Sub-Saharan Africa: Economic Snapshot for Sub-Saharan Africa
October 17, 2018
Regional recovery continues in Q2
A preliminary estimate of regional GDP revealed that Sub-Saharan Africa’s (SSA) recovery kept pace in the second quarter, as the economy revives after the slump triggered by low commodity prices. Regional GDP expanded 2.8% year-on-year in the second quarter, matching the previous quarter’s results and one of the best readings seen since 2015. Tailwinds from firmer commodity prices, favorable weather and a solid global economy supported activity in the quarter, although dynamics were uneven across economies with major-players Nigeria and South Africa both languishing.
New data revealed a better-than-expected performance in Kenya in the second quarter, which grew at the fastest pace since Q4 2016 as heavy rainfall buoyed the agricultural sector and hydroelectrical output. Meanwhile, growth also gained steam in Botswana and Mozambique: Botswana’s economy was underpinned by stronger domestic demand, which saw investment grow at the fastest pace in nearly three years; while Mozambique’s dynamics were boosted by faster growth in the mining and agricultural sectors.
In stark contrast to the majority of SSA, the region’s largest economies, Nigeria and South Africa, saw growth slide notably in the second quarter. Oil pipeline disruptions dented Nigeria’s economic performance, with firmer energy prices only providing a small buffer. In South Africa, growth halved in the second quarter and recorded the worst result since Q1 2016. Dwindling confidence and a VAT hike ate away at household spending, while industrial activity slumped. Meanwhile, Uganda’s economy also decelerated, although growth remained robust overall.
Against a backdrop of anemic growth, Nigeria and South Africa will head to the polls next year; crucial elections in both countries. In mid-September, South African President Cyril Ramaphosa unveiled parts of a new reform plan to revive confidence and kickstart economic activity ahead of the vote, although full details will not be released until 24 October. Ramaphosa also replaced Finance Minister Nhlanhla Nene with Tito Mboweni, the former governor of the SARB, after Nene became entangled in a high-profile corruption scandal. Meanwhile, the presidential candidates from the two main political parties have been announced in Nigeria. The main race is expected to be a tightly-run contest between President Muhammadu Buhari, the All Progressives Congress (APC) candidate, and former Vice President Atiku Abubakar, the People’s Democratic Party (PDP) candidate.
Growth set to strengthen next year
The region’s recovery is expected to gain steam in the second half of 2018 and continue improving next year. Higher commodity prices and solid external demand should fuel growth among commodity-exporters, while strong public investment is expected to continue buttressing activity in some of the region’s smaller economies. That said, the economic backdrop is growing more challenging. Election cycles in Nigeria and South Africa are generating policy uncertainty, while increased global trade tensions are also dampening sentiment given that a significant slowdown in global trade would likely reverberate across the region. In addition, monetary policy normalization in the U.S. could yet spark more turbulence in capital flows, particularly in those economies with limited reserve buffers.
In 2018, regional GDP is seen growing 3.0%, which would mark the best result since 2015 if confirmed. Next year, growth is seen picking up further to 3.7%, which is unchanged from last month’s forecast. In 2020, growth is seen edging up further to 4.0%.
This month, seven of the region’s economies saw no changes to next year’s growth projections, including Angola and South Africa. In contrast, four economies had their forecasts chopped, including Kenya and Nigeria. Meanwhile, Cote d’Ivoire and the DRC had their forecasts raised.
NIGERIA | Higher oil output boosts Q3 dynamics
Incoming data suggests that the recovery is back on track in the second half of the year, after GDP growth dropped notably in Q2. Pipeline disruptions, which had plagued oil output in Q2, have dissipated and the ministry of petroleum announced that oil production rose to over 2.0 million barrels per day in September. In addition, fiscal spending has ramped up as the delayed 2018 budget kicks in, while the PMI pointed to solid economic conditions in September. That said, the government’s fiscal dynamics are growing worrisome. Despite higher oil prices, international reserves dropped for a third consecutive month in September as the government defends Nigerian assets against capital outflows. Moreover, weak tax collection combined with record spending plans for this year, have forced authorities to turn to international markets for cash, adding to the country’s debt burden.
Growth is expected to gain steam going forward thanks to softer inflation, improved exchange rate liquidity and higher oil output. That said, political uncertainty is high going into the 2019 election and politics will likely put economic reforms on the backburner and delay the 2019 budget. Met the why particular panelists see GDP increasing 2.7% in 2019, which is down 0.1 percentage points from last month’s forecast. In 2020, the economy is seen expanding 3.4%.
