Sub-Saharan Africa: Economic Snapshot for Sub-Saharan Africa
September 19, 2018
Recession in South Africa hits growth in H1
Available data suggests that Sub-Saharan Africa’s (SSA) economy kept pace in the second quarter as growth in the region continued firming in the aftermath of the commodity price-driven slump. That said, regional growth through the first half of the year was downgraded significantly this month as metrics for a number of the heavyweight economies fell short. Regional GDP is projected to have grown 2.8% in the second quarter, in line with the first quarter’s expansion—although growth in the first half of the year was down a notch from the fourth quarter last year. Still solid by most measures, the second-quarter outturn appears to have been bolstered by the supportive external environment, in large part thanks to robust global demand for key commodities. Growth dynamics were, however, far from uniform across the region as the two largest economies confronted challenging scenarios.
Major-players Nigeria and South Africa led the second-quarter downgrade, with both economies losing considerable ground and failing to meet market analysts’ expectations in the quarter. Activity remained weak; in Nigeria, despite higher prices, the all-important oil sector constrained growth as pipeline disruptions hit output. Non-oil sector activity, meanwhile, benefited from easing inflation and improved exchange-rate liquidity but still left room for improvement. In South Africa, the economy fell into recession in light of back-to-back contractions through the first half of the year—in annualized terms. Although household spending was partly stifled by droughts in the agricultural sector, the malaise was broad-based in the second quarter as Ramaphosa-induced confidence dwindled and, moreover, highlighted the industrial sector’s shortcomings.
On the other hand, second-quarter growth in Ghana and Kenya appeared to remain upbeat despite likely ticking down from the previous quarter. Solid export growth amid strong global demand for key commodities looks to have kept Ghana’s economy chugging along, although the domestic economy seems to have been weighed down by the weak cedi and elevated inflation. In Kenya, improving business conditions and the fading of political anxieties in the aftermath of last year’s protracted election cycle appear to be supporting consumption and investment, while the recovery of the agricultural sector has helped to alleviate the sting facing consumers.
Early projections suggest faster third-quarter growth as industrial activity firms across the regional heavyweights. That said, a number of new political and economic developments in recent weeks could determine regional growth prospects through the remainder of the year. In Angola, Kenya and Zambia, outstanding discussions with the International Monetary Fund (IMF) have brought the prospect of reform, uncertainty and calamity, respectively. Angola’s new government approached the IMF in late August to discuss financial support in return for structural and economic reforms. Amid eroding fiscal and external buffers, the conditions of any loan are expected to lend political cover to President João Lourenço’s anticipated reform agenda, to which he seems to have been steadfastly committed since taking office last year. Meanwhile, in Kenya, officials walked away from the IMF’s USD 1.5 billion standby facility, announcing in mid-September that the Treasury would not renew the two-year-old lending program. Although officials appear to be considering a new arrangement, the announcement spooked investors who saw the lapsed agreement as a necessary buffer against external shocks. In debt-ridden Zambia, the freefall of the kwacha has put pressure on officials to accelerate talks with the IMF in hopes of securing a bailout. By mid-September, however, negotiations still appeared to be on hold.
Meanwhile, political tensions have risen in Nigeria and South Africa in the run-up to next year’s elections. In Nigeria, a shifting landscape suggests the vote will be a tight race. In South Africa, a number of obstacles stand in the way of President Cyril Ramaphosa’s re-election; in the weeks ahead, a series of last-ditch economic reforms are expected to address the ongoing recession in Africa’s most-developed economy. These proposals, intended to stimulate economic activity through reoriented government spending, come on the heels of a heated land-reform debate that has divided the electorate. The collapse of the rand in recent months amid the emerging-market selloff has exacerbated matters for Ramaphosa, stoking inflation and eating into consumer spending.
Regional growth to accelerate in 2019
A healthy global economy, elevated commodity prices and improved agricultural output, as well as solid government spending, are expected to support the SSA economy next year. Regional GDP is seen growing 3.2% in 2018, which would mark the best result since 2015 if confirmed. Although the economy has been on a firmer footing since growth fell to an over two-decade low two years ago, challenges to the outlook remain. Difficult business conditions and poor infrastructure, as well as relatively small private sectors, have restrained the pace of the recovery. In addition, several economies are burdened with high levels of public debt, and perennial security concerns continue to plague investment. Despite these downside risks, however, regional growth is seen climbing to 3.7% next year, unchanged from last month’s projection.
This month, four of the region’s economies saw next year’s growth projections cut, including heavyweights Angola, Nigeria and South Africa. That said, upward revisions to the growth forecasts of four economies, including Ghana, offset the downgrades. Meanwhile, five economies saw no changes to their growth prospects next year.
