Country Note | Kenya – Drought & rate cap to weigh on growth

By Rafiq Raji, PhD

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We cut our 2017 growth forecast to 5.1 percent (from 6 percent). Drought troubles re-emerged in Q1-2017, with an almost immediate impact on inflation. (Food inflation was 21 percent in April.) Rains have fell short by more than a quarter of the average this year, weighing significantly on agricultural output (24 percent of GDP, 50 percent of export earnings and 60 percent of employment). Food and cash crops have been affected. An imminent maize shortage would only be averted with ramped-up imports. The authorities’ maize reserves have been almost totally depleted, and thus would need re-stocking. The late and meagre rains are also delaying the flowering of coffee bushes. Sugar and tea production are envisaged to decline quite significantly (more so for sugar) this year as well. Considering it is election season (polls on 8 August), nerves are a little frayed; with the opposition and indeed millers blaming the government for not heeding earlier shortage warnings. It is estimated the maize harvest this year could fall short of the 4.3 million tonnes needed by more than 1 million tonnes. Together with slower private sector credit extension on the back of the authorities’ interest rate cap (put in place in September 2016), growth is set to be constrained consequently. A counter-argument is that the interest rate cap is not primarily responsible for lower credit to key sectors of the economy. That is, just because it is slower does not mean growth would be significantly impacted. The Central Bank of Kenya did a study on this, governor Patrick Njoroge says in a recent interview with CNBC Africa. It found for instance that retailers in the trading sector, due to their own unfavourable circumstances, have now come to depend more on supplier credit. And that even as agriculture is a dominant sector of the economy, bank credit constitutes just 4 percent of its financing. Still, there has been an opportunity cost to the government’s interest rate cap, with banks prefering to divert the relevant portion of their risk buckets to risk-free government securities. Private sector credit extension is currently about 4-4.5 percent, a far cry from 21 percent in August 2015. Add to that the earlier highlighted looming drought-induced food crisis. Unsurprisingly and with elections only months away, the Kenyatta government has been forced into action. Authorities announced in mid-May that about KES6 billion would be used to subsidize food imports. A supplementary budget is in the works in this regard. The Central Bank of Kenya (CBK) would almost certainly not be able to ease policy this year. Good thing it took the chance when it did in September 2016. Lower interest rates was a factor behind our higher growth forecasts in September.

Kenya Macro Forecasts 2017 2018 2019
Real GDP, % change 5.1 5.5 6.0
Inflation, % change 11.8 8.4 5.8
Current Account Balance (% GDP) -6.0 -5.5 -5.1
Fiscal Balance (% GDP)* -7.1 -5.7 -4.5
USD:KES** 103.5 103.0 101.0
Source: Macroafricaintel Research, *fiscal year begins July 1, **year-end

Violent and chaotic party primaries raise concerns about August elections
Party primaries in April were marred by violence and rigging. Both the ruling Jubilee party and newly formed opposition coalition National Super Alliance (NASA) party had one form of disruption or the other. However, the fracas at that of the Jubilee party was more serious. 62 people were charged to court in early May for either bribing voters or inciting violence during the primaries. Incidentally, as quite a few intending candidates were not able to secure party nominations before the 10 May Independent Electoral and Boundaries Commission (IEBC) deadline, the August elections are set to have the highest number of independent candidates on record. Preparations for the polls by the IEBC itself have ran into some holdups. For instance, the IEBC cancelled the contract for the electronic voting system in March, raising opposition fears that a forced manual voting amendment of the electoral law by the ruling Jubilee party may become the main voting mechanism, instead of the backup it is supposed to be. Although the IEBC says it is considering other options, indications suggest the election may be significantly contentious should voting be done manually. Thus, fears about violence during the elections are not misplaced. But would it likely be as intense as the 2007 elections? We do not think so.

