Sub Saharan Africa Economic Outlook Ahead of Upcoming Elections


Wednesday, June 28, 2017 5:40 PM / BMI Research

BMI hosted a webinar on upcoming elections across Sub-Saharan Africa, including those in Angola, Kenya, Rwanda, DRC and South Africa. At the Q&A session that followed, these were the most commonly asked questions:

Kenya - What impact will the election in Kenya have on the country’s currency and interest rates?

While we expect an uptick in violence in the run-up to Kenya’s August 8 election, it will have only a temporary effect on the shilling.

During the prolonged period of unrest that followed the contested result in the 2007 election, the shilling sold off dramatically against the US dollar, depreciating by 14.5% in January 2008, but pared back most of these losses by April after the violence subsided.

While we do not expect violence to reach the levels seen in 2007/2008, it could still trigger a temporary sell-off in the currency, before the economy’s strong fundamentals allow it to pare back these losses.

Although such a sell-off could lead to a short-term jump in inflation, we do not think this would be sufficient to prompt any monetary tightening from the central bank.

Our forecasts for both the shilling (to average KES104.2/USD in 2017) and central bank rate (10.0%) have factored in any potential volatility around the election.

What has been the impact of the cap on commercial bank lending rates on Kenya’s banking sector and wider economy? Could the cap be reversed following the election?  
Although intended to bring down the cost of borrowing for Kenyan households, the cap on lending rates has had the opposite effect, pricing out riskier borrowers from credit markets.

While there has been some speculation that the government may remove the policy following the election, we believe that a complete abandonment of the cap would likely be too great a reversal for the government to stomach.  

It is far more likely that we will see the margin widened to allow banks more flexibility in setting lending rates, facilitating an increase in credit growth from a projected 7.3% in 2017 to 18.0% in 2018, as banks resume lending to pent-up demand for credit.

The slow-down in credit growth due to the cap will weigh on economic growth in 2017, as small- and medium-sized enterprises continue struggling to gain access to credit.

DRC - If President Kabila is forced out of office in 2018 after failing to hold an election during 2017 in the DRC, how might this play out?  
It is looking increasingly likely that President Joseph Kabila’s administration will fail to hold a presidential election in DRC in 201ss7, as had been agreed in the December 31 peace agreement between the government and opposition parties.

In addition to promising an election and his retirement, Kabila committed to forming a transitional government in conjunction with members of the opposition.

However, his appointment of Bruno Tshibala as Prime Minister in April without broad consent of opposition parties suggests he is not taking his commitments seriously, and is looking to delay the election once again. Our core view remains that Kabila will not be able to hold onto office indefinitely should he fail to hold an election in 2017.

He simply lacks the nationwide support and control that would be needed to remain in office.

Kabila lacks the popularity of President Paul Kagame in neighbouring Rwanda and does not enjoy the same degree of state control as Denis Sassou Nguesso in neighbouring Congo-Brazzaville, both of whom have successfully changed their country’s constitutions to allow them to remain in office beyond the end of their original term limits.  

Instead, we would anticipate a significant increase in social instability and armed insurgencies. As state authority receded into the country’s capital, we believe President Kabila would choose to step down from power rather than risking a violent coup or descent into civil war.  

Angola - What is the likelihood of additional currency devaluations in Angola following the August election?  
Angola’s August election will mark the end of an era when President José Eduardo Dos Santos steps down from power after 37 years of rule, leaving João Lourenço as head of the ruling MPLA and likely winner of the vote.  

We do not believe a new leader will herald any significant change in policy direction over coming months, including with regard to the currency peg.

Most of the economy relies on a parallel exchange rate for access to foreign currency (which already trades at a significant discount to the official exchange rate), but import costs in prioritised sectors such as energy and healthcare would increase dramatically on the back of any meaningful devaluation.

Although inflation has been falling over 2017, it remains high and well above the central bank’s target of 15.8%, at 36.5% y-o-y at its latest print in March.

 A devaluation of the kwanza would place greater stress on the economy during what could be a politically sensitive time in the approach to the election.  

Furthermore, the government has a substantial external debt burden, equating to 37.7% of GDP in 2017 according to our forecasts, and any devaluation of the official exchange rate would increase the cost of servicing this debt.

As such, we believe the costs of devaluing the currency in any meaningful way remain too high, particularly at a time when a slow recovery in oil prices is alleviating pressure on the central bank to do so.  

