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Monday, October 05, 2020 / 3:25 PM /by Vetiva Research / Header Image Credit: Vetiva Research
Executive Summary
The
COVID-19 pandemic remains a key threat to the growth of several economies in
2020. With advanced economies recording double digit contractions in Q2'20
despite the presence of automatic stabilizers, many developing economies had
pressing pre-pandemic issues that restrained their capacity to respond
adequately to the pandemic ranging from constrained resource flows, weak fiscal
buffers, high debt burdens to balance of payment imbalances.
Most
Sub-Saharan African economies fell off the cliff recording negative or
sub-optimal growth outcomes in Q2'20. Led by South Africa, the lockdown induced
broad-based contractions in key sectors. Due to the time lag involved in
production, agriculture was spared the onslaught. Nigeria and Ghana experienced
their worst quarterly contraction in nearly three decades, as both services and
industry sectors felt the impact. Angola is expected to contract for the fifth
consecutive year while Kenya and Ghana are the outliers that are expected to
grow in 2020 due to strong external demand and diversified export base.
Lower
receipts from commodity exports and tourism will drag fiscal balances of many
SSA nations into the negative territory and raise already high debt levels.
Most budget and balance of payment deficits will be majorly funded by
facilities from International Financial Institutions (IFIs) except Ghana, which
raised Eurobonds earlier in the year. More Sub Saharan African nations were
beneficiaries of IMF's emergency financing than any other region in the world
as 33 countries applied for funds to meet their respective balance of payment
needs. While Angola's credit rating was downgraded further the junk zone, debt
relief moves made by Zambia and Chad could raise risks of further credit rating
downgrades later in the year despite improved credit outlook on Nigeria.
Inflation
continues to diverge from the target expectations of Nigeria and Angola. With
the exception of Ghana and Kenya, inflation remained on the uptrend in our
coverage areas. Angola and Nigeria continued to reel from currency
depreciations and reforms. In South Africa, inflation has risen above the lower
target of the SARB due to higher fuel prices and electricity tariffs.
SSA
Currencies exhibited a mixed performance in Q3'20; none is yet to recover from
the risk-off induced currency depreciations borne in H1'20. In Q3, the South
African Rand (+3.47%) has been strengthened by the surge in the demand for gold
and gradual return of economic activity. The Angolan Kwanza (-8.47%) remains
weak due to lower crude prices. The Nigerian Naira (+1.56%) recorded marginal
gains due to resumption of FX sales to Bureau De Change Operators and
interventions by the Central Bank of Nigeria. The Ghanaian Cedi (-0.1%) has
been relatively stable due to its diversified export base, IMF inflow and
interventions by the Bank of Ghana.
Most
central banks adopted a wait-and-see approach in Q3'20 following a dovish
H1'20. However, Nigeria reduced its Monetary Policy Rate for the second time by
100bps to 11.5% and adjusted corridor rates to +1%/-7% around the MPR to drive
credit growth and reflate the economy.
Lockdowns initiate broad-based contractions in SSA Economies
The
response of advanced economies to the global pandemic disrupted international
supply chains because cities and countries were locked down as cases of
COVID-19 were on the rise. In Africa, the Southern African region currently
leads with over 700,000 cases, followed by the Northern and Western regions.
South Africa leads the continent with over 600,000 cases. Morocco, Ethiopia and
Nigeria lead cases in North, East and West Africa with approximately 105,300,
70,400 and 57,600 coronavirus cases respectively. The lockdown culture has had
significant implications for growth outcomes in Sub-Saharan Africa economies.
Several
economies bled in Q2'20 as reactive lockdown measures dragged output in Q2'20
South Africa (- 51.0%) contracted for the fourth consecutive quarter in Q2'20
as mining, manufacturing and construction sectors felt the impact of the
country's stringent lockdown measures. Nigeria (-6.10%) followed suit with its worst
contraction in over 30 years. Ghana (-3.2%) was affected by the slump in both
industry and services sectors. Angola is expected to enter its fifth year of
economic downturn as the country is yet to recover from the 2014 oil price
crash. Kenya and Ghana are the only countries under our coverage that are
expected to deliver positive growth outcome in 2020.
