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

Q2-2016 Outlook | Kenya – Banks’ fears & political troubles to weigh

By Rafiq Raji, PhD

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We revise our 2016 growth forecast to 5.7 percent (previously 6.0 percent). There is still a lot to cheer about the Kenyan economy. Better rains should boost the agricultural sector (27 percent of GDP). Negative El Nino effects have largely subsided, albeit risks remain. And we expect tourism would pick up as travel advisories have been lifted by key source markets – in this regard, recent opposition parties’ CORD coalition – who fear the so-called Independent Electoral and Boundaries Commission (IEBC) would be biased and thus want it scrapped ahead of August 2017 elections – clashes with the police during recent protests potentially dampens this prospect. CORD leader, Raila Odinga lost the 2013 presidential elections to incumbent president, Uhuru Kenyatta. The political cycle has started in earnest – way too early in our view. President Uhuru Kenyatta and his Jubilee coalition partners have been campaigning since the beginning of the year – subtly at first but now more overt. Opposition parties have taken the hint clearly, judging from their own recently ramped-up efforts. Also, troubles in the banking sector (3 bank failures as at April) raises the prospect that likely higher loan delinquencies – bad loans rose to 8 percent in March (5.7 percent in March 2015) – may make banks slower to lend, as they implement stronger risk management measures. There are questions about the Central Bank of Kenya’s capacity to provide robust supervision of banks; it lacks capable information technology staff for instance. Add to that the likely need for authorities to rely more than planned on the local debt markets as external financing conditions tighten further – especially on renewed expectations of a US Fed rate hike in June and general market caution with respect to the debt of African sovereigns. Security challenges from still existing terrorist threats are compounded by renewed worries about potential election violence – writ large in already intermittent clashes between members of opposition parties and the security services. These concerns would also likely impact portfolio flows, a major source of support for the Kenyan economy. Still, authorities’ infrastructure spending (in power, rail, etc.) remains on course – China is providing significant support in this regard, offering a US$5.4 billion loan in late March for the extension of the Mombasa-Nairobi-Naivasha standard gauge railway (geothermal power infrastructure in Naivasha is expected to support a planned industrial cluster) to Malaba on the Ugandan border, with the benefits expected to manifest over the medium term. The Mombasa-Nairobi SGR is 70 percent complete and should be operational in June 2017, authorities say. We thus retain the view that a 10 percent medium-term growth expectation is realisable: as completed transport and energy infrastructure and improved regional integration releases ample growth reserves.

Kenya Macro Forecasts 2016 2017 2018
Real GDP, % change 5.7 6.0 6.1
Inflation, % change 6.0 5.2 5.0
Current Account Balance (% GDP) -8.3 -7.0 -6.5
Fiscal Balance (% GDP)* -8.1 -6.6 -5.2
USD:KES** 102.5 104.0 101.0
Source: Macroafricaintel Research, *fiscal year begins July 1, **year-end

Budget overruns in the 2016/17 fiscal year are likely in light of early start to political cycle. Treasury secretary Henry Rotich is scheduled to deliver a KES2.26 trillion (30.6 percent of GDP) budget for the 2016/17 fiscal year – a 23 percent increase in spending on the KES1.84 trillion 2015/16 FY budget – in June. This would be the first budget since responsibility for preparing the document was transferred to the Presidency. Although spending cuts are planned, we are skeptical they would be met in an election year. Still, authorities were able to reign in spending to some extent in the concluding fiscal year and look set to achieve the deficit target of about 8 percent. This is despite revenue collection falling below expectations. So, there is reason to expect some improvements in the fiscal outlook. Authorities have set a budget deficit of 9.3 percent of GDP for the 2016/17 fiscal year, expecting it would likely be 6.9 percent on slower spending. The completion of the Mombasa-Nairobi Standard Guage Railway (SGR I) is expected to provide relief for the fiscus to the tune of at least 1.8 percent of GDP, according to the IMF. Authorities expect that planned measures to increase revenue and cut costs should enable an additional 1.2 percent of GDP in savings. Furthermore, authorities aim to bring the fiscal deficit down to 5.3 percent of GDP in FY 2018/19 and less than 4 percent for subsequent fiscal years.

