macroafricaintel | South Africa – Revision of forecasts

By Rafiq Raji, PhD

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South Africa Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 2017 2018 2019
GDP Quarterly % Change (saa)   1.2 0.6 2.8 -1.2 2.0 0.4 2.0      
GDP Annual % Change 0.5 0.9 1.7
CPI Quarterly % Change   5.2 5.0 5.1 3.8 3.9 4.1 3.5      
CPI Annual Average % Change 5.3 4.0 2.9
C/A Quarterly Average % Change -4.1 -4.3 -4.5 -4.6 -4.4 -4.1 -4.4 -4.2      
C/A Annual Average % Change -4.4 -4.3 -4.1
PPI Quarterly % Change yy   4.5 5.2 4.5 4.1 4.1 4.2 4.3      
PPI Annual Average % Change 4.8 4.2 4.3
Repo Rate Long Term Forecast   7.0 6.8 6.5 6.0 6.0 6.0 6.0      
Repo Rate Long Term Forecast 6.5 6.0 5.0

Q1-2016 Outlook | South Africa – All about growth

By Rafiq Raji, PhD

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Weaker growth likely in 2016, 0.9% in our view. On power shortages, drought effects, higher interest rates, and weak rand mostly. Drought effects on the agriculture sector (2% of GDP) – which contracted by 13% (seasonally adjusted annualised basis) in Q3 2015 (most recent data), albeit a lesser contraction than the prior two quarters – are likely to become more acute in Q1 2016. Authorities estimate up to 6 million tonnes of maize – over half of country’s needs – may need to be imported this year, as a 25% drought-induced drop in the harvest is expected. With improvements in power supply, manufacturing (13% of GDP) – which began picking up in Q3, rising by 6% (saa) after two consecutive quarters of declines – should continue on a path of recovery. Still, power shortages – load shedding is expected to continue into the first quarter of 2017 albiet no power cuts are envisaged until April 2016 – would be a drag on growth in 2016. During the course of 2015, about a quarter of South Africa’s 45GW power generation capacity was offline due to compulsory maintenance and repairs. Consequently, growth was cut by at least 1 percent in 2015. Almost half of the outages were unplanned, a symptom of its ageing power plants. Two new coal-fired power stations are expected to add about 10GW to the country’s grid by 2018. Long-term plans include a controversial 9.6GW nuclear power plant and at least 20GW to be sourced from renewable sources. The prospects for the mining sector (7% of GDP) – entered into a recession in Q3, contracting further by 9.8% (saa) – are uncertain, mostly to the downside. Weak demand from China (20% of SA trade) is a major factor and would weigh on trade performance for the year. For Q1, the African Growth and Opportunity Act (AGOA) trade dispute with the United States on poultry imports would be keenly followed. A suspension of AGOA trade benefits by 15 March if the dispute is not resolved would be damaging to the country’s reputation, a greater cost than the estimated USD4-7 million potential lost benefits if the suspension goes ahead. The tourism sector (3% of GDP) is set to pick up however, as hitherto constraining children visa rules have been eased. Medium-term prospects for the economy also remain solid, with current headwinds likely muted by 2018.

South Africa Macro Forecasts 2015 2016 2017
Real GDP, % change 1.4 0.9 2.0
Inflation, % change 4.6 5.6 4.6
Current Account Balance (% GDP) -4.1 -4.3 -4.5
Fiscal Balance (% GDP)* -4.0 -3.8 -3.5
USD:ZAR** 15.5 18.0 16.0
Source: Stats SA, IMF, Macroafricaintel Research, *fiscal year starts on 1 April, **year-end

