Saturday, August 15, 08:40
PM / by Vetiva Research/ Header Image Credit: Action Against Hunger
Against the backdrop of the viral shock that exposed the weakness of public health systems, African countries joined the rest of the world by imposing travel restrictions and lockdowns despite the unavailability of requisite safety nets. As a result, various economies began to relax lockdown measures when states had to balance the pendulum between lives and livelihoods. The pandemic is expected to plunge the region into its worst recession in 25 years and push 27 million people in Sub-Saharan Africa into the poverty trap.
Growth outlook remains subdued as the IMF expects Sub-Saharan Africa to contract (-3.2%), twice as much as its previous forecast (-1.6%). Economies driven by natural resources and tourism are expected to face the fiercest impact, while non-resource intensive countries are expected to stagnate. In retrospect, renewed demand for safe haven assets such as gold may ease the expected impact of the pandemic on Ghana and South Africa, while easing of lockdowns in Europe and the sticky recovery in oil prices will provide a soft relief to Nigeria and Angola. However, locusts and flooding remain issues of concern in the East African region.
With a plunge in public revenue and rise in emergency expenditure, fiscal deficit as a percentage of GDP is expected to nearly double in 2020. Despite debt relief packages set up by international creditors, only 4 out of 25 eligible nations have applied due to the antecedent impact on credit rating and perception in the foreign bond market. Monetary policy decisions have been dovish across the region to alleviate the impact of the pandemic.
In the first half of the year, risk-off sentiments weakened floating and pegged currencies, with the South African Rand (-23.9%) and the Angolan Kwanza (- 20.0%) bearing the largest brunt ahead of the Naira (-6.8%), Shilling (-5.1%) and Cedi (-1.3%). The Nigerian Naira was recently devalued by 5.3%, while the Sudanese government has plans to devalue and cut subsidies. We expect a rebound in economic activities to ease pressure on Sub-Saharan currencies given the positive surprise in Kenya's Q2 trade numbers and the upsurge in demand for gold.
Inflation pressures remain heightened in oil-rich economies - Nigeria (12.6%) and Angola (22.6%) whilst a fall in disposable income reduced pricing pressures in Kenya (4.6%). Notably, inflation fell below the lower target of the Reserve Bank in South Africa (2.2%) for the first time in 15 years due to lower fuel prices induced by the slump in crude prices.
Oil prices influence commodity prices
SSA economies experienced divergent inflation outcomes over H1'20. This is hinged on the slump in oil prices that dominated Q1'20 despite the mild recovery in oil prices in Q2'20. Oil-dependent economies like Nigeria and Angola recorded consistent rise in inflation over the past six months. Low fuel and food prices translated into disinflation in Ghana and South Africa while reforms kept prices elevated in Zambia.
Nigeria experienced pricing pressures from devaluation of the Naira and monthly review of the price of Premium Motor Spirit. Commodity prices were also impacted by travel restrictions and social distancing measures that aggravate transport costs. Despite the waning effects of border closure in Q1'20, inflation rose as the twin factors of devaluation and upward review of PMS prices drove commodity prices higher. Thus, inflation is expected to rise in the near to medium term. Panic buying incited higher inflation in Ghana as inflation rate breached the apex bank's upper band in April (10.6%) and May (11.3%).
In May 2020, Inflation fell below the South African Reserve Bank target of 3% for the first time in fifteen years. This was driven by a drop in the price of fuel as gasoline prices were 27% lower year-on-year. Inflation fell from 4.1% in March to 3.0% and 2.1% in April and May before rising marginally to 2.2% in June. Kenya experienced continued disinflation as lower housing and food costs springboard into lower commodity prices. Inflation fell to 4.6% in July from a range of 5.5%-5.6% between March and May.
Inflation continues to rise unabated in Angola due to the impact of lower oil prices on its exchange rate. Depreciation in the kwanza has set inflation on an uptrend from 18.0% in Jan-2020 to 22.6% in June 2020.
We expect the implementation of energy and FX reforms in Nigeria and Angola to keep inflation on an uptrend while higher oil prices in H2'20 might provide a reprieve. With signs of recovery in Chinese demand for oil, higher oil prices in the second quarter can raise inflationary concerns in non-oil dependent nations. We also expect easing of lockdown measures to raise disposable income and heighten inflation outcome further.