Inflation expectations have subsided, allowing for monetary policy easing. The Central Bank of Kenya (CBK) was vindicated in its view that El Nino price pressures were temporary and would subside as heavy rains eased. With headline inflation now below the upper bound of the CBK’s inflation target of 7.5 percent – April inflation was 5.3 percent year-on-year, conditions have become ideal for the easing of monetary policy. We expect headline inflation to be below 6 percent throughout Q2, albeit it should average at 6 percent for the year. Our July inflation forecast takes into consideration an expected inflation-adjusted excise tax increase of about 6 percent on some consumer goods in that month. We also expect Shilling stability for most of the quarter. Still, we differ at the moment from CBK governor Patrick Njoroge’s view – which we have come to respect – in mid-May that the current account deficit would shrink faster than expected to about 6.2 percent from the Bank’s estimate of 6.5 percent in 2015. Improvements in tea and horticulture exports and higher remittances from Kenyans in the diaspora are attributed. Our view of the likely current account deficit in 2016 remains in line with earlier expectations of about 8 percent of GDP, 8.3 percent specifically. This is in light of likely volatility in portfolio and capital flows (in part due to electoral violence fears and worries about banks’ strength) and renewed US Fed rate hike expectations. As this is our worse case scenario, we envisage a likely downward revision in Q3 when there should be more clarity. In any case, the CBK has an adequate buffer (via the US$1.5 billion IMF standby facilities it secured in March) should there be shocks. Following from our expectation of slower inflation, we see the CBK cutting rates at its first meeting in Q2 (23 May) by 150 basis points to 10 percent from 11.5 percent hitherto. We also envisage further rates cuts later in the year, as much as 200 basis points probably. Our end-2016 policy rate forecast is 8.0 percent.

Kenya Q2 2016 Q3 2016 Q4 2016 Q1 2017
Policy Rate, % 10.0 9.0 8.0 7.5
Source: Macroafricaintel Research

Q2-2016 Outlook | Nigeria – Late start to weigh on growth

By Rafiq Raji, PhD

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We revise our growth forecasts downwards; now see 2 percent growth in 2016 (previously 4 percent). Our supposed conservative growth forecasts in January turned out to be optimistic. We over-estimated the ability of President Buhari’s administration – which floundered for most of Q1. With the issues around the unprecedented 6 trillion naira 2016 budget only near resolution in May – five months into the year, it is fair to say that even 2 percent growth in 2016 may turn out to be optimistic. Thus, the risks to our growth forecasts are to the downside. What are the issues? Foreign exchange remains scarce. With no indication on future policy direction, uncertainties on this front remain. Fuel is also scarce – although supply eased in the first week of May, we are skeptical about sustainability, in Q2 at least – and power shortages continue, due to gas supply disruptions and scanty rains. Then there is the issue of security. Just as some progress was being made by the Nigerian Army in tackling the terrorist group, Boko Haram, other security threats have arisen: Fulani herdsmen from the northern parts of the country (authorities allege they are foreigners) have been engaged in wanton killings of rural farmers in the south, residents of which are now contemplating arming themselves. With emoluments for former Niger Delta militants cut, there are renewed agitations in that part of the country as well; evident in increased oil and gas pipeline vandalization. President Buhari has been slow to react to the new security threats. If Nigerian authorities succeed in getting their acts together however, the medium term growth outlook may be better. The IMF believes any economic recovery over the medium term would be modest in any case. In the absence of a substantive economic management team, we do not see a quick turnaround.

