Sub Saharan Africa – Regional Favourites Facing Headwinds


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

BMI View: Rising political unrest, deteriorating business environments and greater than anticipated fiscal slippage have dimmed the long-term growth outlooks of regional favourites such as Kenya, Ghana, Uganda, Tanzania and Ethiopia. While Côte d'Ivoire has largely retained its lustre, the potential for economic instability or underperformance in the agricultural sector suggests the risks are heavily skewed to the downside over a multi-year time horizon.


Rising political, regulatory and fiscal risks will present long-term economic headwinds to some of BMI's long-time regional favourites such as like Côte d'Ivoire, Uganda, Kenya, Ghana, Tanzania and Ethiopia.


We have long flagged these countries as likely to be economic outperformers in Sub-Saharan Africa (SSA), given their relatively diversified economies, broad-based political stability and improving business environments.


However, in the past six months, we slashed our long-term (2017-2026) growth forecasts for all, but one.


A shift away from previous business friendly policy (Tanzania), project delays (Uganda), prolonged political unrest (Ethiopia), and substantial fiscal slippage (Ghana and Kenya) will likely temper fixed investment to a greater extent than we had previously anticipated.


Moreover, while we have not revised down our Côte d'Ivoire forecasts at this stage, structural challenges in the crucial cocoa sector may lead us to shift down our multiyear growth projections in the months ahead.


It is crucial to stress growth in these countries will still far outpace average regional growth, but the aforementioned challenges suggest economic gains will be more muted than we initially anticipated.


Kenya And Ghana: A Necessary Pull-Back In Spending Will Temper Growth

After greater-than-expected fiscal slippage in Kenya and Ghana in the last few quarters, a sharp shift toward fiscal consolidation will offer some headwinds to growth over the coming five to 10 years.


In Ghana, the revelation of even greater fiscal deficits than had previously been reported is likely to temper expansionary fiscal policy under the newly elected New Patriotic Party (NPP).


We had anticipated at least some uptick in spending by the party after significant campaign promises including free secondary school education, a new dam for every village, a new factory for every district and USD1mn in development spending for every constituency.


However, in January, the NPP announced the discovery of a GHS7.0bn (USD1.6bn) hole in the budget, ostensibly left over from the previous National Democratic Congress (NDC) administration, which would have made the 2016 budget deficit equivalent to 9.0% of GDP rather than the 6.5% previously believed and ramped up the debt burden to 74% of GDP (from 69%).


With the government likely to prioritise maintaining its agreement with the IMF, this will limit the scope for significant spending. Meanwhile, we also see economic fallout from a paring back of spending in Kenya.


The government has significant ramped up its debt burden over the past five years, which jumped from 41.6% of GDP in 2011 to an estimated 56.5% in 2016. This has only been exacerbated in the last few few quarters by pre-election spending ahead of the August contest.


As of October 2016, the government had increased spending on wages alone by 130.8% compared to the same period in the previous year. While it is extremely unlikely this growth will be sustained across the fiscal year, we have nonetheless factored in a substantial increase in wages into our FY2016/17 projections.


Our core view is for a pullback in spending over the coming years, with the government likely to target recurrent spending such as the public sector wage bill, as well as modestly paring back capital spending.


Moreover, the risks to growth lay to the downside. Should we see the government fail to cut spending, real GDP would likely be more robust in the near term, but increasing investor concerns over debt sustainability could ramp up borrowing costs, bolstering spending and creating something of a vicious circle.


The eventual fiscal consolidation would likely have to be even more stringent, with greater negative knock-on effects on growth.


Uganda & Tanzania: Project Delays And Regulatory Environment Risks Rising

In Uganda, a spate of project delays have encouraged us to temper our long-term growth forecasts. Plans to build a refinery at Hoima (originally set to come online in 2020) have been delayed after the firm awarded the tender, RT Global Resources, pulled out.


Meanwhile, with the crucial Hoima-Tanga pipeline having failed to receive its final investment decision thus far, our Oil & Gas team has pushed back its forecast for first oil to 2021.


Crude production from the country's highly promising Lake Albert resource base is contingent on the successful construction of the USD3.5bn pipeline, which is highly technically challenging and planned on a tight timeframe.