Politics to weigh as ZumaMustFall and FeesMustFall protests heighten risks of increased populism and exacerbate political risk perceptions, especially as ruling elite digs in. FeesMustFall protests are a symptom of deep-rooted resentment of the elite and would force increased populism. The potential casualty is the fiscus. These increased agitations by the South African poor and young suit President Jacob Zuma’s politics. Re-appointed finance minister Pravin Gordhan may have little choice but to tune into increased calls for equity by the majority black population. In mid-January, cabinet approved amendments to the budget to cover university fees, allocating ZAR2bn to the National Student Financial Aid Scheme (NSFAS) for the 2016/17 fiscal year (FY); additional to ZAR10bn NSFAS would administer in the 2016 academic year. ‘Economic freedom,’ a phrase which forms the name of the ultra-leftist Economic Freedom Fighters (EFF) party was on the tongue of President Zuma at the ruling African National Congress (ANC) party’s 104th anniversary in January. We interpret this to mean the President and the ruling ANC party would try to strike a balance between current capitalist-friendly policies of the ANC and some of the socialist extremes of the EFF. Ahead of local government elections in May and August, we expect to see some Black Economic Empowerment (BEE) policy emphasis. The State of the Union address by President Zuma scheduled for 11 Februaryahead of the budget presentation by finance minister Gordhan on 24 February – provides an opportunity to reinforce this drift.

Ratings downgrade to junk status is increasingly likely. Standard & Poors (S&P) and Fitch have a BBB- rating for South Africa, one notch away from junk. S&P, which has a negative outlook on South Africa, issued two warnings in under 2 months in late January, raising the prospects that should growth come out weaker, it would downgrade the country’s rating. Our view is that the focus of ratings agencies is now really on growth. As growth is largely projected to be weaker in 2016 (IMF forecasts 0.7% growth this year), the 2016/17 budget presentation on 24 February would need to be extraordinarily persuasive for rating agencies to reconsider their position. The probability of that happening is low. We forecast a fiscal deficit of about 4% of GDP in the 2015/16 and 2016/17 fiscal years, higher than government projections announced in the Medium Term Budget Policy Statement (MTBPS) in October. Key would be how the finance minister ensures the planned nuclear procurement does not weigh on the fiscus significantly. Authorities approved the controversial 9,600MW nuclear procurement plan in December 2015. How much additional support is earmarked for State-Owned Enterprises (SOEs) like the South African Airways (SAA) would be another key marker to be watched. Finance minister Gordhan has directed that SAA go ahead with a cost-saving swap transaction recommended by erstwhile finance minister Nhlanhla Nene, whose opposition to a more expensive alternative cost him his post in December 2015. The move was reassuring to investors. Additional support for SOEs and weak growth are key rating drivers. Thus, should authorities announce more support for SOEs and growth comes out below expectations, a downgrade by S&P is likely in Q2.

Drought and weaker rand effects to push inflation higher. We see the headline inflation rate averaging at 6.4% year-on-year (yy) in Q1, albeit we see it tapering to 5.7% in March. Inflation rose 5.2% yy in December 2015. It is set to rise further in Q1, especially as drought-induced food price pressures accelerate some more. We expect the headline rate would rise above 6 percent – the upper bound of the SARB’s target band – in Q1, as the rand likely remains weak and drought effects become more acute. This is in spite of a drop in fuel prices in January. Drought effects have been amplified by the El Nino system with maize – source grain of major food staple – prices at record highs, doubled in 2015. Although there are expectations that significant rand weakening since December 2015 may quicken the pace of the current tightening cycle of the South African Reserve Bank (SARB), we do not share this view. With rating agencies all but decided on a likely downgrade of South Africa to junk status should growth deteriorate further, it is unlikely the SARB would not want to help keep growth up to the extent that it could. So even as the rand has deteriorated significantly since the New Year, our view is that the SARB would likely only hike its benchmark rate by 25bps to 6.5 percent in Q1, likely at the January monetary policy committee (MPC) meeting. With electricity tariffs likely to be increased later in the year and the headline inflation rate likely again breaching the upper end of the SARB’s inflation target in Q4, we expect an additional 25bps rate hike then.

South Africa Q1 2016 Q2 2016 Q3 2016 Q4 2016
Policy Rate, % 6.50 6.50 6.50 6.75
Source: Macroafricaintel Research

[Updated] Q1-2016 Outlook | Nigeria – Fiscal expansion is concerning

By Rafiq Raji, PhD

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

[Updated version corrects typographical errors, adds details, etc.]