Nigeria Macro Forecasts 2016 2017 2018
Real GDP, % change 2.0 3.0 4.0
Inflation, % change 12.5 13.0 12.4
Current Account Balance (% GDP) -3.0 -2.0 -1.5
Fiscal Balance (% GDP) -5.0 -4.0 -4.0
USD:NGN* 250 300 350
Source: Macroafricaintel Research, *year-end

Business executives have been quite vocal about current economic difficulties but choose to endure in light of the country’s long term potential. Furthermore, the much-anticipated National Economic Council retreat in March turned out to be anti-climactic, largely ignoring key issues of interest; especially the clearly sub-optimal foreign exchange policy of the CBN. More puzzling, President Buhari’s economic philosophy – economic diversification mostly – seems out of sync with the policies of his government. It is very difficult to be optimistic about the Nigerian economy right now. With monetary and fiscal policies in such shoddy form amid a continuing oil slump and strained finances, Standard & Poor’s put Nigeria on a negative outlook in March, making it all but likely a subsequent assessment in September would be a downgrade. In late April, Moody’s downgraded the country’s credit rating to B1 from Ba3 on what it considers a lower for longer bearish crude oil market. We are not surprised by these developments, having highlighted this possibility in our commentary. Expectedly, authorities have chosen to abandon Eurobond issuance plans, on cost considerations mostly. Instead, Nigerian authorities are looking to China. President Buhari secured more than US$6 billion worth of investments during his trip there in April. He also re-negotiated loans agreed with the Chinese by previous Nigerian administrations, especially that of President Goodluck Jonathan. These loans could be about US$13 billion, in our view; based on an assumed 85 percent Chinese funding: There is the US$12 billion 1,402-kilometre Lagos-Calabar railway line project and the US$8.3 billion Lagos-Kano railway modernization project (contract was initially signed in 2006). There is also talk of a US$4-5bn currency swap agreement with the People’s Bank of China (PBOC), albeit the CBN already signed one with the Industrial and Commercial Bank of China (ICBC). Authorities are yet to reveal when and if any deal has been struck with the PBOC. They have also not revealed the amount of renegotiated Chinese loans.

We think the Central Bank of Nigeria (CBN) would hike rates further in May, by 100 basis points to 13 percent, and may devalue the naira later in the year, albeit reluctantly. It is quite clear that keeping the naira artificially strong – in the interbank market at least – has not been helpful for the Nigerian economy. Inflation has risen into the double-digits and essential commodities are scarce. With the central bank getting to determine who gets foreign exchange, political patronage around the issue is on the rise. There have also been numerous instances where foreign exchange acquired officially was diverted to the parallel market for arbitrage purposes. As further naira devaluation also supports the economic diversification objective of the authorities, we think the CBN has little choice but to change course. In a surprise move, the monetary policy committee (MPC) of the CBN hiked its policy rate by 100 basis points to 12 percent in March, signaling a departure from its hitherto unorthodox approach. The move – predictable under normal circumstances – came as inflation rose into the double-digits, 12.8 percent in March, far above the upper bound of the CBN’s target inflation band of 6-9 percent. We expect headline inflation to be about 13 percent on average in Q2. We have also revised our annual inflation forecasts upwards: 12.5 percent in 2016 (previously 10.6 percent) and 13 percent in 2017 (previously 8.4 percent). The consequent negative real interest rates would warrant further policy tightening. Thus, we expect the CBN to increase its policy rate by another 100 basis points to 13 percent at its only MPC meeting this quarter in May. We also think it is reasonable to expect that a more flexible exchange rate regime would also come about in due course. In this regard, President Buhari’s intransigent stance on the naira is a major constraint, as he continues to insist further naira devaluation would not be beneficial for majority of Nigerians. As we think an overvalued naira is not sustainable, we retain our view of naira devaluation, albeit timing is uncertain. Our end-2016 forecast for the US dollar exchange rate remains 250 naira, a 26 percent devaluation from the current level of 199. Speculations remain on what the CBN’s new foreign exchange framework would look like when it is announced. A 2-tier system and a wider exchange rate band have been mooted. While much bolder actions would be required, a framework would at least provide some predictability.

Nigeria Q2 2016 Q3 2016 Q4 2016 Q1 2017
Policy Rate, % 13.0 14.0 15.0 15.0
Source: Macroafricaintel Research

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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