Expansionary cycle to subside in H2'20
Central Banks exhibited a dovish tone in the first half of 2020 as we have seen more rate cuts in the world year-to-date than the whole of 2019. Measures to moderate the pressures caused by the pandemic such as stimulus packages, reduction of reserve requirements, loan restructuring and asset purchase programs were implemented. The U.S. Fed Chair acknowledged extraordinary uncertainty on economic prospects of the world's largest economy.
In Sub-Saharan Africa, the ripple effect of the pandemic on households and businesses has induced expansionary monetary responses. We've seen a dovish chorus across the region, with the South Africa Reserve Bank slashing the rate by 300bps to 3.5%. Kenya held rates at 7.0% in July after delivering a 150bps easing in earlier meetings, alongside a 100bps reserve requirement loosening. Nigeria meted out a surprise 100bps cut in MPR in May to a fouryear low of 12.5%, despite rising inflation and devaluation concerns, to support counter-cyclical fiscal stance. Angola, its OPEC counterpart did not effect any change with its apex bank keeping an eye on exchange rate-driven inflationary pressures. We expect SSA Central Banks to maintain status-quo by monitoring the transmission mechanism of earlier cuts as economic activity is revived.
SSA Currencies Under Pressure
Currencies remained under pressure while pegs had to be adjusted to align with economic realities. All currencies under our coverage depreciated, led by the Rand (-23.9%), Kwanza (-20.0%) and the Naira (-6.8%). The Kenyan Shilling (-5.1%) and Ghanaian Cedi (-1.3%) also weakened despite interventions from their respective apex banks.
The rand weakened immensely against the dollar due to the downward review of growth forecasts by Moody's, power challenges and COVID-19 vulnerabilities. The Angolan Kwanza remains under pressure given constrained oil receipts that have limited the supply of dollars into its reserves. The official USD/NGN exchange rate was devalued in Q1'20 by 18% from #N306/$ to N360/$ over depleting reserves and low oil prices. Efforts at unifying the naira towards the NAFEX rate in the I&E FX window induced further devaluation to N379/$ despite the inflow of $3.4 billion under the Rapid Financing Initiative of the IMF in April.
The Kenyan Shilling was supported by diaspora remittances ahead of tourism and agricultural products. However, favourable weather conditions and lifting of lockdown measures in export markets improved tea exports. The Ghanaian Cedi has been heralded by apex bank intervention, higher resource prices (gold and cocoa) and lower import bill.
Due to the dependence of African nations on commodity exports, portfolio inflows, remittances and official development assistance, depletion of reserves would necessitate further currency depreciations while currencies linked to key commodity exports may witness a slight reprieve as trade recovers in H2'20.
Deeper Economic Contraction Expected in SSA
Relaxation of lockdowns across the region in Q2 were an outcome of necessity, as the pendulum swung between preserving lives or livelihoods. The pandemic is expected to plunge the region into its worst recession in 25 years and push 27 million people in Sub-Saharan Africa into the poverty trap. Thus, the IMF exhibited further pessimism on FY'20 growth outcomes for Sub-Saharan Africa. The region is expected to contract by -3.2% (v/s -1.6% earlier) led by economies dependent on tourism and natural resources due to lower stimulus packages than advanced and emerging market countries. Resource-intensive economies such as Angola, Congo and Ghana were expected to experience weaker external demand while agricultural exports of Kenya, Ivory Coast and Ethiopia face the brunt of supply chain disruptions. Cabo Verde, Mauritius and Seychelles are expected to face significant economic downturns due to the decline in international travel and tourism.
Debt Levels to Remain Heightened
Fiscal capacity is expected to strain given outright decline in revenues as a result of lower exports and tax receipts. Increased public spending on account of emergency responses, weaker currencies and lower GDP growth is expected to nearly double fiscal deficits as a proportion of GDP. With seven countries already in distress, debt sustainability ratios could worsen further. Only two nations -Ghana and Gabon- were able to raise funds from the Eurobonds market this year, while Nigeria shelved its plans due to heightened risks on account of COVID-19.
Thus, most regional economies relied on local debt markets and multilateral institutions. 29 Sub-Saharan African nations benefited from IMF disbursements in H1'20 via its emergency lending facilities. Despite the announcement of Debt Service Suspension Initiatives by G20 nations to defer interest payments, 4 out of 25 eligible nations in Africa -Ghana, Kenya, South Sudan and Somalia- have taken advantage of the initiative due to the risk of downgrade by ratings agencies.