The propects for the Nigerian economy in 2016 are mixed but largely positive, may grow by 4%. Most recent growth data for 2015 has been lacklustre. The economy grew by 3% on average in Q1-Q3 2015. We, however, expect the growth headline for 2015 to come out at 3.5%. Our higher growth expectations for 2016-17 is underpinned by some of the authorities’ policies that we consider to be very positive. Laudable reforms have started. Fuel subsidies have been removed. Leakages in public finances are being blocked, especially as a Treasury Single Account (TSA) is now fully in force. And the Central Bank of Nigeria (CBN) – whose independence is questionable – has stopped the sale of foreign exchange (FX) to bureaux de change operators, who have been conduits for speculative pressure on the naira. Plans are also afoot for the sale of a part of the state oil company via an initial public offering (IPO) in 2018. The long-suffering Petroleum Industry Bill (PIB) has been broken up into manageable parts with the legislature likely to pass the crucial components this year. Still, 4% growth is below potential. Business and industry groups highlight FX restrictions as a major constraint. Authorities’ discordant tunes in this regard have been problematic. After the initial optimism that FX restrictions might be lifted and the naira devalued as signaled in the 2016 budget proposal, President Buhari later suggested this might no longer be the case in late December 2015. Subsequently, in January 2016, finance minister Kemi Adeosun signaled there might now have been a change in the authorities’ stance. Such variations worry investors. Still, naira devaluation is imminent. Our FX forecasts assume a likely gradualist approach. Not that this is what we would recommend. A sharper devaluation would be more effective in contributing to the authorities’ goal of diversifying the economy. Hence, we see the exchange rate at 250 naira to the US dollar before end-2016.

Nigeria Macro Forecasts 2015 2016 2017
Real GDP, % change 3.5 4.0 4.3
Inflation, % change 9.0 10.6 8.4
Current Account Balance (% GDP) -2.0 -1.5 -1.0
Fiscal Balance (% GDP) -1.6 -3.0 -2.0
USD:NGN* 199 250 270

Source: IMF, Macroafricaintel Research, *year-end

Fiscal expansion risks getting out of control should crude oil prices not recover. Nigerian authorities expect to fill part of the 2.2-3 trillion naira revenue gap in the 2016 budget (6 trillion naira) from recovered looted funds. With authorities averse to plea- bargaining, we believe it may record little success in this regard. So the borrowing requirement might actually be higher. Already, authorities have announced they might borrow USD9bn in 2016, with up to USD5bn to be sourced externally. Authorities have also indicated they would seek the issuance of a USD1bn Eurobond this quarter. Under current market conditions, the issuance would be relatively expensive. China-fueled global risk aversion would weigh. Still, authorities would need to depart from current rigidities if they desire favourable pricing and subscription. In a recent article, the Nigerian finance minister signaled the fiscal deficit in 2016 might actually be at least 3 trillion naira (3% of GDP), an almost 1 percent increase from the announced 2.2% of GDP planned deficit when the budget was read in December 2015. The revision came as oil prices slided below USD30 in January. We have revised our forecasts accordingly. The legislature, which started debate on the 2016 appropriation bill in January, has already indicated it might revise downwards the crude oil price benchmark of USD38 in the budget proposal by the executive branch. Our guidance would be USD25, the midpoint of the cost of production of USD13 and USD34 for low/shallow water and deep offshore production respectively.

Corruption fight is a positive. However, rule of law would be key to success. There is an increasing perception that the leadership feels nostalgic about the swift but often injurious approach to justice during the military era. Still, the amount of stolen funds are staggering. At the World Economic Forum in January, US secretary of state John Kerry revealed that about USD9bn had only recently been traced to corrupt Nigerian government and military officials of the immediate past administration. That amount is enough to fund the 2016 budget deficit. Civil society agitations for the preservation of rule of law are likely to be a good check on potential dictatorial tendencies. Such outcries have been effective. An earlier planned law to censor social media met with stiff resistance, forcing the President to announce his aversion to the bill. Lawmakers have also been forced to reconsider it. A one-party state scenario is re-emerging, however. With the ruling party consisting of disparate elements, alternative power centres are also building up. The Nigerian Senate is becoming increasingly activist and influential, likely a source of irritation to the country’s presidency. So although a rapprochement between the two arms of government seems to be holding, political calculations around a post-Buhari presidency point to likely continuing tensions.