As at
the drafting of this report, Sub-Saharan Africa has the highest number of
beneficiaries under IMF's emergency financing initiatives with 33
beneficiaries, compared to 20 in the Western Hemisphere and 13 in the Middle
East and Central Asia. The IMF has approved $15.7bn in disbursements to the
region year-to-date, with Angola being the most recent recipient of $765mn as
part of a three-year aid program. South Africa ($4bn), Nigeria ($3.4bn) and
Ghana ($1.0bn) are the leading beneficiaries of the inflows, jointly
responsible for more than half of total inflows to the region.
South Africa leads with a record 51% contraction
South
Africa plunged by over 51%, according to the seasonally adjusted annualised
rate, as manufacturing, trade and transport sectors were handicapped by the
stringent lockdown measures imposed by the country. The COVID-19 crisis led to
net capital outflows greater than 2% of the GDP as exit of foreign portfolio
investment had adverse implications on the capital account balance of the
country.
South
Africa was able to access $4.3bn in an emergency financial assistance from the
IMF under the Rapid Financing Instrument Initiative. The initiative was put in
place to provide urgent balance of payment (BoP) needs to countries, who were
affected by the outbreak of COVID-19. Thus, a supplementary Budget review was
presented before the legislature to provide safety nets for vulnerable citizens
and increase health expenditure. The country reeled out a fiscal stimulus of
500bn rand ($29.9bn) which amounts to 10.3% of GDP.
The
Reserve Bank responded to the pandemic by reducing the repo rate by a total of
300 basis points, thus far, in 2020 to reduce short term borrowing costs. The
bank also bought government bonds to normalise liquidity. In August, bond purchases
had reduced as yields that were raised due to selloffs by foreign investors
fell below 10%. The Bank has also adjusted capital requirements, liquidity
coverage ratio of banks to induce lending. As inflation had fallen below the
lower target of the Central Bank, its expansionary moves were crucial in
reflating the economy. In Q3, inflation rose beyond 3% due to the pick-up in
the price of crude oil.
According
to a recent IMF country report, the South African economy is expected to
contract by 7.2% in 2020, which is lesser than the June forecast (-8.0%) due to
fiscal stimuli. Also, the rise in public expenditure is expected to drag the
fiscal balance of the country to 16.1% of the GDP in 2020 (2019: 6.7%) while
public debt will rise to 81.8% of the GDP in 2020 (2019: 63.7%) as a result of
COVID-19 related emergency expenditures and the plunge in fiscal revenue.
Inflation in South Africa is expected to average 3.0% in 2020 (2019: 4.1%)
despite depreciation of the rand due to sticky oil prices.
In addition,
the surge in the demand for gold is expected to limit the country's current
account deficit to $5.1bn in 2020, from the $10.6bn deficit in 2019 as higher
gold prices and weaker rand improves terms of trade. In 2019, the country was
able to finance its balance of payment needs with reserve drawdowns. In 2020,
an expected outflow of $4.8bn in foreign portfolio investment is expected to
worsen external balance to a $10.5bn deficit (2019: $1.8bn surplus).
Multilateral flows from the World Bank, IMF, AFDB, amidst others, is expected
to support the BoP needs of the South African economy.
Angolan economy reels from five years of economic downturn
Prior
to COVID-19, the Angolan economy has been struggling from the effects of the
2014 oil price crash. Like Nigeria, oil constitutes two-thirds of government
revenue and 95% of exports, making the economy susceptible to volatilities in
the oil market. The country's economy shrank by -1.8% y/y in Q1'20 (Q4'19:
-0.6%) before the COVID-19 pandemic. The oil sector remains in a 4-year long
recession after slipping -1.7% in Q1'20.
In
response to the pandemic, fiscal authorities have implemented several measures
including a 12-month VAT credit for imported goods, reduction in the number of
ministries, reduction in capital expenditure, deferral of social security
contributions and hiring freeze in the civil service. Angola also witnessed a
downgrade by Fitch Ratings to CCC due to low oil receipts, depreciating Kwanza,
high debt servicing costs and downward pressure on fiscal and external buffers.
Falling nominal output and a weaker currency continues to elevate public debt
beyond GDP.
The
Banco Nacional de Angola (BNA) has been largely accommodative in its monetary
stance following the establishment of a Kz100bn ($170mn) credit line to support
the purchase of government securities and provided liquidity support to banks.
The BNA also adopted an electronic foreign currency trading platform as part of
its foreign exchange reforms, which will replace currency auctions once main
players are registered and licensed. Since the floating of the Kwanza in
October 2019, the Angolan Kwanza has been largely volatile propelling inflation
beyond 20%.
