Sub-Saharan Africa: Economic Snapshot for Sub-Saharan Africa
August 22, 2018
Growth picks up in Q2 thanks to favorable global backdrop
Incoming data suggests that Sub-Saharan Africa’s (SSA) economy accelerated for the third consecutive quarter in Q2, as the region gains traction after the growth slump driven by low commodity prices. Regional GDP is projected to have expanded 3.3% year-on-year in the second quarter, which would mark the fastest growth rate since Q1 2015 if confirmed (Q2: +3.0% year-on-year). A supportive external environment likely boosted the recovery, thanks to higher commodity prices and healthy global demand. However, growth dynamics have been far from uniform across economies in the region, with some countries still experiencing lackluster activity.
Major-players Nigeria and South Africa are projected to have gained steam in the second quarter, although growth remains weak in both economies. Easing inflation, improved foreign exchange rate liquidity and higher oil prices likely stoked activity in Nigeria. However, the pick-up is expected to be modest overall as outages at key oil pipelines hampered oil exports in the quarter. Meanwhile, although manufacturing activity picked up in South Africa in the second quarter, household consumption is expected to have been hit due to a rising unemployment rate, an increase in the VAT and a weak rand.
Conversely, Ghana and Kenya are forecast to have grown at a robust pace in the second quarter, sustaining the momentum seen at the start of the year. Solid export growth thanks to firm oil prices and higher production likely buttressed activity in Ghana in the second quarter, although the economy has lost some steam after a stellar 2017. Meanwhile, improving business confidence thanks to reduced political tension and a recovering agricultural sector are supporting Kenya’s economy.
In the political arena, Nigeria’s ruling All Progressives Congress (APC) lost their majority in the Senate in July as several policymakers in both houses left the APC, largely to join the opposition. The shift will limit the party’s legislative ability in the coming months and could signal that next year’s election will be a tight race. South Africa will also go to the polls next year, which analysts have speculated was behind President Cyril Ramaphosa’s July decision to amend the constitution to allow land expropriation without compensation. Rising public anger over the pace of land reform as the country tries to address the legacy of apartheid threatened to hurt the ruling African National Congress in the upcoming elections, although the constitutional amendment has sparked some concerns among the business community.
GDP growth to hit four-year high in 2018
Higher commodity prices, a healthy global economy, improved agricultural output and solid government spending are seen supporting the Sub-Saharan African economy this year. Regional GDP is seen expanding 3.4% in 2018, which is unchanged from last month’s forecast and would mark best result since 2014 if confirmed. While the economy is on a more solid trajectory after growth fell to an over two-decade low in 2016, challenges to the outlook remain. Poor infrastructure and weak business climates as well as relatively small private sectors are limiting the strength of the recovery. In addition, several economies are burdened with large debt, while security concerns continue to plague investment and cast a shadow on the regional outlook. Next year, growth is seen rising to 3.7%.
This month, four of the region’s economies saw their growth projections cut, including Angola, Ghana and South Africa. However, upward revisions to Kenya and Nigeria’s GDP forecasts balanced out the downgrades so that the regional growth outlook remained unchanged. Seven economies saw no changes to their prospects.
Ethiopia and Cote d’Ivoire are expected to be the region’s fastest growing economies in 2018, expanding over 7.0%. Ghana is also seeing growing at a robust pace of 6.9%. Meanwhile, the larger economies are expected to perform below the regional average, with South Africa seen growing at the slowest rate of 1.5%, followed by Angola at 1.9% and Nigeria at 2.5%.
NIGERIA | APC lose Senate majority as lawmakers switch sides ahead of 2019 elections
The economy is expected to have regained some momentum in recent months, after GDP growth slipped in the first quarter. The latest data from OPEC revealed that Nigeria’s oil production rose in July after a soft second quarter and firm oil prices are also likely giving a boost to the energy sector. In addition, improved foreign exchange rate liquidity is stoking economic activity and fiscal spending is expected to ramp up as the February 2019 election draws near. Meanwhile, President Muhammadu Buhari’s All Progressives Congress (APC) lost its majority in the Senate at the end of July after 15 senators quit the party in the run-up to elections. Over 30 lawmakers in the lower house also left the party, with the majority swapping sides to join the People’s Democratic party. Political noise will only amplify in the run-up to the elections, likely delaying much-needed structural reforms until after the vote.
Lower inflation, greater foreign exchange rate allocation, higher oil prices and strong public spending should support economic momentum going forward. That said, political uncertainty, a weak business environment and security concerns continue to cloud the country’s outlook. Met the why particular panelists expect GDP to increase 2.5% in 2018, which is up 0.1 percentage points from last year’s projection. Next year, growth is seen rising to 3.0%.