Rising debt profile worrying
Key concern is that the authorities are increasingly relying on relatively expensive syndicated loans. As at end-2016, Kenya’s external debt was US$17.7 billion (26 percent of GDP). Since then, the authorities have taken on at least US$2.55 billion in syndicated loans. In March, authorities took US$1.55 billion in syndicated loans: $800 million from Standard Chartered, Standard Bank, Citi, and Rand Merchant Bank; $500 million from Afrexim and TDB; and $250 million from TDB. And in May, the authorities took another US$1 billion syndicated loan split between commercial banks and development financial institutions. These alone add 3.7 percent of GDP to the debt stock. It is doubtful the authorities’ 6.0 percent of GDP fiscal deficit target for 2017/18 FY (starts 1 July), from 9.0 percent of GDP in 2016/17, would be met. We have raised our fiscal deficit forecasts consequently. President Uhuru Kenyatta tried to be reassuring on the rising debt profile in his state of the nation address in mid-March. But the government’s actions have not been in tune with its rhetoric: On 1 May, Mr Kenyatta raised the minimum wage by 18 percent. It is not all too surprising though. (We highlighted in our last note how upcoming elections might spur disproportionate public spending.)

CBK to pause expansionary stance
Drought conditions in Kenya have caused a spike in food prices, with inflation in toe. Annual consumer inflation was 11.5 percent in April. (compare that to 7 percent in January.) Our current forecasts put inflation higher subsequently; and definitely outside of the Central Bank of Kenya’s (CBK) 2.5-7.5 percent target band for the remainder of 2017. In March, the price of a 90kg bag of maize rose by 5 percent, and is set to spike even more as sellers hoard their stock. Army worms were also reported to have ravaged over 140,000 hectares of maize crops in western and southern Kenya in May, potentially adding to food price pressures down the line. With elections due in August, the government can ill-afford a food shortage crisis. So after depleting its maize reserves to less than a day’s worth (4,500 tonnes) in mid-May, following a release of about 36,000 tonnes to ease the supply shortage, the Kenyan government plans to subsidise wholesale food imports to stabilize prices. But for the drought-induced food crisis, the bank would have remained in a good position to cut rates further this year, after a 50 basis point cut to 10 percent in September 2016. Now, that is totally out of the question. And it would not make sense for it to hike rates either.

Kenya Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 10.0 10.0 10.0 10.0
Source: Macroafricaintel Research

Country Note | South Africa – Toxic politics

By Rafiq Raji, PhD

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We upgrade our 2017 growth forecast to 0.7 percent, from 0.4 percent. (The IMF is more optimistic though, raising its 2017 growth forecast to 1 percent from 0.8 percent in May.) Still, the South African economy remains delicate somewhat. Some of the wear and tear came out in the Q4 2016 GDP growth data, coming out negative: -0.3 percent (seasonally adjusted and annualised). Since then, especially in Q2 2017 thus far, and amid negative political noise, it has shown remarkable grit. The positively surprising resilience can be evidenced in recent mining (7 percent of GDP) and manufacturing (13 percent of GDP) production data (March), which both beat expectations, coming out at 0.3 percent (year-on-year) and 15.5 percent respectively. (A contraction was expected for the former and the latter was significantly higher than expectations of about 4 percent.) Recent retail sales data was also quite good – turned positive in March after a year-on-year contraction a month earlier led to expectations of a continued negative trend – despite an increasingly debt-weary consumer class. There are other considerations for the upward review. Some of the constraints (load-shedding, political noise, rand weakening and volatility, drought-induced food imports and price spikes) which bogged down the economy last year have either diminished or become non-existent. 

South Africa Macro Forecasts 2017 2018 2019
Real GDP, % change 0.7 0.9 2.3
Inflation, % change 6.2 5.5 6.5
Current Account Balance (% GDP) -4.5 -4.4 -4.3
Fiscal Balance (% GDP)* -3.6 -4.1 -4.0
USD:ZAR** 13.7 12.5 12.7
Source: Macroafricaintel Research, *fiscal year starts on 1 April, **year-end