Upward inflation trend likely to continue. Headline inflation – which has been above 9% (the upper end of the CBN’s target band) since June 2015 – rose to 9.6% year-on-year (yy) in December 2015. In Q1, we expect the headline to be about 10%, and likely above this mark in Q2. Although the price of petrol was reduced by 0.6% in early January, local media reports suggest petrol is still being sold above the regulated price. In late January, the price of kerosene – cooking oil used by majority poor – was reviewed upwards by 66%; evidence that the government is determined to stop costly subsidies. Food prices have also risen sharply. In December 2015, food inflation rose 10.6% yy, a 1.2% month-on-month (mm) increase. Prices for imported food have increased because of FX restrictions. Simultaneously, prices for food produced locally have maintained an upward trajectory because of increased demand, higher fuel prices and continuing insecurity in key food baskets in the northern part of the country. Likely naira devaluation would add to price pressures. Thus, we see inflation maintaining the current upward trajectory for most of 2016.

We expect the Central Bank of Nigeria (CBN) to keep its policy rate unchanged at 11 percent in Q1. This view is not data-dependent, however. We have simply come to the conclusion that the CBN is deliberately dovish, a point Governor Emefiele made only too clear when the monetary policy committee (MPC) took the counterintuitive decision to actually cut interest rates in November at a time that prices are rising. As we expect headline inflation would continue on an upward trajectory – and mostly above the upper end of the CBN’s inflation target band – for most of 2016, the data-dependent view would be to actually tighten monetary policy. An imminent naira devaluation – perhaps at the January 2016 MPC meeting – heightens the risk of inflation rising above 10% in Q2 2016. Considering that the CBN has not been perturbed by inflation being above 9 percent since June 2015, inflation targeting is probably no longer a priority for the Bank; at least, not within the current official target band. We, however, expect an inevitable reversal of the Bank’s current expansionary stance in the third quarter of 2016.

Nigeria Q1 2016 Q2 2016 Q3 2016 Q4 2016
Policy Rate, % 11.0 11.0 12.0 13.0
Source: Macroafricaintel Research

Q1-2016 Outlook | Nigeria – Fiscal expansion is concerning

By Rafiq Raji, PhD

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

The propects for the Nigerian economy in 2016 are mixed but largely positive, may grow by 4%. Most recent growth data for 2015 has been lacklustre. The economy grew by 3% on average in Q1-Q3 2015. We, however, expect the growth headline for 2015 to come out at 3.5%. Our higher growth expecations for 2016-17 is underpinned by some of the authorities’ policies that we consider to be very positive. Laudable reforms have started. Fuel subsidies have been removed. Leakeages in public finances are being blocked, especially as a Treasury Single Account (TSA) is now fully in force. And the Central Bank of Nigeria (CBN) – whose independence is questionable – has stopped the sale of foreign exchange (FX) to bureaux de change operators, who have been conduits for speculative pressure on the naira. Plans are also afoot for the sale of a part of the state oil company via an initial public offering (IPO) in 2018. The longsuffering Petroleum Industry Bill (PIB) has been broken up into manageable parts with the legislature likely to pass the crucial components this year. Still, 4% growth is below potential. Business and industry groups highlight FX restrictions as a major constraint. Authorities’ discordant tunes in this regard have been problematic. After the initial optimism that FX restrictions might be lifted and the naira devalued as signaled in the 2016 budget proposal, President Buhari later suggested this might no longer be the case in late December 2015. Subsequently, in January 2016, finance minister Kemi Adeosun signaled there might now have been a change in the authorities’ stance. Such variations worry investors. Still, naira devaluation is imminent. Our FX forecasts assume a likely gradualist approach. Not that this is what we would recommend. A sharper devaluation would be more effective in contributing to the authorities’ goal of diversifying the economy. Hence, we see the exchange rate at 250 naira to the US dollar before end-2016.

