Sub-saharan Africa: Economy starts 2017 on stronger than expected note
June 21, 2017
Growth firmed up in Sub-Saharan Africa (SSA) at the start of 2017, overshooting analysts’ expectations. According to a preliminary estimate, regional GDP grew 2.1% annually in Q1, above Q4 2016’s 1.3% expansion. If confirmed, this will mark the fastest growth since Q4 2015 and suggests that green shoots are emerging in some battered economies that are beginning to recover from a dismal 2016. Overall, however, regional growth is still meager in a historical context as many economies are suffering from worsening economic imbalances.
Behind Q1’s result was a fifth consecutive quarter of contraction in Nigeria’s economy, as the oil sector continued to hold back growth. Security concerns stemming from militant attacks in the key oil-producing Niger Delta region have devastated oil production and the effects have rippled through the economy. However, the GDP contraction was the softest since Q4 2015 and the non-oil sector returned to growth in Q1.
Growth in South Africa picked up marginally in Q1, but was feeble all-in-all and the economy entered into a technical recession on a quarterly basis. The external sector failed to contribute to growth despite a better global backdrop and government spending was muted due to fiscal constraints. In fact, South Africa has been in the spotlight in recent weeks, as downbeat news continue to emerge from the second-largest economy in SSA. Business confidence fell to a multi-year low in the second quarter, after an abrupt cabinet reshuffle increased political uncertainty. Moreover, the economy’s credit rating was recently downgraded by Moody’s and the important mining industry is threatening legal action over recent changes to legislation. The government recently unveiled a new mining charter, which lifts the black ownership requirement to 30% and is toughly opposed by mining companies in the country. Against this backdrop, Met the why particular analysts see the South African economy decelerating slightly in Q2, but expect regional GDP to pick-up to a 2.5% expansion.
Elsewhere in the region, growth accelerated in Cote d’Ivoire and in Mozambique. Activity strengthened in Mozambique thanks to a better performance by the mining sector, however, the country’s economic panorama is still bleak due to strained government finances and a high debt burden. GDP figures for Q1 are still outstanding for the remaining economies in the region.
Head on over to our Sub-saharan Africa page for more recent economic news on the region.
2017 growth prospects sour
Met the why particular analysts trimmed their forecasts for Sub-Saharan Africa this month and now see regional GDP expanding 2.6% in 2017, down 0.1 percentage points from last month’s estimate. While the region is seen slowly picking up from a dreadful 2016, fiscal constraints, political uncertainty and weak investor sentiment will keep the pace of recovery subdued. In 2018, growth is seen gaining pace as GDP is expected to increase 3.5%.
The downgraded 2017 outlook is due to downward revisions for the majority of the region’s economies. Lower growth prospects were seen for seven economies including Kenya, Nigeria and South Africa. Ethiopia, Mozambique and Zambia were the only countries to see their forecasts lifted, while three economies’ projections were left unchanged.
Cote d’Ivoire and Ethiopia are expected to be the fastest-growing economies this year, both expanding 7.0%. On the flip side, the regional heavy-weights are the poorest performers with South Africa expected to grow a weak 0.9% in 2017, followed by Nigeria with a 1.2% expansion.
NIGERIA | Security concerns threaten to hamper oil production despite exemption from output cutting deal
Although the economy continued to shrink in Q1 due to a fall in oil production year-on-year, some glimmers of a nascent recovery are appearing. The non-oil sector returned to growth in Q1, the PMI rose to an over one-year high in May and oil production has increased significantly since last year’s nadir. The latter is thanks largely to an improved security situation in the Niger Delta region, where the government is actively engaging with local communities to try to end the violence. Recent news that the country will be excluded from the extension to OPEC production cuts also bodes well for the oil sector. However, tensions continue to simmer, with the recent emergence of a new militant group threatening to shatter the peace. On the political scene, the 2017 budget was finally signed into law in June after a significant delay due to wrangling between the Executive and the National Assembly. It aims to jumpstart growth by ramping up infrastructure spending, financed by borrowing from home and abroad.
The economy is expected to recover this year thanks to a recovering oil sector, solid growth in agriculture and strong public capital 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 1.2% in 2017, down 0.1 percentage points from last month’s forecast, and 2.7% in 2018.