The maize harvest this year could almost double the last, albeit worries remain about a potential El Nino drought in July-September. Load shedding is now largely unheard of, with new power plants coming on stream by and large according to plan. For instance the Medupi unit 5 came online in April, adding 800MW to the grid. Such is the case now that Eskom, the state power utility, feels secure enough to pushback on green independent power producers; a negative for investor-friendliness but evidence of confidence. Political risk has increased, however, as the ruling African National Congress (ANC) prepares to replace Jacob Zuma as party president in December. Campaigns have begun in earnest. The two principal candidates, deputy president Cyril Ramaphosa and erstwhile African Union Commission chairperson and President Zuma’s ex-wife Nkosozana Dlamini-Zuma, have been reaching out to delegates ahead of the elections. With Mr Ramaphosa obviously a better candidate but out of favour with Mr Zuma, tensions abound. The coming months could be very tense indeed. In-fighting in the ANC, a determined but beleaguered Mr Zuma looking to ensure his ex-wife replaces him, and deputy president Cyril Ramaphosa’s ambition to be chosen instead, have caused a lot of ruckus within the party and wider South African polity. This would probably remain the case till December. Regardless, the South African economy would probably still pull ahead in 2017. Should Mr Zuma prevail at the party conference, however, a wait-and-see approach might be adopted by long-term foreign capital providers. Portfolio investors might not be so worried initially, we have found.

Populist politics may trigger further ratings downgrade
S&P Global Ratings and Fitch Ratings both downgraded South Africa’s credit rating to junk status in early April, after former finance minister Pravin Gordhan was removed from his post in late March. Moody’s is largely believed would follow suit, albeit opinions are divided over whether theirs would be a one-notch downgrade to just one level above junk status or two-notches down to junk status. Mr Gordhan’s replacement, Malusi Gigaba, has since proved to be a little controversial, however, after a widely acknowledged good performance at the World Economic Forum in Durban in May. Concerns revolve around a much touted ‘radical economic transformation’ that could include among other things land expropriation without compensation, nationalisation of the South African Reserve Bank (SARB), mines and commercial banks. Already, a developmentalist state-owned bank to be spinned out of the postal service is in the works. There has been some toning down of the socialist rhetoric lately though. More realistic but still populist options are now being considered it seems. For instance, Mr Gigaba plans to use the $40 billion procurement budget at his behest to aid black businesses. And he continues to assure investors that any supposedly populist initiatives would remain within the bounds of the 2017 budget parameters. So his real intentions (and that of his principal) would probably only become obvious in October when he presents the mid-term budget and probably more so in that for the 2018-19 fiscal year in February. In any case, some sense of what these could be are already becoming obvious.

There is clearly a determination by the Zuma government to build new nuclear power plants; estimated at US$30-70 billion. After a high court ruled in April that an earlier arrangement with Russia (the authorities have similar agreements with China, France, South Korea and the United States) was inappropriate, the government announced in mid-May that new and more transparent ones would be signed instead. The return of disgraced former Eskom chief executive Brian Molefe to the state power utility in May, after a reportedly botched attempt to be finance minister, bolster suggestions in some quarters that the authorities’ nuclear power plans would go ahead irrespective of the potential negative impact on the fiscus. Mr Gigaba has thus far suggested that any move on this front would only come about if the government can afford it. It is highly unlikely however that Mr Gigaba would be able to rule against any of Mr Zuma’s proposals, who it has been suggested seems quite inordinately enthused about the nuclear power programme. Fears about increased corruption in government from already deplorable levels have been raised consequently. These considerations inform our expectations of likely fiscal deterioration and the upward revisions to our 2017 and 2018 deficit forecasts.

Rates likely steady for remainder of 2017
Annual consumer inflation would likely remain outside of the SARB’s 3-6 percent target band (except for July perhaps) for the remainder of 2017. True, the headline figure declined in March to 6.1 percent from 6.6 percent in January and would probably be about 6 percent in April if our forecast is vindicated, it is likely to venture outside the band subsequently. Because even if food prices prove to be stable (on the back of a likely bumper maize harvest this year and hitherto ample imports to fill the gap from an earlier drought-induced decline in domestic production), power tariffs are likely to rise: Eskom secured approval in February from the electricity regulator to raise tariffs by 2 percent in the 2017/18 fiscal year. More relevant though is that the regulator also gave the power utility a carte blanche of sorts to make additional hike requests. And if crude oil prices rise as envisaged, fuel prices (and transportation costs in tandem) would probably rise as well. External factors would also weigh. The US Fed would probably raise rates twice more later in the year, after two hikes already in December 2016 and March 2017, further tightening global credit conditions. The ratings downgrade to junk status and highlighted domestic and external factors have motivated calls in some quarters for the SARB to hike rates. Governor Lesetja Kganyago has expressed scepticism about whether such a move would be differential to foreign portfolio and direct investments. More importantly, a rate cut is almost certainly out of the question this year. Thus, we expect the repo rate to remain unchanged at 7 percent for the remainder of 2017. Our inflation forecasts (at this time) support keeping it that way till end-2018.