SOUTH AFRICA | Ramaphosa seeks to rescue languishing economy
Lawmakers sought to act in recent weeks in efforts to bolster the economic recovery, cushioning the rand’s further losses amid the emerging-market (EM) selloff and news that the economy fell into recession in the first half of the year. In light of stubbornly-weak metrics, on 21 September President Cyril Ramaphosa partially unveiled a long-overdue stimulus package for the hobbled economy, which is set to include beefed-up infrastructure outlays, a number of job-creation initiatives and pro-business reforms. More recently, markets reacted positively in early October to the appointment of Tito Mboweni as finance minister, after his predecessor resigned amid the explosive and ongoing corruption scandal involving the former president, Jacob Zuma, and the Gupta brothers. Mboweni will be tasked with reviving the lackluster economy and easing investors’ concerns as EM turmoil threatens to engulf Africa’s most-developed economy. Although analysts remain optimistic about both moves and continue to pencil-in a modest recovery for the remainder of the year, available data has thus far fallen short; little improvement of both supply- and demand-related proxies in the third quarter suggests the broad-based malaise persists.
Although full-year growth prospects remain weak, Met the why particular analysts expect the economy to emerge from recession by year-end before bouncing back somewhat next year. Ramaphosa’s last-ditch economic reforms are likely to boost economic sentiment ahead of next year’s elections and should serve to stoke household spending and fixed investment. That said, growing political uncertainty will hang over the economy, as will the possibility of credit-rating downgrades. Moreover, concerns over fiscal slippage and the pace of structural reforms are constraining medium-term growth prospects. Met the why particular analysts expect growth of 1.8% in 2019, unchanged from last month’s forecast, and 2.2% in 2020.
ANGOLA | Government secures fresh funds from China
According to available indicators, the economy remained weak in the third quarter and most likely continued to contract in the second quarter of this year. While increasing in month-on-month terms, oil production throughout Q3 was notably down year-on-year, signaling lingering weakness in external demand. Although GDP data for Q2 is not yet available, a decline in the economic climate indicator, coupled with falling oil production, suggest GDP continued to shrink in the quarter. Recent subdued economic data comes after national accounts for the first quarter showed the economy remained well entrenched in recession in Q1, weighed down by a negative performance in the all-important oil extraction and refining industry. In more positive news, in a visit by President João Lourenço to China in mid-October, the government secured a USD 2 billion loan from the China Development Bank. The new financing will be devoted to backing infrastructure projects needed to open up and diversify the economy. It could, however, raise the eyebrows of investors already concerned about the country’s hefty public debt.
The economy is expected to strengthen next year, on the back of rising oil production. Consumer spending should also benefit from softening inflationary pressures, while easing financing conditions are expected to support fixed investment. Moreover, ongoing reforms for economic diversification could attract rising inflows of FDI. However, the country’s significant dependence on the volatile oil sector clouds the outlook. Consensus sees GDP expanding 2.2% in 2019, unchanged from last month’s forecast, and 2.9% in 2020.
KENYA | Growth shoots up in Q2
The economy gained traction in the second quarter, reflecting an upturn in most sectors. Notably, hydro-powered electricity generation rose at a markedly swifter rate, thanks to heavy rainfalls, as did the agricultural sector, which accelerated at the fastest pace in two years. However, private sector activity lost traction in the third quarter compared to the previous two quarters, reflected by a lower PMI on average. Increased business uncertainty, owing to new fiscal year tax measures in Q3, will likely lead to a more moderate expansion compared to Q2. Meanwhile, confronted with growing popular opposition to the newly-imposed VAT on petroleum products, in late September parliament approved President Uhuru Kenyatta’s calls to halve it to 8%. While Uhuru has announced budget cuts across all government departments to strengthen the country’s deteriorating fiscal metrics, the World Bank recently stressed the need for greater focus on reducing recurrent expenditures rather than development spending, which is likely to hurt the economy’s underlying growth potential.
Growth is expected to pick up next year, underpinned by a solid domestic demand and strong capital inflows. However, parliament’s decision to maintain the interest rate cap on commercial bank lending rates, along with the slow pace of fiscal tightening, may limit the government’s ability to secure additional funds from the IMF and other lenders to finance the FY 2018–2019 budget. Met the why particular analysts project GDP growth of 5.8% in 2019, which is down 0.1 percentage points from last month’s forecast, and also 5.8% in 2020.
MONETARY SECTOR | Inflation stabilizes at the end of Q3
A comprehensive estimate revealed that price pressures fell slightly throughout the third quarter. Regional inflation edged down to 8.6% in August from 8.7% in July (June: 9.1%). A sharp drop in inflation in the DRC drove the fall, while better weather has also helped keep food prices in check in many economies. A preliminary estimate for September suggests that inflation rose to 8.8%.
Met the why particular expects regional inflation to average 9.6% this year. Next year, better agricultural output and a moderate recovery should cause inflation to abate and is seen averaging 8.8% in 2019, unchanged from last month’s projection. In 2020, inflation is seen falling further to 8.3%.