Tuesday, January 12, 2016 05:26 PM / ARM Research
Today, coming closer home, we review economic and market performances in Africa for 2015, as well as delineate our expectations on same, for H1 2016.
Against the backdrop of continued downturn in commodity prices, rising insecurity, adverse weather effects and protracted political crises, Africa’s growth extended its faltering trend into H2 15. As a result of the foregoing, IMF’s revised its 2015 growth forecast for SSA to 3.8% YoY in October 2015 as well as projecting its mean North African growth estimate lower to 2.08% YoY. Largely reflecting impact of lower commodity prices on exports, current account position of most African countries deteriorated, with the resulting impact weighing on currencies of most countries.
Further compounding economic woes in the region was the escalating impact of drought and flood on food prices in Southern and Eastern Africa respectively which pushed inflation in the respective regions and consequently across the continent higher. Unsurprisingly, given the aforementioned vulnerabilities, equity markets fell over H2 15 (the S&P All African Index declined 20.9%) widening 2015 loss to -21.2%.
Africa’s growth is however expected to improve in 2016 with the IMF forecasting a 50bps YoY and 1.82bps YoY rise for SSA and North Africa respectively to 4.3% YoY and 3.9% YoY respectively. The upbeat growth picture stems from expected economic recovery from Ebola-torn countries in addition to faster pace of growth in the low income countries on the back of large-scale infrastructure investment and improved consumer spending. Nonetheless, weaker fiscal outlook for commodity exporters as well as expected decline in portfolio flows—given monetary tightening in US—should weigh on investors’ sentiments towards Africa’s financial markets.
Similar to trends across EM countries, Africa’s macroeconomic picture worsened on the back of sustained decline in commodity prices as well as inherent domestic challenges.
Africa’s economic output floundered with IMF revising its 2015 GDP growth projection for SSA from 4.5% in April 2015 to 3.8% in October 2015—lowest annual growth in sixteen years mean North Africa growth estimate of 2.08% is 1.8pps lower than its April 2015 forecast. The even tamer growth picture for the North African region stemmed from economic weakness in Algeria, Tunisia and Egypt. For Algeria, lower oil prices are the main culprit whilst the other two are feeling the dampening impact of terrorist attacks in their tourism industries. Notably, Tunisia’s GDP growth of -0.1% in Q3 15 is the country’s first negative GDP growth in 15 quarters. Security concerns also underpin the Egyptian tourism ministry’s expectations for a 15% YoY contraction in 2015 tourism (5.9% of GDP) revenues.
Alongside insecurity effects, sustained downtrend (nine consecutive months by October 2015) in revenues from Suez Canal (-5.2% YoY to $4.38 billion) despite multi-billion dollar expansion project, as well as slowing growth among trade partners showcase the pressure on the Egyptian economy. In Central Africa, ongoing sectarian violence in Central African Republic (CAR) continues to ravage the country, with the United Nations calling for urgent humanitarian aid for more than a million malnourished children.
The Western part of Africa also had its fair share of insurgent activities, as Al-Qaeda linked Al-Mourabitoun, based in Northern Mali, extended its attacks to the South when its November 2015 siege on an hotel left 27 people dead. In the same vein, Boko Haram continues to wreck havoc in Cameroon, Chad, Niger and Nigeria with the insurgency impact in the latter compounded by the economy’s reel from lower oil prices. In addition to weaker commodity prices, Ghana’s economy continues to be impacted by electricity challenges and fiscal consolidation. Economic performance in the Southern region was similarly pressured as the region’s biggest economy, South Africa, posted its lowest growth rate since the 2009 recession in Q3 15 as electricity shortages and falling metal prices (2015 GSCI metals: -25%) impacted its manufacturing sector (Q3 15: +1.4% YoY), while the country’s worst drought since 1982 underpinned the recession in its agricultural sector (-16.2% YoY). The story was similar for other countries in the southern region, but particularly Zambia, whose largely hydro sourced electricity was severely impacted by drought, exacerbating weakness emanating from plunging copper prices (2015: -24.9%) even as bearish trend in oil prices (2015: -45.3%) continue to drag Angola’s economic growth lower.
Figure 1: Latest GDP Growth Rates (%) for Select African Countries
Commodity price rout undermines African currencies
Given the heavy dependence of African countries on commodity exports (SSA: two third of total exports), sustained downtrend in commodity prices (GSCI: -22.01%) worsened the current account position, consequently underpinning IMF’s revised 2015 current account deficit for SSA (+1.1pps to 5.7% of GDP) and North Africa (Average: +2.6pps to 16.9%) in October 2015. As a result of the foregoing, governments’ needs to finance the resultant fiscal deficit drove borrowings higher, with Eurobond issuance rising 8.8% YoY to $9.25 billion in 2015. However, given the macroeconomic challenges, these loans were issued at higher yields, limiting the current account support.