South Africa Q2 2017 Q3 2017 Q4 2017 Q1 2018
Policy Rate, % 7.0 7.0 7.0 7.0
Source: Macroafricaintel Research

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 | Nigeria – Revision of forecasts

By Rafiq Raji, PhD

See PDF copy of presentation viz. macroafricaintel-nigeria-brief-nov-2016-updated

See Q4-2016 Outlook report for reference viz.



Real GDP Growth % qq % yy
Q1 2015 -11.6 4.0
Q2 2015 2.6 2.4
Q3 2015 9.2 2.8
Q4 2015 3.1 2.1
Q1 2016 -13.7 -0.4
Q2 2016 0.8 -2.1
Q3 2016 9.0 -2.2
Q4 2016F 4.0 -1.4
Q1 2017F -10.0 2.9
Q2 2017F 2.0 4.1
Real GDP Growth %
2016F -1.5
2017F 3.0
2018F 3.1

Q4-2016 Outlook | South Africa – Political risk may trigger ‘junking’

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc.)

0.2 percent 2016 growth now expected
We revised our 2016 growth forecast to -0.2 percent in June, after the economy contracted by 1.2 percent (saa) in Q1 2016. To our delight, Q2 2016 GDP growth surprised to the upside, coming out at 3.3 percent (saa). Our expectation was much dour, -0.4 percent. Some of the initial cheer was dampened only too quickly: early Q3 manufacturing and mining data was poor. In July, manufacturing output (13 percent of GDP) slowed to 0.4% year-on-year (yy), from a revised 4.7% yy in June. Mining (7 percent of GDP) was more disappointing: it contracted 5.4% yy in July from a revised -3.0% yy in the prior month. The improvement in Q2 is worthy of some consideration regardless. The South African Reserve Bank (SARB) has signalled as much, indicating it would likely review its growth forecasts upward when its monetary policy committee (MPC) meets in September. Also, power supply constraints have eased quite significantly, with no load shedding expected in 2016-17; albeit one unit of the 2-unit 1,800MW Koeberg nuclear power plant was shut down in September for refueling and maintenance – expected back on line by end-October. Independent renewable power producers have been making progress in any case, that is, when their strides were not hampered by the state utility Eskom, which worries the IPPs’ progress threatens its future income. Even so, the 800MW unit 5 of Eskom’s Medupi coal power station was added to the grid in September, expected to be commercially available in March 2018. In the 18 months to September, about 1,800MW of incremental power has been added to the grid, officials say, with plans to ensure the total increment reaches about 8,600MW by 2020/21. 6,132MW would come from the Ingula hydro-power (KwaZulu-Natal province) and Kusile coal-fired plants (Mpumalanga province). Agricultural output (2 percent of GDP) continues to be weighed down by drought though, albeit effects are more inflationary than growth constraining. In September, authorities revealed the drought had shrunk the national maize planting area by 30 percent and the cattle herd population by 15 percent. Business confidence is hard to read; sour by and large thus far in any case. For instance, after seven quarterly dips, business sentiment improved in Q3 2016 amid concerns about political risk, based on a survey by the Bureau of Economic Research, but declined in August in the survey by the South African Chamber of Commerce and Industry (SACCI).

