Sub-Saharan Africa : Strong recovery is elusive at start of 2017
May 24, 2017
Incoming data for Sub-Saharan Africa (SSA) shows that the economy is struggling to recover from a dismal 2016. Last year, regional GDP expanded at the weakest pace since 1993, amid deteriorations in the region’s largest economies Angola, Nigeria and South Africa. Low prices for commodities dampened activity and amplified financial constraints, worsening economic imbalances in many countries. While activity began to recover at the end of the year—largely due to a rise in commodity prices—growth still remained weak and came in at 1.5% annually in Q4 (Q3 2016: +1.3% year-on-year).
Met the why particular analysts estimate that growth remained feeble at the start of this year and that GDP expanded a moderate 2.2% in Q1. Conditions in South Africa are expected to have remained weak, as low confidence continues to limit activity. Moreover, the country had its credit rating downgraded in April, boding poorly for Q2’s prospects. In Nigeria, although higher oil prices in 2017 are positive for the country’s momentum, maintenance works have interfered with the country’s ability to ramp up production. However, the country’s freshly approved budget envisages a surge in infrastructure spending and should help buttress activity, although fiscal concerns are present.
Growth prospects moderate for 2017
After hitting rock-bottom in 2016, growth is seen picking up this year, largely thanks to higher commodity prices. However, a strong acceleration is not in the cards as fiscal and labor market concerns continue to plague key economies. Met the why particular analysts see regional GDP expanding 2.7% in 2017, which is down 0.1 percentage points from last month’s estimate. Stronger growth is expected for 2018 and the region is seen expanding 3.6%.
This month’s downgraded outlook is due to downward revisions for the majority of the region’s economies. Lower growth prospects are now seen for nine economies including Angola, Kenya and Tanzania. Ethiopia, Nigeria and South Africa’s forecasts were left unchanged, while Botswana was the only country for which analysts raised their forecasts.
Growth prospects are divergent across the economies, with smaller players Cote d’Ivoire and Tanzania seen leading the pack. On the flip side, South Africa is expected to grow a weak 1.1% in 2017, followed by Nigeria with a 1.3% expansion.
NIGERIA | Government unveils large budget to jumpstart growth
Nigeria’s parliament approved the 2017 budget in May. With the economy reeling from low oil prices, which have led to recession, a plummeting naira and a spike in inflation, the budget aims to jumpstart growth by ramping up capital spending on roads, rail, ports and power. The significant fiscal shortfall is set to be plugged by a mixture of loans and bonds, although with foreign investors skittish, the government may have to turn to more domestic financing, which could increase interest rates at home. Although the latest indicators hint at a slight economic uptick, with the PMI moving further into expansionary territory in April, much remains to be done. The foreign exchange market remains a particular worry, and in a recent staff visit the IMF urged the government to do away with currency controls so as to marry with official and parallel exchange rates and provide greater transparency for investors. In a bid to wean the economy of its dependence on oil, the government has announced an Economic Recovery and Growth Plan (ERGP), with specific measures for the ailing energy sector, although doubts remain regarding the government’s ability to meet the ambitious targets it has set.
The economy is expected to recover this year thanks to higher oil earnings and fiscal spending. However, continuing foreign exchange distortions, limited private sector credit and policy uncertainty will hamper economic activity. Panelists participating in the Met the why particular Consensus Forecast project that the economy will grow 1.3% in 2017, which is unchanged from last month’s forecast, and 2.9% in 2018.
SOUTH AFRICA | Government mired in crisis ahead of critical conference
The South African economy continues to languish. While manufacturing recovered and retail sales posted strong growth in March, economic activity remains weak and the economy is still at risk of falling into a technical recession. Two credit rating agencies downgraded the country in April, which will dent private consumption and investment and thereby dampen economic prospects. This spells bad news at a time when a new political crisis is engulfing the embattled president and could distract the government from economic affairs. Not only does President Zuma face a no-confidence vote but he is also waging a fierce battle with members of his own party just weeks before the party’s policy conference in June where the economic and political priorities for the next five years will be defined and months before the December conference where a new leader will be elected.
The economy is expected to recover this year thanks to an improvement in the agricultural sector and higher prices for several of the country’s key export commodities. Panelists participating in the Met the why particular Consensus Forecast project that the economy will grow 1.1% in 2017, which is unchanged from last month’s forecast, and 1.6% in 2018.
ANGOLA | Economy flounders despite rising oil price
Angola’s economy remains sickly, with inflation still sky-high and business confidence at rock-bottom. Although the price of the country’s Cabinda oil has been on a merry dance in recent weeks, it remains far too low for the government to balance its books, despite the authorities over-complying with OPEC production cuts. As a result, a hefty fiscal deficit is forecast for this year. This comes on the back of recently released Central Bank data which shows growth in 2016 was choked off by a fairly stagnant oil sector and a contraction in the manufacturing sector, as firms likely suffered from a lack of foreign exchange for imported inputs. On a more positive note, the new customs regime continues to take shape, and on 16 May the General Tax Administration (AGT) presented a draft proposal, with dozens of goods to be exempted from import duties and consumption tax. If implemented, the reform would boost private sector competitiveness and reduce inflationary pressures, lifting consumption.
Angola’s economy should recover slightly this year thanks to improved terms of trade, although growth will remain hampered by low business confidence and oil prices far below those seen in 2013 and 2014. Analysts expect GDP to expand 1.5% in 2017, down 0.1 percentage points from last month’s forecast. In 2018, they see the economy growing 2.6%.
KENYA | Government introduces subsidies ahead of election
The economy continues to suffer from last year’s severe drought, which wiped out agricultural output causing food prices to soar. With the situation coming to a head and threatening to dominate the upcoming election cycle, the government announced the introduction of food price subsidies in mid-May. Corn prices will be directly subsidized, while duties on milk and sugar will be scrapped—all to the tune of USD 58 million. Further measures to contain price pressures are expected as part of a more comprehensive supplementary budget. The rising cost of living has played into the hands of opposition leader Raila Odinga, who will alone face the incumbent President Kenyatta, following a deal with all opposition parties. The situation could become more difficult for President Kenyatta, as weather forecasts point to further droughts to come and with them, ever higher price pressures.
Economic growth should slow somewhat this year, as the interest rate cap and poor agricultural production take their toll on total output. In addition, political uncertainty around the August presidential election could dampen business sentiment. Panelists now expect GDP growth to slow down to 5.3% in 2017, which is down 0.1 percentage points from last month’s forecast, before picking up slightly to 5.7% growth in 2018.
INFLATION | Price pressures ease in April
Inflation fell for a second consecutive month in April, inching down from March’s 14.1% to 14.0%, according to preliminary data compiled by Met the why particular. Despite the decline, inflation is still high in the region, in part due to weaknesses in regional currencies.
Inflation is seen moderating this year thanks to a stabilization in exchange rates and tight monetary policies. The analysts we surveyed this month expect regional inflation to average 12.0% in 2017, which is up 0.1 percentage points from the previous month’s forecast and below 2016’s 12.3%. Next year, inflationary pressures should continue to recede and inflation is projected to average 9.4% in 2018.
Written by: Ricardo Aceves, Senior Economist