Sudan - High Inflation Will Cloud Otherwise Bright Outlook


Tuesday, July 04, 2017 10:55 AM / BMI Research

BMI View: Real GDP growth in Sudan will be dampened by high inflation in 2017, which will constrain consumer spending. However, increasing investment in the country in the wake of sanctions removal will bolster the longer-term outlook, with most economic benefits to come in 2018 and thereafter.

While Sudan's growth is set to be subdued in 2017, the longer-term outlook is more positive. High inflation, caused by a weak currency, import bans and subsidy cuts, will dent consumer spending power over coming quarters and hurt private consumption – the engine of the Sudanese economy.

However, investment is beginning to trickle back in following the conditional removal of US trade and financial sanctions in January. This will improve the business environment by developing infrastructure, and also lead to new opportunities for agricultural and mineral production, bolstering exports in coming years.

The removal of sanctions will undergo a review in July, meaning the re-imposition of the restrictions could pose a significant downside risk to this outlook.

However, our core view is they will be permanently removed, owing to positive political developments. As such, we forecast real GDP growth of 2.6% and 4.2% in 2017 and 2018, compared to an estimated 2.7% in 2016.

High Inflation To Squeeze Consumers

High inflation, caused by several simultaneous factors, will continue to constrain consumer spending power in the coming months. March inflation came in at 34.7%, up from 11.7% a year earlier.

A dearth of foreign currency has made imports more expensive. The Sudanese pound is pegged to the US dollar, but has a dual exchange rate, with the official rate of SDG6.5/USD significantly lower than the rate for commercial banks, which is nearer to the black market rate at SDG15.8/USD.

The increase in use of the second exchange rate will feed through to inflation and raise the cost of imports. This will be compounded by the removal of government subsidies on fuel, electricity and pharmaceuticals in November, and the ban on food imports from Egypt in September.

The elevated cost of household goods will hurt private consumption, which contributes the largest share to overall GDP, in 2017.

However, improving foreign exchange inflows as trade and investment start to pick up will temper currency-related pressures and reduce pass-through pressure on inflation in 2018.

As such, we forecast inflation to average 32.0% in 2017 from 30.5% in 2016, subsequently cooling to 14.0% in 2018.

Improving Business Environment Will Boost Foreign Investment

The conditional removal of US trade and financial sanctions will likely see investment from Western economies begin to slowly trickle back into Sudan in the years years.

However, investment from the Gulf had already been gaining momentum in the last few years and this will continue to contribute positively to growth as projects are implemented.

In particular, Gulf investment into Sudan's agriculture and livestock industries is set to ramp up due to the country's large amounts of arable land, which Gulf states – particularly Saudi Arabia, UAE and Kuwait – wish to exploit to address their food trade deficits.

We also note ties between Belarus and Sudan have strengthened since the two countries signed a cooperation agreement in January, with the former expressing interest in investing in mining and production of industrial materials.

Furthermore, a new agreement between Ethiopia and Sudan for the Grand Ethiopian Renaissance Dam – which our Infrastructure team expect to be completed in 2019 – to supply power to Sudan will improve electrification in the longer term.

Export Outlook To Improve Following Sanctions Removal

The improved access to Sudan's banking system after the US removed sanctions on financial transactions with Sudanese banks will facilitate foreign transactions, which will make trade with Sudan easier and likely encourage production through investment, and incentives to export.

Gold, which became Sudan's largest export in 2016 (accounting for around one-third of total exports), will continue to see production gains as investment in minerals from the Gulf and Belarus is implemented.  

The aforementioned investment into agriculture, likely leading to more efficient production methods, will also improve future yields, particularly for sugar, nuts and sesame.

Further, while our Oil and Gas team hold a bearish view on oil production, there is upside risk in the longer term, as General Electric and other US companies have expressed interest in returning to invest in the country.


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