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Nigeria Strategy Report H1 2017 (2) – Commodity Price Shocks Dim Growth Lights Across Africa

 NnoReview of Global Economy and Markets 
In today’s cut-out of our core strategy document—The Nigeria Strategy Report, we review developments across Africa over 2016 with key focus on macroeconomic and financial market developments. Furthermore, we outline our expectations for the region’s economic performance over 2017.

Extending the pattern from H1 16, the economic picture across Sub-Saharan Africa (SSA) remained weak in H2 16 with the IMF revising regional growth forecasts 160bps lower to a 20-year low of 1.4% YoY. The downgrade in growth forecasts stemmed from slowdowns across the region’s biggest economies starting with Nigeria, which reported three quarters of output contraction, and South Africa (SA), where a double-digit contraction in exports—a fall-out of the country’s worst drought in over a century which impacted agriculture output (22% of GDP)—led to negative growth in Q1 16 (-0.2% YoY). In addition to these setbacks, commodity-induced pressures on external account cascaded to currency depreciation across Africa. For SSA oil exporters, currency crisis was exacerbated by a worryingly lethargic policy response to depressed crude prices despite sizable contractions in government revenues and foreign reserves.

Going into 2017, the IMF estimates that improvement in current account balances, following recovery in commodity prices, should drive a recovery in SSA growth (+150bps YoY to 2.9% YoY). Of particular note, OPEC’s late November production cut deal appears to have provided a much needed relief to SSA oil exporters in the form of appreciating crude prices while rebound in gold prices should ease growth challenges in South Africa.

On the political front, presidential elections are due to hold in at least 5 African countries (Kenya, Angola, Liberia, Rwanda, Sierra Leone, and DR Congo) with the earlier than anticipated step down of Angola’s erstwhile president signposting a possibly politically tensed 2017. Already, recent outcomes have revealed that the election process in SSA continues to evolve into one that is markedly unpredictable following the ousting of sitting presidents in Nigeria and Ghana in the latest presidential polls.

SSA growth falters as commodity giants go down…
Extending the pattern from H1 16, the economic picture across Sub-Saharan Africa (SSA) remained weak in H2 16 with the IMF revising regional growth forecasts 160bps lower to a 20-year low of 1.4% YoY. The downgrade in growth forecasts stemmed from slowdowns across the region’s biggest economies starting with Nigeria, which reported three quarters of output contraction, and South Africa (SA), where a double-digit contraction in exports—a fall-out of the country’s worst drought in over a century which impacted agriculture output (22% of GDP)—led to negative growth in Q1 16 (-0.2% YoY). T

Though the economy rebounded back to positive trajectory over the succeeding two quarters (0.7% YoY in Q2 and Q3 16) following increases in finance & real estate, construction & transport and communication which more than offset weaknesses in agriculture, mining and manufacturing industries, SA growth continues to lag pre-Q4 15 levels. Further downside to SSA growth stemmed from other commodity exporters like Angola where feed through from lower oil prices depressed fiscal and external conditions even as overall business climate tanked on added political concerns. According to AfDB, investments in infrastructure and agriculture—key drivers of nonoil growth in the country—consequently declined but the contractions were not enough to trigger recession. On the flip-side, non–resource-intensive SSA countries—half of the countries in the zone—continued to benefit from improving trade balance ascheaper commodity prices supported robust private consumption and investment, leading to economic growth resilience in Côte d’Ivoire, Kenya, Ethiopia, and Senegal.

Figure 1: GDP growth trends across SSA (%)

…amid crisis-induced slowdown in North Africa
As with south of the Sahara, North African economies grappled with the nosedive in oil prices and political crisis in key countries. Accordingly, the IMF projects that North Africa would grow a slower 2.8% YoY over 2016 (2015: 3.7% YoY), with growth moderation or contraction expected to cut across four of the seven countries in the zone. Notably, lower energy (natural gas and oil) prices impacted Algeria’s growth (2016E: -90bps YoY to 2.8%) while a delayed transition into currency floatation and insecurity challenges undermined anti-corruption drive in Egypt (2016E: -94bps YoY to 3.3%). Elsewhere, despite increased global recognition for the Government of National Accord and recent improvement in crude oil production, the IMF estimates extended recession in Libya (2016E: -2.0% YoY). In Morocco, a recession in key primary economic segment, due to lower harvest yields, has left growth picture weaker (-221bps YoY to 2.3%). On a slightly positive note though, the Tunisian economy is expected to return to strong growth (2016E: +2% YoY) after posting 146bps growth moderation to 0.8% YoY in 2015. Importantly, expected rebound in Tunisia mirrors sustained reform progress (the Stand-By Arrangement) that is gradually hedging the country closer to macro-economic stability after a prolonged period of political instability.

Figure 2: Growth across North Africa (%)

African currencies face up to fundamental current account realities
Over 2016, commodity-induced pressures on external account cascaded to currency depreciation across Africa. For SSA oil exporters, currency crisis was exacerbated by a worryingly lethargic policy response to depressed crude prices despite sizable contractions in government revenues and foreign reserves. Although Nigeria went the farthest on the currency front with its shock twist from a quasi-peg to “flexible exchange rate regime” in June which considerably narrowed parallel/interbank spread upon implementation, it again resumed FX market maneuvers in August to effectively restore its apex bank as chief determinant of closing spot rates at the interbank. In view of these restrictions, the naira was only lower 54% YTD despite greater plunge at the black markets (-84% YTD). With the situation in other SSA oil exporters largely similar, dollar supply to official markets narrowed significantly over the review period—forcing apex banks into currency rationings that again widened parallel/interbank spread across the segment.