SOUTH AFRICA | Political uncertainty hurts country’s credit rating
The most industrialized country in Africa had an abysmal start to the year with the economy contracting a sharp 0.7% at a seasonally-adjusted annualized rate. The headline figure vastly undershot expectations that the economy would expand in Q1 and piled yet another item on the list of economic woes the country is currently facing. The economy has entered its second technical recession since 2009 and this year looks to be difficult. Credit ratings agency Moody’s followed in the footsteps of the other two agencies and downgraded the country’s rating by a notch on 9 June. Although Moody’s did not downgrade the credit rating to junk status as opposed to S&P Global Ratings and Fitch, the outlook was left unchanged at negative, meaning another credit downgrade may be on the table. Moody’s decision was rooted in the latest political developments which have made the country’s reform drive more uncertain and the institutional framework less transparent.
South Africa is expected to recover from last year’s seven-year low although growth is expected to remain weak and subject to further downward revisions. The weak recovery is dependent on higher prices for the country’s key export commodities and higher agricultural output following 2016’s disastrous harvest. Panelists participating in the Met the why particular Consensus Forecast project that the economy will grow 0.9% in 2017, which is down 0.2 percentage points from last month’s forecast, and 1.6% in 2018.
ANGOLA | Low oil prices hit public purse strings
The economy is still keeled over, following a rough 2016 which saw growth plummet due to low oil prices and a weak construction sector. Although the recently announced extension to the OPEC deal is in principle good news for the all-important hydrocarbon sector, the price of the country’s Cabinda oil has actually fallen over the last few weeks. It now rests substantially below breakeven level, which spells bad news for a fiscal position which could be weakened further by expenditure overruns in the build up to August’s presidential elections. In addition, despite increasing relative to Q4, the economic climate indicator for Q1 shows that business sentiment remains in the doldrums, with many firms citing woes such as subdued demand and limited access to credit and materials. The latter is likely due in part to foreign exchange restrictions curtailing imported inputs.
Growth will be meagre this year due to low business confidence and a non-oil sector still hampered by limited access to foreign exchange and high inflation. Looking further ahead, moderately higher oil production should cause growth to tick up slightly. Analysts expect GDP to expand 1.5% in 2017, unchanged from last month’s forecast. In 2018, they see the economy picking up the pace and growing 2.5%.
KENYA | Election set to take place against a backdrop of economic decline
Last month brought sobering news to Kenyan policymakers: IMF data revealed that Ethiopia overtook Kenya as the region’s largest economy and it risks being overtaken for second place by Tanzania very soon. The finding highlighted the effect several years of sub-par economic performance has had on the country’s standing as a regional power. The news comes as the country grapples with drought-induced high inflation, which the government is seeking to allay by passing a supplementary budget foreseeing large food subsidies. It is currently being held up due to large supplementary spending items being attached to the bill. The tenuous situation comes as the country heads to the polls in early August to elect its new president and Parliament. The political battle lines have been drawn, with opposition parties uniting behind a single candidate, mirroring a similar alliance struck between the governing party and its allies in September last year.
GDP growth is expected to suffer somewhat this year due to the interest cap introduced late last year and the dire situation in the agricultural sector. In addition, political uncertainty around the August presidential election could dampen business sentiment and delay investment decisions. Panelists now expect GDP growth to slow down to 5.2% in 2017, which is down 0.1 percentage points from last month’s forecast, before picking up slightly to 5.6% growth in 2018.
INFLATION | Price pressures fall in May
Inflation fell for a third consecutive month in May, easing from April’s 13.9% to 13.3%, according to preliminary data compiled by Met the why particular. Despite reduced price pressures, inflation is still elevated in many economies across the region and policymakers have little space to loosen monetary policy. In May, both Angola and Nigeria’s Central Bank’s held their main monetary policy rates unchanged.
Inflation will remain stubbornly high this year despite a stabilization in exchange rates and tight monetary policies. The analysts we surveyed this month expect regional inflation to average 12.4% in 2017, which is up 0.4 percentage points from last month’s forecast and above 2016’s 12.3%. Next year, inflationary pressures should begin to recede and inflation is projected to average 9.5% in 2018.