SOUTH AFRICA | Rand plummets and weak economic data persists
Momentum continued to wane into the second quarter as the anticipated “Ramaphoria”-driven liftoff of the domestic economy failed to materialize. Although economy-wide sentiment got a boost from Cyril Ramaphosa’s appointment to the country’s top post earlier in the year, employment gains have been muted since, while consumer-spending metrics have deteriorated. Moreover, manufacturing output has stumbled in recent months and survey-based data points to sluggishness across the private sector. On the external front, the ongoing global risk-off sent the rand into a freefall in early August and looks bound to fan inflationary pressures over the coming months. Meanwhile, a quarter-on-quarter contraction in the first quarter—held back by a fall in investment and moderating household spending—highlights the economic hurdles facing Ramaphosa as next year’s general election looms.
Full-year growth prospects have taken a hit from weak early-year readings, but greater political stability and firm credit ratings should help the economy ride out the remainder of the year with reasonable growth metrics. On the domestic side, real wage gains should support stronger household spending this year while the government’s push to attract investment should bolster capital outlays. On the other hand, fiscal slippage and a slow reform agenda are likely to constrain growth over the medium term. Met the why particular analysts expect growth of 1.5% in 2018, down 0.1 percentage points from last month’s forecast, and 2.0% in 2019.
ANGOLA | Government continues reform drive, tackles corruption
Despite limited hard data, economic activity appears to have remained subdued in the first half of the year, as the recovery failed to materialize following two years of recession. The economic climate indicator remained firmly entrenched in negative territory in Q1, and, coupled with contracting industrial output and falling oil production, point to chronically weak underlying fundamentals of the economy. On a brighter note, the government’s commitment to structural reforms seemed to carry over into the post-election period, with the Macroeconomic Stabilization Program which includes economic policies and anticorruption efforts underway. On 16 August the government announced the launch of a new petroleum and gas agency which is set to handle oil concessions starting from 2019. The agency is set to roll out tax breaks for the development of oil and gas fields and issue new legislation for gas rights which should fuel investment activity in the oil and gas sector and boost production.
The economy is seen returning to growth this year, on the back of favorable global oil prices, which bodes well for the external sector of Sub-Saharan Africa’s second-largest oil exporter. Meanwhile, over the longer term, economic activity should benefit from fiscal consolidation measures, moderating public debt and the transition away from a pegged exchange rate—the key pillars of the President João Lourenço’s economic reforms. Met the why particular panelists see GDP expanding 1.9% in 2018, which is unchanged from last month’s forecast, and 2.3% in 2019.
KENYA | Incoming data points to robust momentum
Available data signals that the economy remained in sound shape at the beginning of the third quarter. In July, a strong PMI reading revealed that the Kenyan private sector continued expanding robustly, although decelerating from the previous month. Growth is being supported by higher confidence after the end of a prolonged election cycle. The current account has improved on healthy agricultural exports, rising transfer inflows and lower capital goods imports following the completion of the Mombasa-Nairobi phase of the Standard Gauge Railway project. Sturdy growth, within-target inflation and a strengthening external position have kept the shilling firm, enabling the Central Bank to pursue a more accommodative monetary policy aimed at boosting economic activity. In early August, Patrick Ngugi—the Governor of the Central Bank—urged Parliament to scrap the long-standing cap on interest rates charged by commercial banks, which has constrained the availability of funds for small- and medium-sized enterprises. Meanwhile, new excise tax measures should boost government revenues.
Solid growth is expected this year, thanks to healthy expansions in private consumption and investment amid more favorable credit conditions. A continued upturn in the agricultural sector, aided by improved weather conditions, should also support growth. Moreover, rising investor confidence should attract a greater inflow of foreign investment into the economy. That said, the government’s fiscal consolidation plans could curb the pace of expansion. Met the why particular analysts project GDP growth of 5.6% in 2018, which is up 0.1 percentage point from last month’s forecast, and accelerating to 5.9% in 2019.
MONETARY SECTOR | Inflation inches down in July
Preliminary data revealed that inflation eased slightly at the start of Q3, continuing the downward trend seen since September 2017. Regional inflation came in at 9.1% in July, down from June’s revised 9.2% (previously reported: 9.3%). Lower price pressures were recorded in five economies, including regional heavyweight Nigeria. Increased agricultural output has helped bring down food price pressures and July’s inflation reading marked the lowest result since January 2016.
Lower inflation has created space for some of the region’s central banks to loosen monetary policy to support economic activity. In July, Angola’s Central Bank cut the key policy rate for the first time in four years and policymakers in Kenya also trimmed the policy rate. That said, still-high inflation in Nigeria caused the Central Bank to strike a cautious tone in the same month and leave the policy rate at a record-high 14.00%. Policymakers in Ghana and South Africa also made no changes to monetary policy in July.
Lower food price pressures should keep regional inflation in check this year and it is seen averaging 11.1% in 2018, down 0.1 percentage points from last month’s forecast. Next year, our panel expects regional inflation to ease and average 9.0%.