South Africa Macro Forecasts 2016 2017 2018
Real GDP, % change 0.2 1.9 1.7
Inflation, % change 6.8 5.9 6.1
Current Account Balance (% GDP) -4.7 -4.5 -4.4
Fiscal Balance (% GDP)* -4.0 -3.8 -3.5
USD:ZAR** 14.9 15.0 14.0
Source: Macroafricaintel Research, *fiscal year starts on 1 April, **year-end

25bps rate hike likely in November, continued pause in September
After barely coming within range in July at 6 percent, inflation would likely accelerate enough to breach the SARB’s 6 percent upper bound target from August to March 2017. Even so, the SARB would probably keep the repo rate unchanged at 7 percent at the MPC meeting in September. We anticipate a justifiable 25 basis point tightening to 7.25 percent at the November meeting, the likely peak of the cycle. Thereafter, it is probable the SARB may see room to start easing rates from Q2 2017. Our revised inflation forecasts see the headline averaging above 7 percent for the five months to year-end, from 6.8 percent in August to about 8 percent in December. Drought-induced food price increases are expected to continue, as the prospects for improved rains have diminished significantly. Fuel prices are set to rise in October. Some rand volatility is also expected towards year-end as expectations gyrate over a potential ratings downgrade to junk status by at least one of the global rating agencies, SPGlobalRatings especially. Political uncertainty would perhaps continue to hover over all considerations in any case. Above-inflation wage deals also weigh on the outlook. In September, auto workers agreed an 8-10 percent increase over 3 years with employers. Other unions are expected to take a cue from this. Even so, platinum mineworkers failed to agree a wage deal in September. A strike in the sector is probable in late Q3 or Q4. In the past, the SARB expressed significant worries about how these wage deals could be differential to its rate-setting decisions.

Junk play is still on
Hitherto growth was a major consideration for rating decisions expected before year-end. Still is. However, political risk may be what finally tilts the balance against the government. There is an ongoing power tussle between finance minister Pravin Gordhan and President Jacob Zuma. Mr Gordhan has been harassed severally: from a purportedly planned arrest to publicly embarassing jibes at him by supposed allies of Mr Zuma. On balance, Mr Zuma has been able to get his way. Nuclear power plans, money for which is not readily available, are to go ahead nonetheless. Ms Dudu Myeni, an ally of the president, severally accused of mismanagement, has been reappointed to the chair of longsuffering state-owned South African Airways. Other moves by the presidency, widely believed to be aimed at clipping the wings of the Treasury, have been about. For instance, a presidential council on state-owned enterprises (SOEs) has been set up. That is, in addition to an already existing inter-ministerial SOEs committee chaired by the deputy presidency. A botched supposedly planned enquiry into banks’ conduct in withdrawing support for the Gupta family, wealthy Indian immigrants allied to Mr Zuma, was probably what finally hardened negative views. Authorities deny any such enquiry – widely believed to be targeted at curbing the powers of the South African Reserve Bank – was planned. Investors have taken notice. Futuregrowth, an asset manager, decided to pull the plug on some SOEs on political risk concerns. Similarly, Danish lender, Jyske Bank, went underweight the bonds of state-owned power utility, Eskom, citing governance concerns. More investors and financial institutions have probably done as much, or plan to, quietly. Rating agencies have begun to raise their voices as well. Moody’s recently warned in-fighting in the ruling African National Congress (ANC) party – which intensified after a poor showing in the August 2016 local polls – increased the probablility of a downgrade later this year. Moody’s put SOEs on notice for potential downgrades in mid-September. Interestingly, Moody’s is supposed to be the dove: Fitch and SPGlobalRatings are typically hawkish, the latter more so. Authorities are undaunted. After successful coordination efforts that fended off negative rating reviews in June, Mr Zuma’s government has begun another charm offensive with business leaders to avert a downgrade come year-end. Ratings review meetings with authorities are scheduled to start in earnest: Moody’s (21-22 September), SPGlobalRatings (early November), and Fitch (early December). Moody’s affirmed its two-notch above junk credit rating (Baa2) for South Africa in early May. Standard & Poor’s (S&P) and Fitch followed suit in June, affirming their higher one-notch above junk rating, but with negative outlooks. Rating decisions by all three are slated for December.