Nigeria Macro Forecasts 2015 2016 2017
Real GDP, % change 3.5 4.0 4.3
Inflation, % change 9.0 10.6 8.4
Current Account Balance (% GDP) -2.0 -1.5 -1.0
Fiscal Balance (% GDP) -1.6 -3.0 -2.0
USD:NGN* 199 250 270

Source: IMF, Macroafricaintel Research, *year-end

Fiscal expansion risks getting out of control should crude oil prices not recover. Nigerian authorities expect to fill part of the 2.2-3 trillion naira revenue gap in the 2016 budget from recovered looted funds. With authorities averse to plea bargaining, we believe it may record little success in this regard. So the borrowing requirement might actually be higher. Already, authorities have announced they might borrow USD9bn in 2016, with up to USD5bn to be sourced externally. Authorities have also indicated they would seek the issuance of a USD1bn Eurobond this quarter. Under current market conditions, the issuance would be relatively expensive. China-fueled global risk aversion would weigh. Still, authorities would need to depart from current rigidities if they desire favourable pricing and subscription. In a recent article, the Nigerian finance minister signaled the fiscal deficit in 2016 might actually be at least 3 trillion naira (3% of GDP), an almost 1 percent increase from the announced 2.2% of GDP planned deficit when the budget was read in December 2015. The revision came as oil prices slided below USD30 in January. We have revised our forecasts accordingly. The legislature, which started debate on the 2016 appropriation bill in January, has already indicated it might revise downwards the crude oil price benchmark of USD38 in the budget proposal by the executive branch. Our guidance would be USD25, the midpoint of the cost of production of USD13 and USD34 for low/shallow water and deep offshore production respectively.

Corruption fight is a positive. However, rule of law would be key to success. There is an increasing perception that the leadership feels nostalgic about the swift but often injurious approach to justice during the military era. Still, the amount of stolen funds are staggering. At the World Economic Forum in January, US secretary of state John Kerry revealed that about USD9bn had only recently been traced to corrupt Nigerian government and military officials of the immediate past administration. That amount is enough to fund the 2016 budget deficit. Civil society agitations for the preservation of rule of law are likely to be a good check on potential dictatorial tendencies. Such outcries have been effective. An earlier planned law to censor social media met with stiff resistance, forcing the President to announce his aversion to the bill. Lawmakers have also been forced to reconsider it. A one-party state scenario is re-emerging, however. With the ruling party consisting of disparate elements, alternative power centres are also building up. The Nigerian Senate is becoming increasingly activist and influential, likely a source of irritation to the country’s presidency. So although a rapprochement between the two arms of government seems to be holding, political calculations around a post-Buhari presidency point to likely continuing tensions.

Upward inflationary trend likely to continue. Headline inflation – which has been above 9% (the upper end of the CBN’s target band) since June 2015 – rose to 9.6% year-on-year (yy) in December 2015. In Q1, we expect the headline to be about 10%, and likely above this mark in Q2. Although petrol prices were reduced by 0.6% in early January, local media reports suggest petrol is still being sold above the regulated price. In late January, the price of kerosene – cooking oil used by majority poor – was reviewed upwards by 66%; evidence that the government is determined to stop costly subsidies. Food prices have also risen sharply. In December 2015, food inflation rose 10.6% yy, a 1.2% month-on-month (mm) increase. Prices for imported food have increased because of FX restrictions. Simultaneously, prices for foods produced locally have maintained an upward trajectory because of increased demand, higher fuel prices and continuing insecurity in key food baskets in the northern part of the country. LIkely naira devaluation would add to price pressures. Thus, we see inflation maintaining the current upward trajectory for most of 2016.

