Softer Commodity prices aggravate Africa’s slowing growth…



Wednesday, July 22, 2015 11:54 AM / ARM Research

We continue with the serialization of our core strategy document – the Nigeria Strategy Report. Today, coming closer home, we review economic and market performance in Africa over the first half of 2015 as well as delineate our expectations on same for H2 2015.

Review of Global Economy and Markets

Against the backdrop of weaker commodity prices, Ebola epidemic, political uncertainty, rising insecurity and weaker growth among its trade partners, Africa’s economy has so far witnessed tepid growth. The pace has been so stunted as to necessitate multiple downward credit ratings review by relevant agencies. The weaker economic activity in the continent also compelled IMF to revise its earlier (October 2014) growth forecast for SSA downwards (-130bps to 4.5%) while mean North African growth was projected 246bps slower than previous at 3.7%.

Table 1: African Countries whose credit ratings were downgraded

Source: S&P, Moody’s, ARM Research

The West-African sub region has been the most hit with economic challenges, battling with the impact of Ebola epidemic which grounded commerce, agricultural, services, travel and transportation sectors in the three worst affected countries. The impact of the Ebola Virus Disease (EVD) was felt among neighbouring countries, with Gambia’s tourism sector (40% of annual economic output) the most affected. Economic woe of the region was further compounded by the pressures on Africa’s biggest economy (Nigeria) underpinned by weaker oil prices, while the region’s second largest economy (Ghana) continued to slow given the fiscal reforms the country is implementing. Amidst the dampening effect of continued political imbroglio in Libya and oil-induced weakness in Algeria, North Africa’s economy was further affected by deceleration among its trade partners, reducing the region’s export proceeds. In central Africa, economic activities were curtailed by lingering political impasse in CAR and South Sudan, member countries were also impacted by softer commodities prices. Finally, the Southern part of the continent, similar to other regions, witnessed slowdown driven by weakness in commodities prices at Angola (oil) and Zambia (Copper), which more than offset a pickup in South Africa’s Q1 GDP (80bps to 2.1% QoQ). 


Figure 1:  Q1 2015 GDP Growth Rates (%) for Select African Countries



Source: Trading Economics, ARM Research, *Q4 14 Figures

Exchange rate pressures: current and capital account deficits outweigh tightening measures


Amidst commodity price pressures, heightened political risks trailing the electioneering cycle as well as US Fed hints at an interest rate hike, capital flows to the African region subsided. Similarly, lower export proceeds underpinned by bearish commodity prices worsened current account[2] position, with the deterioration along with reduced capital flows resulted in the weakness of currencies across board. 


Figure 2:  Current Account balances (%) for Select African Countries



Source: IMF, ARM Research, *2015 Estimate

The Ghanaian Cedi has however remained the worst performing currency in Africa, depreciating 36% YTD[3], while Zimbabwe formally ditched its local currency following years of hyper-inflation which made its currency worthless[4].  Meanwhile the CFA franc which is the major currency among central African countries continued to dip (-9% YTD) though this mostly reflected pass-through from its Euro peg – EURUSD (YTD: -8.6%) which fell following the commencement of the ECB’s bond buying program.  


Figure 3: Performance of Euro and CFA against the US dollar (H1 15)



Source: Bloomberg, ARM Research 

In response to the currency weakness, African central banks intensified monetary policy tightening with the Central Bank of Kenya and Bank of Ghana both raising key interest rate by 150bps and 100bps to 10% and 22% respectively. Similarly, the Bank of Uganda hiked interest rate by 100bps for the second time this year to 13%. Elsewhere, the Central Bank of Nigeria raised statutory reserve requirement 11pps to 31% while Bank of Angola raised its benchmark Basic Interest Rate (BNA) by 25 basis points to 9.25%. 

Figure 4: H1 15 Performance of major African currencies



Source: Bloomberg, ARM Research


As Africa’s inflation maintains its discordant tempo


Notwithstanding the monetary tightening across the region, currency weakness underpinned higher inflation across Nigeria, Algeria and among CFA Franc users (Burkina-Faso, Cote D’ivoire and CAR). In addition to the currency depreciation, spike in energy costs driven by a cut in fuel subsidy pushed inflation higher in Angola and Egypt. However, the bearish trend in commodities prices ensured divergent inflation picture with South Africa and Zambia’s inflation respectively falling 70bps and 100bps to 4.6% and 6.9%YTD, while Zimbabwe mired further into deflation (-190bps to -2.7%). Weaker energy and food prices were also responsible for the moderation of Ghana’s inflation figure (-10bps to 16.9%).  


Figure 5: 2015 Mean Inflation Figures (%) of Major African Countries (Jan-May)



 Source: Bloomberg, ARM Research,*-Jan-April 2015 


Macro-economic headwinds weigh on equity indices


In tandem with the slowdown in economic growth,  equity markets recorded losses over H1 15, with the S&P All Africa index[5] falling 2%, underpinned by weakness in Egypt (-11%), Nigeria (-3.5%), Mauritius (-4.5%) and Zambia (-5%) which, combined, more than offset gains in South Africa (+4.1%), Botswana (+12.5%), Tunisia (+12.4%) and Ghana (+4%). The decline in Nigeria’s equity market reflects foreign sell-offs following depressed oil prices, rising political tensions leading up to the March 2015 election as well as policy uncertainty post election, while temporary introduction of capital gains tax as well as MSCI’s removal of one of the four stocks representing Egypt in the MSCI-Egypt Index drove weakness in that country’s broader bourse. As for the Mauritian bourse, the downtrend reflects deteriorating investors’ confidence following a $693 million (Sh63.7 billion) scam which rocked the country’s banking system. Meanwhile, the Ghanaian equity index’ gain over H1 15 was largely underpinned by the emergency aid deal obtained from the IMF ($918 million) which boosted investors’ confidence. In South Africa, the Johannesburg Stock Exchange (JSE) benefited from slower than expected hike in US interest rates, as well as surge in equity capital (+29% YoY to R92 billion in the first five months of 2015) raised by listed companies on the index. 


Monetary tightening and slower growth to stoke further economic slowdown


Macroeconomic stability among Africa’s countries could be further threatened should growth amongst its major partners (Europe and China) further weaken, portending further downtrend in commodity prices and exacerbating current account pressures to resource exporters across the continent. While an Ebola-free Liberia and containment of the epidemic for much of 2015 would ordinarily have been a good omen, rising occurrence of new cases as well as those arising from unknown source of infection, and in new locations to boot, have triggered fears of a second wave of the outbreak, highlighting the challenges still faced on this front.


Figure 6: Confirmed cases of Ebola cases in the three most hit countries



Source: WHO, ARM Research

In addition, recent declaration of a cholera outbreak in South Sudan should further compound economic activities in the country which is still battling with lingering political crises. Further posing pressures to economic growth within the African region is the less accommodative outlook of US monetary policy [6]which could crimp capital flows to the continent, adding further strains to the already weak currencies. The consequent impact on foreign-currency-denominated debt-service costs will further burden fiscal and current accounts positions among member states. Overall, the broadly weak growth picture, currency concerns, potential capital outflows, mounting security threats and policy uncertainty trailing the heavy political cycle herald sustained pressures for African economies and markets over the rest of 2015.


Table 2: 2015 election date for African Countries


Source: NDI, ARM Research


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