South Africa Q3 2016 Q4 2016 Q1 2017 Q2 2017
Policy Rate, % 7.0 7.25 7.25 7.25
Source: Macroafricaintel Research

Q4-2016 Outlook | Kenya – 2017 polls all that matters now

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc.)

Improved trade, tourism prospects support growth forecasts
We retain our 5.7 percent growth forecast for 2016, with improvements in 2017-18 to about 6 percent. Q1 2016 growth of 5.9 percent portends our forecast would likely be within range of the eventual full year headline. Tourism would likely end the year on a cheery note. An 18 percent rise in revenue to KES100bn from the sector is expected. About half of that was already earned by mid-2016, according to authorities in late-August. Fears about political unrest abated in late Q3, as the opposition CORD coalition reached a compromise with their ruling Jubilee counterpart, which saw the emergence of a revised electoral law; recently signed by President Uhuru Kenyatta. Trade may also get a boost in due course. Phase one of the new Mombasa port terminal was commissioned in September. When finished, the Mombasa port would be the largest in the east African region, catering for cargo traffic from neighbouring Uganda and Rwanda. The impasse with neighbouring countries on the European Union (EU) Economic Partnership Agreement (EPA) has also subsided. Uganda changed its mind about not signing and Burundi is likely to follow suit. Intensified pressure on Tanzania to sign in light of this suggests it may also change its mind. Not signing the EPA would make Kenyan exports to the EU expensive, as it would no longer have preferential tariff access. The East African Community (EAC), currently chaired by Tanzania, has asked for more time. There are indications the EU may oblige beyond the 1 October original deadline. In any case, authorities have already indicated they would enter into a unilateral arrangement should its regional partners cause a holdup. Brexit trade-related concerns remain overblown, in our view. Only issue therefore is already intense political activities ahead of elections in August 2017 and how that potentially colours everything else.

Kenya Macro Forecasts 2016 2017 2018
Real GDP, % change 5.7 6.0 6.1
Inflation, % change 6.0 4.9 5.6
Current Account Balance (% GDP) -6.3 -6.0 -5.5
Fiscal Balance (% GDP)* -9.5 -8.7 -7.3
USD:KES** 102.3 104.0 101.0
Source: Macroafricaintel Research, *fiscal year begins July 1, **year-end

Room for another rate cut
After having to pause hitherto on resurgent but likely temporary upward inflationary risks, the Central Bank of Kenya (CBK) could, if it wanted to, cut rates by 100 basis points to 9.5 percent, as early as at its monetary policy committee (MPC) meeting in September – last time was in May, when the CBK cut rates by 100 basis points to 10.5 percent. We believe there might be even more room for the CBK to ease policy further by another 100 basis points to 8.5 percent before year-end. By our reckoning, inflation would likely ease to about 5 percent then. Concerns about fuel price increases, which rose in mid-July amid resurgent insecurity, have since subsided or diminished. There is risk however of potential electricity tariff hikes, as geothermal power plants shut down for maintenance have created a supply gap of about 200MW and imports – that from Uganda (more than 90 percent of imports) up 32 percent in the year to July for instance – of diesel-fired and hydro-powered alternatives to fill it are relatively expensive. Chances are the electricity sector regulator would not entertain any new price hike requests this year; especially since the disruptions are not likely to be secular. Never mind that electioneering is already in high gear. Otherwise the inflation outlook looks good. The Shilling has been relatively stable and should remain so. Our view discountenances the downgrade of the currency by Fitch Ratings in mid-July. Why? The IMF precautionary facilities have proved quite effective buffers thus far, with import cover at about 5 months since mid-year. No reason why they should not continue to be. We worried about banks in our last report in May. We still do. Bad loan provisions have increased since, especially by big Kenyan banks. Following dismay at its lack of savvy IT staff to match those at banks it supervises, the Central Bank of Kenya (CBK) beefed up its human resource capacity in the period since our last report. A recently passed interest rate cap law may reduce banks’ appetite (or scope) for lending, however.