We expect the Central Bank of Nigeria (CBN) to keep its policy rate unchanged at 11 percent in Q1. This view is not data-dependent, however. We have simply come to the conclusion that the CBN is deliberately dovish, a point Governor Emefiele made only too clear when the MPC took the counterintuitive decision to actually cut interest rates in November at a time that prices are rising. As we expect headline inflation would continue on an upward trajectory – and mostly above the upper end of the CBN’s inflation target band – for most of 2016, the data-dependent view would be to actually tighten monetary policy. An imminent naira devaluation – perhaps at the January 2016 monetary policy committee (MPC) meeting – heightens the risk of inflation rising above 10% in Q2 2016. Considering that the CBN has not been perturbed by inflation being above 9 percent since June 2015, inflation targeting is probably no longer a priority for the Bank; at least, not within the current official target band. We, however, expect an inevitable reversal of the Bank’s current expansionary stance in the third quarter of 2016.

Nigeria Q1 2016 Q2 2016 Q3 2016 Q4 2016
Policy Rate, % 11.0 11.0 12.0 13.0
Source: Macroafricaintel Research

Q1-2016 Outlook | Ghana – Fiscal consolidation to continue

By Rafiq Raji, PhD

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Likely resolution of electricity crisis in Q1 to set stage for growth uptick in 2016. Our growth forecast for the year is 5%. After an initial false declaration that the 3-year old power crisis had been resolved by the erstwhile power minister Kwabena Donkor in early January, there are indications it would actually be normalized in Q1. The IMF confirms this. Industry (23% of GDP) – which grew 3.6% year-on-year in Q3 2015 (most recent data) should pick up when this is resolved. To mitigate against risks of the type of gas supply distruption that worsened the ongoing power shortages at some point, authorities plan to procure a floating storage regassification unit (FSRU) as backup. Other independent power projects are also planned, more likely to start in subsequent quarters; albeit elections in November might cause delays as officials concentrate on remaining in government. Our higher growth expectation for 2016 is also driven by an expected increase in crude oil production, albeit benign. A potential recovery in cocoa production and exports should also help push the agriculture sector (25% of GDP) – which grew 3.2% yy in Q3 2015 – up a bit. Crops and cocoa, which constitutes more than 80% of value added in the agriculture sector, grew by almost 200% quarter-on-quarter in Q3. Cocoa price volatility may weigh, however. Similarly, an expected recovery in gold production and exports may revive the mining sector – which contracted by 2.2% in Q3 2015 – in Q1 and remainder of the year. We do not give them a significant consideration in our forecasts, however, in light of their likely continuing volatilty. More importantly, incremental output growth from the agriculture and industry sectors would only be differential if the services sector (52.1% of GDP) remains on a steady growth path. Most recent data for the services sector – which recorded the highest growth of the three major groupings in Q3 2015 of 4.9% – is encouraging.

Ghana Macro Forecasts 2015 2016 2017
Real GDP, % change 3.0 5.0 8.0
Inflation, % change 17.1 15.2 9.1
Current Account Balance (% GDP) -8.2 -7.5 -6.5
Fiscal Balance (% GDP) -7.2 -6.1 -4.0
USD:GHS* 3.8 4.2 4.0
Source: IMF, Macroafricaintel Research, *year-end

Fiscal consolidation to continue. Better than expected fiscal performance in Q1-Q3 2015 underlies our confidence. Authorities recorded a cash deficit of 4.7% of GDP between January and August 2015, 0.2ppt less than the target agreed with the IMF. Although authorities indicate this positive trend would continue in 2016, the recent decision not to go ahead with a planned withholding tax on interest earned by individuals concerns us, especially in an election year. Still, we think there is not likely to be other such moves. Other fiscal measures announced in the 2016 budget if implemented are expected to shave off at least 2% off the budget deficit, according to the IMF. With only about 40% of the USD918mn IMF programme funds disbursed thus far, we think authorities are likely to remain on the path of fiscal consolidation both for the funds and the credibility it has brought them among the investor community. Also, the Bank of Ghana (BoG) is not expected to fund any part of the budget from 2016 onward, which is a positive development considering it funded 4.8% of the financing need in 2015.