South Africa
How and when will President Jacob Zuma step down from office? Does the case currently before the Constitutional Court requiring a secret ballot in the no-confidence motion increase the risk that he will leave office early?

Alternatively, might he attempt to extend his tenure in office? We believe that President Zuma will step down shortly after the December ANC elective conference, either in late 2017 or early 2018.  

Despite rising signs of discontent with President Zuma, both within the ANC and broader electorate, this is unlikely to translate into sufficient pressure to see Zuma pushed out earlier through methods such as a no-confidence motion, impeachment or recall by the National Executive Committee.  

The president has substantial influence in the upper echelon of the ANC power structure. Coupled with the natural reticence of ANC legislators to openly side with the opposition against their party leader, this will help ensure Zuma’s political survival.  

Voting on the no-confidence motion by secret ballot, as has been suggested by the opposition, would make Zuma more vulnerable. Even still, it remains unclear whether the Constitutional Court will approve such a ballot – at the time of writing the court is currently hearing the case.

Moreover, a no-confidence vote would be no guarantee that a sufficient number of ANC lawmakers would side against the president.  

At this same time, we believe it is unlikely President Zuma will attempt to extend his term in office past 2019.  

The constitution of South Africa limits presidents to a maximum of two five-year terms in office. Despite some speculation in the media Zuma might attempt to change the constitution to allow himself additional time in office, we see little impetus for him to do so.  

Rather, we believe the president is far more concerned with reaching a negotiated settlement within the ANC, whereby he will receive assurances of protection against prosecution once he steps down from office.  

What is the outlook for South Africa’s mining sector?
We forecast South Africa’s mining sector to gradually contract in value from USD33.8bn in 2017 to USD32.9bn in 2021 as the country faces ongoing headwinds from policy uncertainty and a generally declining investment environment.  

The rise in commodity prices, exemplified by iron ore, which surged by 137% between January and March 2017, has led to improved operational results among major mining companies and will drive an average growth of 2.2% in South Africa’s mining sector during 2017.  

However, this growth rebound will prove to be temporary due to an expected retreat in iron ore prices through the remainder of 2017, policy uncertainty regarding the final conditions of the new mining charter and ongoing labour disputes.

As a result, we foresee major divestments and production shortfalls among miners in the country in coming years.

In April, Anglo-American announced it will sell its South African coal assets to Seriti Resources Holdings Ltd for approximately USD166mn, while platinum producer Lonmin reported a loss of USD181mn for the six months to the end of March as the company battles labour unrest.  

What will be the impact of the upcoming ANC policy conference in June?
The policy conference, set to take place between June 30 and July 5, is unlikely to be a game-changer.  

We see little scope for the conference to result in a significant unifying of the party, with divisions between the traditionalists and reformists at least as much due to patronage politics and personality as policy differences.  

Meanwhile, we do not see a significant deviation in the current policy direction of the party. We anticipate continued adoption of more left-leaning rhetoric from the ANC in an attempt to drum up support.

Even the more reform-minded members of the ANC have begun to embrace the rhetoric of ‘radical economic transformation’ (embraced originally by Zuma as an economic blueprint in his January 8 speech).  

Based on statements from high-ranking members of the ANC and the party’s own policy documents, this is unlikely to lead to action on some of the most left-leaning policies, including nationalisation of banks or mines, or expropriation of land without compensation.  

There has been talk of election reform in the ANC, in an attempt to increase transparency and reduce so-called ‘gatekeeping’ by dominant factions of the governing party. Such changes are likely to be resisted by those benefiting from the system in place.  

Are we likely to see an opposition coalition victory in the 2019 election in South Africa? 
No. Even as support for the ANC continues to weaken and the opposition parties expand their reach across South Africa, we believe there will still be headwinds to the performance of the centre-right Democratic Alliance (DA) and left-leaning Economic Freedom Fighters (EFF).  

While Mmusi Maimane has helped to expand the appeal of the DA, the perception that it is a ‘white’ party has not been completely eradicated and it may struggle to make significant gains outside of South Africa’s major urban centres.  

Similarly, the EFF’s more radical policy ideology would likely cap the extent of its support. While the opposition parties have been willing to cooperate at the local level against the ANC, a national level coalition may flounder in the face of the deep policy differences between them. It is more likely that if the ANC fails to win an outright majority, it would still be by far the biggest party and be able to form a coalition with another party.  

That said, for this to happen in 2019, we believe the ANC would have to more rapidly lose ground with voters, potentially through a fracturing of the party following the December Elective Conference. 

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