Expect election-motivated fiscal spending overruns
We see the fiscal deficit at 9.5 percent of GDP in 2016/17 FY. Infrastructure-spurred borrowings are primarily responsible for the burgeoning deficit, 9.3 percent of GDP in 2015/16 FY. Thereafter, we expect some moderation – 8.7 percent in 2017 and 7.3 percent in 2018 – as these projects are either completed or approach final stages and funding requirements taper. In any case, President Kenyatta has not shown needed fiscal sobriety. His office and that of his deputy reportedly spent one billion shillings each on hospitality in the first three quarters of the 2015/16 fiscal year. And with control of the budget now squarely under the president’s purview, more spending overruns are likely as he campaigns harder and tries to finish infrastructure projects ahead of elections next year. There are indications that even after this, some projects may still not be completed in time for his testimonials during campaigns – already under way, by both sides actually. Even as there are increasing concerns about Kenya’s rising foreign debt profile, authorities are likely to seize the chance to issue another Eurobond at the earliest opportunity. Treasury secretary Henry Rotich plans to sound out the potential for one at the IMF annual meetings in October. Last issuance was in 2014, US$2.82 billion worth, yielding about 7 percent in mid-September. Authorities plan US$4.6 billion (KES462 billion) external borrowing in the 2016/17 fiscal year. Tight global liquidity conditions amid volatile expectations about a potential US Fed rate hike continue to weigh. In the meantime, continued local borrowing may see local yields pressured. An interest rate cap on bank loans may also see incremental interest in government securities, as banks choose to put money in them rather than in sub-optimal loans.

Kenya Q3 2016 Q4 2016 Q1 2017 Q2 2017
Policy Rate, % 9.5 8.5 8.5 8.5
Source: Macroafricaintel Research

Q4-2016 Outlook | Ghana – Tight elections ahead, growth to rise

By Rafiq Raji, PhD

Click to download full report (includes monthly inflation forecasts, etc.)

We retain our 4 percent 2016 growth forecast. A slight improvement from the 3.9 percent recorded in 2015. We cut it to that level in May from 5 percent hitherto. In July, the authorities followed suit, cutting their earlier 5.4 percent growth expectation for the year to 4.1 percent, could be as high as 4.3 percent they now reckon. A little earlier, the IMF cut its own forecast to 4.5 percent. Downward revisions were on the back of expected lower prices for commodity exports and volatile oil production. We highlighted these in our last report in May, the latter especially. The medium to long term outlook is rosier. A petroleum industry law was passed in August. A new gas master plan has been approved. And oil production has resumed at Tullow’s Jubilee facility. Oil production at the Jubilee field ceased for 3 months to May, due to the breakdown of a floating production storage and offloading vessel (‘Kwame Nkrumah’). However, with the Tweneboa, Enyenra, Ntomme (TEN) oil fields now producing (started in August 2016), growth for the remainder of the year into 2017 should be boosted. A third oil field, the Sankofa-Gye-Nyame (SGN), is expected to start production in 2017. Expected higher crude oil production, reliable and adequate power supply, and relatively easier monetary policy underpin our 7 percent growth expectation for 2017; albeit authorities believe growth would be higher, more than 8 percent they say. Ample gas from these fields are expected to resolve a longrunning bottleneck in the electricity value chain. Slower inflation should instigate monetary easing by the Bank of Ghana (BoG). Likely uptick in the prices of cocoa and gold in the international commodities market is also a consideration.

Ghana Macro Forecasts 2016 2017 2018
Real GDP, % change 4.0 7.0 5.7
Inflation, % change 17.3 6.9 5.9
Current Account Balance (% GDP) -7.1 -5.5 -5.0
Fiscal Balance (% GDP) -5.1 -4.7 -3.9
USD:GHS* 4.1 4.2 3.9
Source: Macroafricaintel Research, *year-end