Planned Eurobond issuances in 2016-17 is still a significant part of the funding mix ; albeit it tapers to 14.3% in 2017 from 22-24% in 2015-16. 75% of the planned 2016 issuance of USD1bn would be used to fill the budget gap. The remaining 25% would be used to refinance its previous Eurobond issue which matures in 2017. Domestic debt still retains its dominance of the funding mix. However, authorities plan more longer term issues, with above 1-year issues expected to constitute 72% of total domestic debt in 2017, up from 60% in 2015. As there is not much divergence between the two major political parties on the current fiscal path, we see minimal risk to the fiscal plan if a change in government occurs in what is likely very competitive elections in November; which by the way are expected to cost at least 0.5% of GDP. Still, agitations by labour unions for above-inflation wage increases is a major risk. In January, labour unions engaged in nationwide protests to voice this demand. Ahead of elections, the resolve of the current government would be seriously tested. We factor this consideration into our fiscal deficit forecasts. Our 2016 deficit projection of 6.1% of GDP is significantly higher than that of the authorities of 5.3% of GDP with our views only converging on the likely outcome for 2017 at about 4% of GDP.

We expect a minimum 3ppts rate hike by the Bank of Ghana in 2016. We expect the first rate hike of the year in January, by 100bps to 27% say. Recent increases in utility tariffs – electricity and water tariffs were increased in December 2015 by 59% and 67% respectively – and taxes would likely keep headline inflation above 15% in Q1. We however expect the headline to begin to taper towards the upper end of the government’s target from late Q2. The IMF expects it would only reduce to this point by end-2016. Our forecasts assume the Bank of Ghana tightens monetary policy further in Q1 and Q2 at the very least for this to be realized. The expected deceleration would likely be slow in any case, with inflation likely only beginning to touch the 10 percent range from November. Elections scheduled for 7 November suggest to us a likely need for another rate hike in Q4 to anchor inflation expectations around the political cycle.

Cedi stability to remain. A likely USD1bn Eurobond in Q1, financing from the IMF & World Bank, increase in crude oil production, and an expected increase in cocoa and gold export proceeds are expected to trim the current account deficit in 2016 and over the medium term. We project the current account deficit would be 7.5% of GDP in 2016, down from an expected 8.2% in 2015. Consequently, FX reserves are expected to be able to fund at least 3 months of imports and probably more throughout the quarter. Thus, the Cedi is likely to remain stable in Q1 – likely exchanging for the US dollar at 3.5 by the end the quarter, an appreciation from current levels of 3.9-4.0 (18-22 January) – and perhaps for the remainder of the year (See our Africa FX Monthly – Jan 2016 published on 05 Jan 2016 for quarterly FX forecasts).

Ghana Q1 2016 Q2 2016 Q3 2016 Q4 2016
Policy Rate, % 27.0 28.0 28.0 29.0
Source: Macroafricaintel Research

Q1-2016 Outlook | Kenya – Public spending, agriculture to drive growth

By Rafiq Raji, PhD

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

6% growth in 2016 is feasible. Continuing boom in construction and agriculture sectors with likely recovery in tourism should see growth improve in 2016, a decent rise from our estimate of 5.5% in 2015. Authorities’ infrastructure spending is expected to boost the construction sector (5% of GDP) which should maintain its double-digit growth trajectory since 2014 having expanded by 14.1 percent year-on-year (yy) in Q3 2015 (most recent data). Lower oil prices should also boost consumer spending. Revision of travel advisories by key tourism source markets should add to already ample foreign exchange reserves, albeit positive effects are likely much more obvious in 2017. Terrorist threats remain, however, underlies contraction in accomodation and restaurant sector of 2.3% yy in Q3 2015. Having contracted in each of the quarters of 2015 recorded thus far, the accomodation and restaurant sector is set to record another year of contraction; the sector contracted by 17.2% in 2014. Recent successful hosting of major international events point to an imminent turnaround in the tourism sector from 2016 onwards. While El Nino rains have disrupted food distribution, we see the agriculture sector (27% of GDP) benefiting from ample rains over the course of the year, aiding growth. The agriculture sector grew by 7.1% yy in Q3 2015, up from 4.4% yy in Q1 2015. There is evidence of strong demand. New car sales were up 12.9% in 2015 driven by demand for light trucks aiding construction. Also, power consumption peaked at 1,569MW in October 2015 with number of consumers rising four times from 6 years earlier to 4.1 million. Authorities expect demand for power to almost double in the next 4 years to 2,834MW. These expectations drive the government’s investments in power generation infrastructure, aided by China. Planned free trade zones close to these power sources and railways connecting them provide a solid basis for the authorities’ medium-term 10 percent growth expectation. We think it is realisable. Much would depend on discipline on the part of authorities, however.

