed by OPEC members in November 2016, have been volatile lately; below $50. Even with recent output cuts extension commentary by Saudi officials, prices have not been responsive. Our view is that crude oil prices would likely return back to above $50, when the extension of the November cuts is officially announced later this month. Also, the government now has a strategy document, the economic recovery and growth plan (ERGP), released after a 3-month delay. The usefulness as we see it, is that there would now be less bickering over what the government should do. With just two years before elections in 2019, and politicking already in high gear, how much of the plan gets to be implemented remains to be seen.

Nigeria Macro Forecasts 2017 2018 2019
Real GDP, % change 3.0 3.1 4.3
Inflation, % change 14.0 7.0 5.0
Current Account Balance (% GDP) -1.0 -2.0 -1.5
Fiscal Balance (% GDP) -4.5 -4.1 -4.0
USD:NGN* 317 313 300
Source: Macroafricaintel Research, *year-end

Rates may stay pat for remainder of 2017
Renewed efforts at collaboration between the monetary and fiscal authorities are encouraging; insofar as undue pressure is not put on the Central Bank of Nigeria (CBN) to cut rates. Finance minister Kemi Adeosun’s desire for monetary policy easing has been bolstered by the slowing of annual consumer inflation in March to 17.3 percent from 18.7 percent in January; albeit the monthly pace actually accelerated by 1.7 percent in March, almost double that in January of 1 percent. Still, we expect inflation to slow further in coming months, probably ending the year at about 11 percent. Consequently, we do not see how the CBN would be able to justify a rate cut. So even as the CBN would likely face continued pressure from the finance ministry, it would be unwise for any easing move to be contemplated until there is a sustained easing in price pressures. Still, there is good reason to be optimistic. Not only has there been a recent appreciation of the naira as the CBN’s FX reserves level rises owing to recent above-$50 oil, a surfeit of dollars in domicilliary accounts is likely to hit the market soon as erstwhile speculators give up on a hitherto expected naira devaluation. In this regard, the CBN has expressed a determination to support the naira, selling about $6 billion thus far this year (April). With exchange rate pressure on consumer good prices diminishing and local production ramping up, the inflation outlook looks promising. Even so, global factors may be constraining. The Fed is decidedly on a tightening course. The Bank of England and European Central Bank may not be far behind as inflation is already above the 2 percent target in the former and almost so in the latter.

ERGP sets stage for borrowings
Authorities successfully issued a $1 billion Eurobond in February, recording almost 8 times oversubscription. Encouraged by the outing, they plan an additional $500 million, likely before end-Q2. And with the ERGP already in implementation mode, the World Bank would likely avail the government credit request of about $1-2 billion. The African Development Bank would also likely release the second tranche of its $1 billion loan. As Nigerian authorities have already provided their funding commitment on the $11 billion Lagos-Calabar coastal railway project, Chinese authorities are expected to do same when negotiations are completed in June. These would all boost the economy most definitely. But then there is the issue of debt sustainability. Although the country’s debt level is below a quarter of its GDP, without restraint, it could easily rise significantly. Besides, the government’s tax revenue is already overburdened by debt servicing, almost 70 percent according to the IMF. Also, the risk that borrowed funds may not be optimally utilized remains a significant risk. Because even as President Muhammadu Buhari’s anti-corruption credentials are exceptional, a wasteful and corrupt public sector culture remains.

Buhari’s health is a key political risk
Mr Buhari recently returned to the United Kingdom for medical treatment. Concerns have been raised about whether he would be able to complete the remainder of his 4-year term. In his stead, vice-president Yemi Osinbajo has proved to be a pair of steady hands. Fortunately, Mr Buhari has provided him all the necessary support to successfully act on his behalf. Still, highwire politicking by mostly northern state governors over a potential vice-president vacancy in the event that Mr Buhari is not able to finish his term is already about. Without proper handling, this could be potentially destabilising. As Mr Osinbajo has proved to be not interested in contesting the presidency in 2019, his expected impartiality should be mitigating to some extent.

Nigeria Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 14.0 14.0 14.0 14.0
Source: Macroafricaintel Research



macroafricaintel | Recent Reports – #SouthAfrica | #Nigeria | #Kenya | #Ghana | #Zambia

NIGERIA – Late start to weigh on growth 

SOUTH AFRICA – Still about growth…and politics! 

GHANA – Slower growth, lower deficit expectations 

KENYA – Banks’ fears and political troubles to weigh 

ZAMBIA – Headwinds may yet endure

Country View | Uganda – Electioneering amid economic headwinds

By Rafiq Raji, PhD

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Growth forecasts revised downwards. We expect 2015 growth of 4.8%. The IMF revised downwards its growth forecasts in November 2015 to 5% from 5.8% previously, below potential of 6-6.5%. Weak exports performance expected in 2015/16 FY (begins July 1) may extend into 2016. We however expect a recovery to begin in 2017 as interest rates decline and the economy trends towards stability. Crude oil production should also boost exports in due course. Authorities issued crude oil production bidding documents to a globally diversified group of 16 companies in October 2015, a sharp contrast to an earlier 2013 licensing round where the only license issued was to a Chinese firm. With the bidding process expected to be concluded in January 2016, we expect successful bids to be announced by authorities before the end of H1-2016. This is in light of the presidential elections scheduled for February 2016. Additional reason to be optimistic is the authorities’ industrialization drive. It plans to boost Uganda’s power generation capacity to achieve this. Eight (8) projects are already afoot to almost double the country’s current capacity of 850MW to at least 1,500MW by 2018. This is even as the current peak power demand of 550MW leaves the electricity grid with a 300MW surplus.