Election-induced spending overruns may be moderate, see 2016 deficit at 5.1 percent (or more) of GDP. There are fears upcoming presidential and parliamentary elections on 7 December may induce disproportionate spending. Leading opposition New Patriotic Party candidate Nana Akufo-Addo’s promise to spend at least US$1.1 billion if elected into office certainly doesn’t inspire confidence. President John Mahama has thus far not taken the bait, publicly at least. In his manifesto speech in mid-September, he mentions the fiscal deficit should fall to 4.9 percent of GDP in 2016, from 6.3 percent last year. We assume it would be a little higher, 5.1 percent, say, an upward review from our 4 percent of GDP expectation in May. Hitherto, his government had not been sending the right signals. Parliament passed a law in August that allows the BoG to fund the budget by as much as 5 percent if needed, in violation of the terms of the ongoing IMF US$918 million Extended Credit Facility (ECF), the third tranche of which is experiencing delays (as at early September) as the Fund seeks assurances the BoG would not have to do that. A successful US$750 million Eurobond (sold at a yield of 9.25 percent) in September, which was five times oversubscribed, suggests the IMF may need to be less insistent. Public indebtedness of about 63 percent of GDP in May (72 percent of GDP in 2015), would probably end the year at about 70 percent, even as authorities expect it to be less; based on finance minister Seth Terkper’s comments in August. Legacy debt at state enterprises remain troubling. For instance the Tema Oil Refinery (TOR) debt levy may last longer than many anticipated, after recent indications that outstanding arears are as much as GHS1 billion. Authorities had also mooted seeking about US$2 billion in syndicated loans to clear similar indebtedness at the state-run power utility. In his mid-2016 budget, Mr Terkper asked for an additional GHS1.8 billion, as tax revenues are likely to underwhelm by at least GHS1 billion. The addition put the potential 2016 fiscal deficit at GHS8.4 billion (about 5 percent of GDP), same amount announced in the original 2016 budget. Moderate spending overruns, despite electioneering pressures, underpin our optimistic but still slightly higher expectation of 5.1 percent.

Reformist stance remains a positive. Considering the high stakes, the government has demonstrated a willingness to push through tough reforms. Even as ongoing reforms (in the energy sector for instance) are somewhat unpopular, and may cost the ruling National Democratic Congress party in upcoming elections, they are ongoing. For instance the electricity distributor has been privatised, amid Electricity Company of Ghana (ECG) workers’ protests and suspension of services in early September. Government efforts alone would not be sufficient to fill the power supply shortfall fast enough. Private participation would be key to hastening things up towards resolution. Still, the reforms could be more far-reaching. There have been some regression in any case. In July, authorities announced a subsidy of sorts on electricity tariffs, targeted at lower consumers mostly, with the first 50 units of power charged at almost half the rate hitherto; suggesting higher consumers would ulitmately be expected to bear the costs. This was a populist move, in our view, aimed at balancing out the already populist stance of the opposition. In any case, a likely tight vote, may become a source of uncertainty, especially if the potential litigation process is not fast-tracked. There could have been relatively ample time had parliament approved a proposed amendment to bring forward the elections to 7 November, a month earlier to the set date of 7 December.

We do not now expect a rate cut before year-end. Our inflation forecasts suggest the headline may be about 14.1 percent by December, the 2016 trough of a downward trend since June – level then was 18.4 percent – albeit there is likely a slight pick-up in September, to 17.6 percent in our view. The most recent inflation data showed a slight year-on-year acceleration to 16.9 percent in August from 16.7 percent a month earlier. But the monthly pace was negative, -0.6 percent, after an almost 2 percent average run in the year to July. Ordinarily, this would motivate some serious consideration of a potential easing of policy. BoG governor, Abdul-Nashiru Issahaku, who in our view is decidedly dovish, would jump at the opportunity if it were viable in any case. Elections in December, a few months away, requires that the Bank of Ghana exercise the utmost prudence, however. Thus, we think keeping rates as they are for the remainder of the year would be most appropriate. As we see the inflation rate in the high single digits in Q1 2017 and lower for the remainder of that year, averaging at about 7 percent in 2017 from about 17 percent in 2016, an aggressive easing of policy then might be justfied. Our policy rate forecasts reflect this. We see the policy rate being cut by at least 300 basis points in each quarter with the end-2017 level at about 14 percent, positive in real terms by about 8 percentage points against our inflation forecast of about 6 percent.

Ghana Q4 2016 Q1 2017 Q2 2017 Q3 2017
Policy Rate, % 26.0 23.0 20.0 17.0
Source: Macroafricaintel Research