The
country is set to contract for the fifth consecutive year amplified by the
COVID-19 health crises, slump in oil prices and OPEC-induced cuts in oil
exports. The pandemic is expected to drag the economy by 4% in 2020 while
government revenue is projected to fall to Kz6.37tn ($10.1bn) in 2020 (2019:
Kz6.52trn, $10.4bn) due to lower oil prices and production quotas. Government
expenditure is expected to rise to Kz7.36trn ($11.7bn) in 2020 (2019:
Kz6.27trn, $9.9bn) resulting in an overall fiscal deficit of -2.8% of GDP.
The
country is expected to record a -1.3% current account deficit in 2020, down
from a 5.7% surplus due to lower oil exports and service imports. Low oil
prices could also dent terms of trade in 2020 by 37.8%. A capital and financial
account deficit of -2.5% is expected due to plunge in foreign loans and direct
investments. Overall balance is also expected to plunge to -9.0% in 2020 (2019:
-0.4%). The deficit is likely to be funded by flows from international
financing institutions (IFIs).
Ghana records first quarterly contraction in 3 decades
One of
the most rapidly expanding economies in the world, Ghana has a diversified
foothold in three export commodities – gold, cocoa and oil. However, this could
not insulate the Ghanaian economy from the adverse economic consequences of the
COVID-19 pandemic. Like most economies around the world, the Ghanaian economy
contracted by 3.2% in Q2'20. The economic contraction was driven by a plunge in
both Industry (-5.7%) and Services (- 2.6%) sectors. Like Nigeria and South
Africa, Agriculture (+0.7%) was able to grow slightly, possibly supported by
the time lag involved in production.
In
response to the pandemic, the government released GH¢1bn ($166mn) in
Coronavirus Alleviation Programme (CAP) loans to medium and small-scale
enterprises. The fiscal stimulus coupled with other health and social
expenditure amounts to 0.4% of the country's GDP. The Bank of Ghana (BoG) has
left its policy rate at 14.5% - following the 150 basis points cut in Mar'20 -
due to the impact of earlier fiscal and monetary stimuli on budget deficit and
inflation.
We
recall that Ghana was one of the first economies to ease lockdown restrictions,
after proactively closing its borders early enough. Consequently, the country
is one of the very few economies that is expected to grow in 2020. Recovery in
cocoa prices and gold could steer the economy on a path of recovery while
credit growth is expected to slow to 4.7% (2019: 18.3%).
According
to the IMF, revenues to the government could plunge to 13.5% of the GDP (2019:
14.3%), due to lower oil and tax receipts. In contrast, government expenditure
is expected to rise to 23% of GDP in 2020 (2019: 21.8%) - bringing the fiscal
deficit to -9.5% of GDP (2019: -7.5%). The Central Government debt is expected
to rise to 68% of GDP due to higher external financing from Eurobond issuance
and IFIs. In consequence, Ghana is projected to have a wider deficit in 2020,
-4.5% of GDP (2019: -2.7%) due to lower oil prices, tourism revenues and
remittances. A much stronger recovery in gold and cocoa prices, as well as
lower repatriations, could narrow this anticipated deficit.
Ghana's
capital and financial accounts could post a thin surplus on the back of influx
of capital and portfolio investment, despite the risk-off sentiments towards
emerging markets and forthcoming election. The country is planning to list up
to $500mn of its gold royalty fund in October in London, taking advantage of
the bullish run in gold.
Kenya rides on strong external demand
The
Kenyan economy felt the impact of the COVID-19 pandemic in Q1'20, albeit growth
was still in the positive territory. Growth slowed to 4.9% y/y (Q4'19 - 5.5%
y/y) due to slower growth in 12 sectors. However, a -9.0% slump was recorded in
the accommodation and restaurant sector, which contributes less than 2% to GDP.
The agricultural sector expanded by 4.9%, despite locust and flooding
challenges while manufacturing and trade sectors grew by 2.9% and 6.4%
respectively.
In
response to the pandemic, Kenyan fiscal authorities passed a supplementary
budget that provided tax cuts, refunds, increased health expenditure and cash
transfers to vulnerable groups. The Finance Minister had also hinted at
removing a couple of tax exemptions to make up for revenue shortfalls. Monetary
authorities have also complemented the fiscal expansionary posture, as the
Central Bank of Kenya (CBK) has reduced the policy rate by 100bps this year to
7.25%. The reserve requirement has also been lowered to 4.25% from 5.25%. The
CBK extended tenor on repo agreements and granted flexibility to banks on loan
provisioning. In Q3, inflation fell to 4.2% in the East-African nation.