Further delays to the FID or inadequate project preparation could risk adding years to the development of the project. Meanwhile, project delays, driven in large part by a failure to improve the regulatory environment in Tanzania, have tempered our longterm growth projections for the country.


In the last few months, Statoil announced it planned to delay a final investment decision on its onshore LNG project in Tanzania by five years. In part, the delay was due to the low global price environment, although the failure of the Tanzanian government to offer a stable legislative framework also played a role.


Even with the passing of the 2015 Petroleum Act, we had long highlighted continued questions over taxation, domestic supply obligations and local content requirements.


With any project likely to take at least four to five years to build, this delay puts the project (and a substantial ramp up in natural gwas production) outside our 10-year forecast window and encouraged us to sharply revise down our long-term growth projections.


Moreover, even after our downgrade to Tanzania's real GDP outlook, the risks are likely skewed to the downside in the face of a shift toward less investor-friendly policies by the Magufuli administration.


Over the past six months, in an effort to narrow the country's fiscal deficits and temper popular discontent with more 'populist' leaning legislation, we have seen measures forcing the listing of mining and telecoms companies on the local stock market, an increase in non-tariff barriers to trade, and a shift to more stringent tax policies.


While the immediate impact of these policies may be somewhat limited, a continued move in this direction could substantially temper business sentiment and weigh on investment inflows.


Ethiopia: Protests Aren't Done

In Ethiopia, the combination of rising social unrest and an insufficient response by the government to address the root cause suggests violent demonstrations are likely to remain a long-standing challenge.


Unrest had been building since late 2015, but 2016 brought two key changes. First, in the past year we have seen the nature of the demonstrations subtly morphing.


Whereas previously the demonstrations were discrete and aimed at changing certain government policies (such as land use), protestors in the past year have begun to voice more wide-ranging complaints against perceived economic marginalisation by the Tigrayan (ethnic minority) dominated government.


Moreover, in the October 2016 demonstrations, protestors began to target foreign firms for attack.


Our core view remains that in the short term, the economic ramifications of the demonstrations are likely to be only modest, given heavy Chinese investment and the government-led nature of infrastructure investment.


However, towards the latter half of our forecast period to 2026, growth is increasingly predicated on foreign (including Western) investment.


With limited indications that the ruling EPRDF is willing to make sufficient compromises to satisfy demonstrators – we believe the calm is more a reflection of the state of emergency more than anything else – the risk of continued sporadic flare ups remains significant.


Côte d'Ivoire: Outperformer, But Risks Skewed To the Downside

Côte d'Ivoire stands out in SSA as the country with the strongest long-term prospects in terms of real GDP growth. While we believe much of the 'peace dividend' after the end of the 2010-2011 civil war has already been priced in, continued efforts to improve the regulatory environment and significant infrastructure investment will support growth.


That said, the risks are poised to the downside. While the country has been largely stable since the end of the civil war, it is still riven by deep cleavages. President Alassane Ouattara's decision to adopt a more conciliatory approach toward members of the armed forces mutinying for more pay has seen the issue temporarily resolved, but we believe it will remain a potential flashpoint as the 2020 presidential elections approach.


Further, there remains a significant tension between the supporters of former president, Laurent Gbagbo, and those of the government, with Gbagbo's supporters complaining of 'victor's justice'.


Ultimately, while the simmering political tensions in Côte d'Ivoire have been largely kept in check, the underlying discontent has not been fully resolved. Should we see a more sustained deterioration in the political environment, this could significantly undermine investment.


A second major risk is we could see weaker than expected cocoa production, weighing not just on the country's agricultural sector, but undermining attempts to diversify and move into agricultural processing (moving exports up the value chain).


Our Agribusiness team has begun to highlight the poor management and lack of transparency in the Conseil Café Cacao, the country's cocoa regulatory and marketing board, as a significant risk.


This was most visible in the last few months in the wake of widespread defaults by local exporters on their purchasing contracts in the 2016/2017 season, but challenges are likely to linger over a multiyear time horizon, potentially weighing on the sector's growth.


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