Kenya Macro Forecasts 2015 2016 2017
Real GDP, % change 5.5 6.0 7.0
Inflation, % change 6.6 6.0 7.0
Current Account Balance (% GDP) -9.0 -8.0 -7.0
Fiscal Balance (% GDP)* -9.0 -8.0 -7.0
USD:KES** 102 104 90
Source: KNBS, CBK, Macroafricaintel Research, *fiscal year begins July 1, **year-end

Planned spending cuts amid ramped-up foreign borrowings to reduce budget deficit slightly. Our view is that the budget deficit would likley reduce to 8% of GDP in the 2016/17 fiscal year (begins July 1) from an estimated 9% in 2015/16. Treasury secretary Henry Rotich aims to cut KES60bn (10% of recurrent expenditure) from planned spending in 2015/16 when he submits a supplementary budget to Parliament in February. This is encouraging. There is a view that the tax base could be expanded if tax incentives were better aligned. We think both measures would be ideal. In the immediate term, we think spending cuts are more actionable especially as revenue targets have been hard to reach. Still, where the tax base to be expanded, 2-3% of GDP could be shaved off the fiscal deficit. We are skeptical about the effectiveness of stripping the budget role from the Treasury, especially as the presidency has been wont to ignore spending caps. However, if well implemented, it could help minimize incentives for phantom budgeting. A Eurobond issue is also planned for Q1 with borrowing costs likely higher – above 10 percent say – albeit longer dated. Likely budget support from China should see weighted borrowing costs lower, however. Authorities are in discussion with the China Development Bank for a budget support loan of USD600m at 3.65%. Authorities also plan to explore alternative foreign funding sources. These arrangements should be concluded within the quarter, in our view.

Inflation likely outside upper bound of central bank’s target band in January and February. Our headline inflation forecast of 6.8% yy in March from 7.9% at the beginning of the year assumes a rate hike of 50bps to 12% in January. El Nino rains are expected to continue in most parts of the country – except in the northern parts – in January. They have been disruptive to the food supply chain, pressuring prices. We see these effects remaining significant but tapering over the course of Q1. The Central Bank of Kenya (CBK) believes that as price pressures are not demand-driven, there is no need to tighten monetary policy further. In early January, Treasury cabinet secretary Henry Rotich wondered about this, based on comments to the media. He took the view that both supply and demand factors should be considerations for monetary policy, a divergent view. We noticed some mixed messaging subsequently, as another senior – but lower ranking – treasury official took the CBK view. Our view is that ultimately the headline inflation rate affects interest rates. And even as it is currently supply-side driven, policy credibility potentially suffers if the headline figure hovers above the target band’s upper limit for an extended period. Thus, even as the CBK is reluctant to hike rates further, it may need to raise rates to anchor inflation expectations and maintain policy credibility. So, we see the CBK hiking its policy rate by 50bps to 12 percent in January. Thereafter, any potential change in policy would likely be dependent on the headline figure in March when El Nino rains should have stopped. Then, conditions might be suitable for a rate cut even. Our forecasts assume an end-2016 policy rate of 11 percent. External factors could throw in a negative surprise however, especially as a longer Chinese slowdown may fuel global risk aversion for most of the year with adverse effects on markets.

Kenya Q1 2016 Q2 2016 Q3 2016 Q4 2016
Policy Rate, % 12.0 12.0 11.5 11.0
Source: Macroafricaintel Research