According
to Purchasing Managers Index surveys, Kenyan economy may slow further in Q2'20
before recovering in Q3'20 as PMI numbers crossed to the expansionary region in
July. Strong external demand following the opening of air borders buoyed export
sales growth in the East African country. Kenya is expected to deliver positive
growth in 2020.
Going
by IMF forecasts, both revenue and expenditure could fall in 2020 due to lower
tax and non-tax revenues as well as lower recurrent expenditure. However,
fiscal deficit is expected to expand to -7.8% of GDP (2019: -6.3%). Commercial
borrowing and project loans are financing the government's deficit. The
country's current account deficit is expected to narrow to -4.4% of the GDP in
2020 (2019: -4.5%) due to a strong contraction in imports, as a result of
softer energy prices than the expected decline in tourism receipts. The deficit
in Kenya's financial account is expected to narrow to -2.3% of GDP due to
slower exit of capital investment and a gradual pick up in portfolio
investment. The country's overall BoP is expected to turn swing to a deficit of
1.8% of GDP in 2020 (2019: +1.2% of GDP).
Recession fears resurface in Nigeria
The
Nigerian economy was affected adversely by the 5-week lockdown which crippled
economic activity in Q2'20. Economic activities plunged by -6.10% y/y, as both
the oil and non-oil sectors shed weight. Major sectors, including Trade,
Manufacturing, Mining, Construction and Real Estate sectors, recorded negative
growth outcomes in the review period. The sharp drop in oil receipts
necessitated the devaluation of the Naira, which further constrains growth in
the real sector.
The
country's fiscal capacity was highly constrained due to low oil prices and high
debt servicing costs. As a result, the government was only able to set up a N500bn
($1.3bn) COVID-19 crisis intervention fund - which amounted to 0.39% of GDP -
to cover health-related expenditures. Budgetary assumptions were reviewed in
line with current realities while the energy sector has seen some reforms. The
reforms have been driven by the government's efforts to expunge expensive
subsidies from its books.
Inflation
has remained stubbornly high due to continuous border closure policies,
exchange rate devaluations and removal of price ceilings from Premium Motor
Spirit (PMS). Despite inflationary pressures, the Central Bank of Nigeria (CBN)
has sustained expansionary monetary stance to reflate the economy. The CBN has
slashed the monetary policy rate (MPR) by a total of 200bps so far in 2020,
including a recent 100bps cut at its Sept'20 meeting and the adjustment of
corridor rates to +1%/-7% around the MPR.
The
bias for growth at the Sept'20 meeting was driven by the desire to boost credit
growth to the economy. The Bank has also introduced a credit recovery system
that could enable banks recover loans from defaulters that are warehousing cash
in other local banks. Coupled with a cut in local savings deposit rates, the
Bank has induced local banks to lend to the real sector.
The
economy is expected to enter a recession barely 4 years after the 2016
recessionary episode. The IMF expects a revised 5.4% contraction in its latest
GDP forecast; however, we see a 2.2% slip in the economy as Agriculture and ICT
continue to trail the path of growth. The Federal Government is also working on
a short-term plan to succeed the Economic Recovery and Growth Plan (ERGP),
which is the Economic Sustainability Plan (ESP). The ESP is a N2.3trn
($6.03bn) plan expected to reflate the Nigerian Economy via real, fiscal, and
monetary plans
According
to the IMF, government revenue is expected to plunge to 4.9% of the GDP (2019:
7.9%) due to lower oil receipts. Government expenditure is expected to fall to
11.7% of the GDP (2019: 12.9%) due to slash in non-essential capital
expenditures and subsidies. Fiscal deficit is expected to widen to 6.8% of the
GDP in 2020 (2019: 5.0%). Fitch recently upgraded its outlook on Nigeria's
Long-term Foreign-Currency Issuer Default Rating (IDR) to 'Stable' from 'Negative' due to stable oil prices, easing of global funding conditions and
relaxation of movement restrictions.
Nigeria's
current account deficit is expected to expand to 3.3% of GDP due to lower oil
exports and unfavourable terms of trade. Exit of portfolio investors could also
drag the capital account balance to negative terrain, resulting in a $16.2bn
wide BoP gap which is likely to be funded by flows from IFIs.
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