Table 1: Africa sovereign euro-bond issuance
The balance of payment concerns were evident in the 2015 performance of the South African Rand (-33.7%), Angolan Kwanza (-31.5%), Algerian Dinar (-21.7%), Ghana Cedi (-18.3%) and Kenya Shillings (-12.9%). In addition, the Egyptian Pound was devalued for the third time in October, driving cumulative 2015 depreciation to 9.5% following the biggest monthly decline in the country’s foreign reserves since January 2012 in September 2015 ($16.3 billion) while the CFA Franc (-14.1%) continued to track movement of its Euro peg (-11.4%). Zambian Kwacha remained the worst performing currency in Africa, depreciating 72.3% in 2015.
Higher food prices induce inflationary pressures across Africa
In addition to inflationary pressures from weakening currencies, food prices trended higher across Africa, particularly in Southern Africa, which experienced its worst drought in four decades, and Eastern Africa, where torrential rainfall led to flood, consequently hampering agricultural harvests. As a result, headline inflation peaked in Zambia (highest since 2005), Angola (highest since August 2011), Uganda (39 month high) and Kenya (13-month high).
Figure 2: Africa’s Cereal Production (Million Tonnes)
Nonetheless, in the same period Zimbabwe mired further into deflation largely underpinned by its currency crises, which further stifled domestic production and consumer demand, as well as influx of cheaper goods from South Africa, while inflation in Sudan, which had skyrocketed following South Sudan’s secession and cut in subsidies in 2013, eased to 2011 levels over the year.
Figure 3: Mean Inflation across Major African Countries
In response to depreciating currencies and rising inflation, African central banks intensified monetary policy tightening over H2 15 with both South African Reserve Bank and Bank of Malawi raising key interest rate 50bps and 200bps to 6.25% and 27% respectively, while Bank of Ghana raised its benchmark monetary policy rate for the fourth time in 2015 by 200bps to 26%. Similarly, Bank of Zambia raised benchmark lending rate 3pps higher to 15.5% for the first time in a year in November 2015, while the Bank of Burundi hiked its interest rate to 15.98% (+3.59pps). In contrast, and with their eyes firmly on boosting economic growth, the Central Bank of Nigeria (MPR:-2pps to 11%, CRR: -11pps to 20%), Bank of Mauritius (benchmark repo rate: -25bps to 4.4%) and Central Bank of Tunisia (interest rate: -50bps to 4.25%) all underwent accommodative policies in H2 15.
Deteriorating fundamentals drive weaker equities performance
Reflecting the progressively weaker macroeconomic fundamentals, equity markets across the continent declined, with the S&P All African Index falling 20.9% in H2 15, dragging 2015 loss to 21.2%. The index’ loss was underpinned by weakness across Egypt (-24.4%), Namibia (-20.9%), Nigeria (-19.8%), Mauritius (-12.7%), Ghana (-12.1%), Kenya (-11.4%), Morocco (-7.8%), Zambia (-6.7%), Tunisia (2.0%) which, combined, more than offset gains from Botswana (+11.6%) and South Africa (+2.1%). Negative performance in Nigeria reflects concerns about fiscal vulnerabilities induced by plunging oil prices and tempered corporate earnings while increased concerns about performance of Egypt’s tourism sector—following terrorist attacks in November 2015 and downing of the Russian jet—weighed on the country’s bourse. Elsewhere, closure of Imperial Bank Ltd on malpractice and fraud charges and placement of Dubai Bank Kenya Ltd under receivership for breaching daily cash-reserve-ratio requirements roiled the equity market in Kenya while depreciating Cedi remains a concern for investors in Ghana.
Figure 4: Performance of Major African Equity Markets
External headwinds weigh on Africa’s macro-outlook
Going forward, Africa’s growth is expected to pick-up in 2016, with the IMF forecasting a 4.3% GDP growth for SSA while projecting a mean growth rate of 3.9% for North African countries. The upbeat macroeconomic picture stems from recovery of economic activities in Ebola torn countries in West Africa (Liberia, Sierra-Leone and Guinea) as well as faster pace of growth in the low income countries on the back of large scale infrastructure investment and improved consumer spending. Similarly, economic growth is expected to improve in Nigeria (+30bps to 4.3%) as a result of higher government spending, reduced policy uncertainty and accommodative monetary policies. In Ghana, rising oil production, diminishing fiscal imbalances and easing of electric power crisis is expected to lift growth (+120bps to 5.7%).
Elsewhere, South Africa’s growth is expected to decline (-10bps YoY to 1.3%) as unfavourable weather conditions (i.e. drought) continues to hamper electricity supply and affect agricultural produce. Notwithstanding the improved growth picture, fiscal vulnerabilities persist as expected decline in commodity prices should exacerbate current account pressures to resource exporters across the continent. Further compounding the current account outlook is the commencement of interest rate normalization in the US, which underpins prospect for a stronger dollar. Given sizable foreign denominated debt of most African countries, debt-service costs across the region is set to rise. The weak fiscal and current account position together with expected decline in portfolio flows given US monetary tightening posit sustained depreciation of the continent’s currencies.
In sum, the balance of payment concerns, rising terrorists’ attacks, as well as political risks associated with the electoral process, especially in crises-torn countries, could remain significant enough to weigh on investors’ sentiments towards the Africa’s financial markets.
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