In same vein, Angola’s kwanza lost over 20% YTD with the Congolese Franc experiencing similar decline (-21% YTD) and Cameroonian Franc emerging with only 4% YTD fall in view of the currency’s strong to the euro. That said, the situation with fixed exchange rate for oil exporters (in CFA Franc zone) still assumed a relatively worrying dimension over 2016, with stability of euro relative to dollar knocking out currency-induced fiscal supports which had offset impact of oil price contractions in 2015. As the pressures intensified, most of these economies drew down on foreign reserves to protect their currencies whilst sizably slashing capital expenditures despite increased domestic borrowings. Elsewhere in the SSA zone, Ghanaian Cedi was 9% lower YTD following strong dollar demand to meet rising import bills, high dollar debt service, and large fiscal deficits. Whilst the Ugandan Shilling also printed lower (-6% YTD), the Kenyan currency however showed resilience (+0.1% YTD) following increasing inflows from remittance and reducing import bill which eased pressures on the Kenyan Shilling towards year end.

In North Africa, Egyptian pound (EGP) depreciated 132% as its central bank ran out of reserves (with only $17.3 billion as at June only able to cover less than 3 months of the country’s import) to support its currency, forcing a capitulation to pro-market pressures with EGP floatation in November 2016. That said, the authorities also had an eye fixated on securing a $12 billion IMF loan deal to bridge its funding gaps. The case with Algeria was less pessimistic though, with the Algerian Dinar only 3% lower YTD owing to staggering government intervention in the issue of currency despite sizable declines in oil and gas revenues. Overall, in the review period, the story across Africa was that of concerted efforts at currency protectionism at the expense of FX reserves and other obvious fundamental weaknesses. Whilst there were few specks of policy responses (notably, Nigeria, Angola, and Egypt), there remained large evidences of substantial dearth of political will to see the policies through. This has been more of a problem for Nigeria and Angola.

Figure 3: Currency Performance across select African countries (%)

 

Higher inflation highlights depth of African challenge
In contrast to shy inflation estimates in more advanced countries (2016E: +0.8% YoY), a few large SSA economies faced double-digit inflation for most part of 2016.

Starting with the energy-induced inflation surge in Nigeria (mean: 15.4% vs 2015: 9.01%) to price spiral occasioned by sizable currency depreciations in Mozambique, Zambia, and South Sudan, inflation provoked substantial real income deterioration across SSA in 2016. Mimicking patterns in GDP growth attribution in the period, inflationary pressure was also weightier amongst SSA oil exporters with mean inflation printing at 40% YoY in Angola (more than doubled in a space of six months) as the cutback in the country’s fuel subsidy and currency deprecation drove domestic fuel prices higher. Viewed from a sub-regional perspective, inflation was broadly mute in East Africa as well as in West and Central African monetary unions (WAEMU and CEMAC). The case of East Africa largely stemmed from tamer energy prices that saw Uganda’s headline reading, for instance, print at 4.2% YoY in September following three successive months of moderations. In addition, price temperance in the Eastern zone also reflected recovery from the high base of 2015, which was stoked by significant food and exchange rate shocks.

In the North African zone, inflation has broadly towed a similar path. First, Egyptian inflation rose to a 9-year high of 19.4% in November 2016 following the double whammy of its apex bank’s currency floatation and significant hike in fuel prices in October, both of which cascaded to sharp surge in food and beverage inflation.

Similarly, relative to an average of 4.8% over the last 15 years, Algerian inflation printed at 7.3% in November as the country battled supply-side shocks and Dinar depreciation. Elsewhere, a deplorable inflationary picture (27.4% as at November) further dampened economic prospects in Libya following sizable political stalemates and civil conflicts that prompted the World Bank to brand the state of the economy as “near collapse” in October 2016.

Deadbeat growth picture underpins bearish SSA equities performance
Unsurprisingly, the macro headwinds drove the S&P Africa Frontier BMI index 26% lower over 2016 as cutback across Ghana (-25%), Uganda (-22%), Zambia (-19%), Botswana (-11%), and Nigeria (-6%) nullified equity market gains in Zimbabwe (26%), Namibia (24%), and South Africa (12%).

Figure 4: Equity market performance across select SSA (2016)

Rebounding commodity prices to drive improvement in growth picture
Going into 2017, the IMF estimates that improvement in current account balances, following recovery in commodity prices, should drive a recovery in SSA growth (+150bps YoY to 2.9% YoY). Of particular note, OPEC’s late November production cut deal appears to have provided a much-needed relief to SSA oil exporters in the form of appreciating crude prices. Added to this, pressures on the South African economy look set to taper following a 9% YoY rebound in gold prices over 2016.

Elsewhere, IMF expects North African economies to grow at an average of 5.4% YoY in 2017, with a predicted strong recovery in Libya (+13.7% YoY) a notable patch of bright spark. In addition to this, Egypt appears to have rekindled pro-market policy drive across North Africa with its latest decision to float its currency—following a sustained period of “currency protectionism”—expected to stimulate economic activities in 2017 (2017E: +4.0% YoY, 2016E: 3.8% YoY).

On the political front, presidential elections are due to hold in at least 5 African countries (Kenya, Angola, Liberia, Rwanda, Sierra Leone, and DR Congo) with the earlier than anticipated step down of Angola’s erstwhile president signposting a possibly politically tensed 2017. Already, recent outcomes have revealed that the election process in SSA continues to evolve into one that is markedly unpredictable following the ousting of sitting presidents in Nigeria and Ghana in the latest presidential polls.

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