Uganda Macro Forecasts 2015 2016 2017
Real GDP, % change* 4.8 5.0 5.5
Inflation, % change 5.2 6.3 5.0
Policy rate, %** 18.0 20.0 19.0
Current Account Balance (% GDP)* -10.0 -11.0 -12.0
Fiscal Balance (% GDP)* -7.0 -7.0 -6.0
USD:UGX** 3,400 3,000 3,200
Source: IMF, Macroafricaintel Research, *fiscal year begins 01 July, **end of calendar year
Most competitive presidential elections yet. The February 2016 presidential election is almost a foregone conclusion with President Museveni expected to win, in our view. More importantly, his two major rivals – Kizza Besigye of the Forum for Democratic Change (FDC) and independent candidate, former prime minister Amama Mbabazi – get an opportunity to test their popularity. Mr Mbabazi – who was sacked as prime minister in 2014 amidst acrimony with President Museveni – failed to secure a nomination in the ruling National Resistance Movement (NRM) party. Attempts by Mr Besigye and Mr Mbabazi to agree on a united front failed. With both candidates believing strongly in their chances in a post-Museveni Uganda, they likely thought joining forces could jeopardize their chances when President Museveni either steps down or passes on. So, we don’t see a major coalition happening now or in the future. With that formed between Mr Besigye’s FDC and some smaller parties largely ineffective, President Museveni is almost certain of victory. Hence, why we think worries around the elections are overblown. However, judging from comments by President Museveni during the campaigns which started in November 2015, the incumbent has a preference for Mr. Besigye; even as the latter has been detained severally by authorities in the past. There are however expectations of relatively low voter turnout for the 2016 elections. In 2011, voter turnout was 59%, a far cry from above 70% participation in the 2001 polls. There are also indications President Museveni plans to attend the presidential debate being organised by the Inter-Religious Council of Uganda. Having snubbed past invitations, it could be inferred the incumbent is really keen on persuading voters this time around.

Extra-budgetary spending likely as elections approach. In October 2015, authorities sought amendments from partliament to the Public Finance Management Act (2015) that would allow it get short-term loans from the Bank of Uganda (BoU) without having to seek legislative approval. Authorities also sought some leeway for supplementary budget spending without parliamentary approval as well. Both moves have been widely viewed to be motivated by the political cycle, reminiscent of similar spending around previous elections. Moody’s changed its outlook to negative from stable in November 2015, citing the February 2016 presidential elections. Precautionary capital outflows have been recorded on these concerns. Election-related spending in 2011, saw inflation shoot up to above 30%. The IMF has raised concerns. At its October 2015 monetary policy committee (MPC) meeting, the BoU highlighted its expectations of inflation continuing to rise over the course of the first half of 2016. Inflation has been resilient against monetary tightening. Since April 2015, the BoU has hiked its policy rate by 500bps to 17% as at October 2015. Inflation jumped to 7.2% yy in September from 4.8% in August as food prices shot up due to the El Nino effect. It has since been on an upward trajectory, rising to 9.1% yy in November from 8.8% in the prior month. The BoU targets a medium term core inflation target of 5% or less.

Further monetary tightening expected. With inflation likely continuing on an upward trajectory and the Shilling likely to weaken some more as the US Fed normalizes monetary policy, we expect an additional 100bps increase in the Bank of Uganda policy rate to 18% at its December 2015 meeting. We expect a minimum 100bps increase in the policy rate in each of the quarters in the first half of 2016. Power tariffs have been going up. In October, the Electricity Regulatory Authority (ERA) announced tariffs would rise by an average 17.4% three months thence. Dollar-denominated power purchase agreements are largely why, with significant pass-through from the weak Shilling. Electricity subsidies were removed in 2012. Authorities’ infrastructure projects amid Shilling depreciation have also depleted FX reserves to about 4 months of imports, below the East African Community (EAC) convergence criterion of 4.5 months. This highlights the need for authorities to shore up reserves. In November, finance minister Matia Kasaija announced it was seeking a USD 200mn loan from the Eastern and Southern African Trade and Development Bank (also known as PTA Bank) principally for this purpose. Amid scarce FX reserves, the BoU has been intervening in markets, futile in our view. Authorities are certainly keen to maintain their reputation for market-determined FX and interest rates. Dollarization persists, however. Interest rates on bank loans have also increased in tandem with the policy rate. Monetary policy tightening has not been accompanied by fiscal consolidation, however. In fact, the signaling by authorities point to likely continued fiscal expansion.

Uganda Q4 2015 Q1 2016 Q2 2016 Q3 2016
Policy Rate, % 18.0 19.0 20.0 20.0
Source: Macroafricaintel Research



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