Ethiopia and Cote d’Ivoire are expected to be the region’s fastest growing economies next year, each expanding over 7.0%. Tanzania, Ghana and Uganda are seeing growing at or above 6.0%. Meanwhile, the region’s largest economies are expected to perform well below the regional average, with South Africa seen growing the slowest, at a rate of 1.8%, followed by Angola at 2.2% and Nigeria at 2.8%.
NIGERIA | Pipeline disruptions hold back growth in Q2
GDP data revealed that the recovery faltered in the second quarter. The slowdown was chiefly driven by lower oil output and despite strengthening momentum in the non-oil segment of the economy. Although activity in the oil sector dropped markedly on an annual basis, partly due to oil pipeline disruptions, the impact on overall growth was partially mitigated by higher global energy prices throughout the quarter. On a more positive note, non-oil sector activity accelerated in the second quarter, led by the booming services industry. However, the improvement should be taken with a pinch of salt: Growth within the non-oil sector came entirely on the back of an impressive performance by the telecommunications sector, while activity in other sectors remained broadly stagnant. Moreover, available third-quarter data appears rather downbeat, signaling that the recovery likely has a way to go yet. The PMI fell markedly in July and remained broadly unchanged in August as new orders and output growth decelerated somewhat.
The recovery should speed up next year, on the back of easing inflationary pressures, greater foreign exchange rate allocation and higher global oil prices coupled with a gradual recovery in domestic oil production. Nevertheless, significant downside risks to the outlook persist: Political uncertainty will remain elevated in the run-up to the 2019 elections, while the lethargic implementation of structural economic reforms will continue to undermine growth prospects. FocusEconomics panelists see GDP increasing 2.3% in 2018 and 2.8% in 2019, which is down 0.2 percentage points from last month’s projection.
SOUTH AFRICA | Rand tumbles as recession hits
Markets tumbled in early September on news that the economy fell into recession in the first half of the year. Output contracted in annualized terms for a second consecutive quarter in Q2, stifled by droughts in the agricultural sector. That said, the malaise was broad-based and the economy ex-agriculture only narrowly avoided a contraction in Q2, highlighting the industrial sector’s shortcomings. As it stands, the optimism associated with “Ramaphoria” has been doused and the economy continues to face numerous hurdles—most pressingly at home. Consumer spending still appears to be taking a beating from stagnant employment gains and higher inflation. Meanwhile, fixed investment has been roiled by a precipitous loss of confidence amid the ongoing land-reform debate and fears of further contagion from the emerging-market (EM) selloff.
Despite weaker full-year growth prospects, FocusEconomics analysts expect the economy to emerge from recession by year-end, before clawing back losses next year. Cyril Ramaphosa’s last-ditch economic reforms are expected to build confidence ahead of next year’s elections, lifting household spending, as well as stoking fixed investment which should also benefit from tighter manufacturing capacity. Although political uncertainty and the possibility of credit-rating downgrades will hang over the economy into next year, fiscal slippage and a slow-moving reform agenda are likely to constrain growth over the medium-term. FocusEconomics analysts expect growth of 1.2% in 2018 and 1.8% in 2019, down 0.2 percentage points from last month’s forecast.
ANGOLA | Government requests IMF loan, looks to tie-in reforms
Recent data released by the Statistical Institute confirmed that the Angolan economy remained in recession at the outset of the year. GDP contracted 2.2% annually in Q1, primarily on the back of a subdued performance in the all-important oil extraction and refining industry, as well as in the trade sector. Available indicators for the second quarter seem to paint a rather gloomy picture as well. Oil production fell to an over 11-year low in Q2, likely wiping out any gains from higher prices and possibly signaling the further weakening of the external sector. In addition, despite moderating to a 31-month low, inflation remained elevated in Q2 and, coupled with the kwanza’s depreciation, likely weighed on domestic demand in the quarter. On 21 August, the government asked for financial support from the IMF, requesting the facility that offers longer-than-usual repayment terms in exchange for economic reforms. Meanwhile, on 9 September President João Lourenço consolidated his power by securing the leadership of the ruling MPLA party, boding well for his ability to implement reforms in the coming years.
FocusEconomics panelists agree that the economy should emerge from recession this year, although many panelists are still taking the latest developments into account. Next year, fiscal consolidation measures, the diversification away from the oil sector and the transition to a flexible exchange rate regime—reforms initiated by the new president—should support the recovery. Moreover, cooperation with the IMF seems to reflect the government’s commitment to change. Consensus sees GDP expanding 1.6% in 2018 and 2.2% in 2019, which is down 0.1 percentage points from last month’s forecast.
KENYA | Government keeps rate cap as leading data hints at firm Q3
Recent data signals that the economy remains on course for a solid third quarter following the second quarter’s likely stronger performance. Business conditions improved in August as reflected by the latest PMI reading, which climbed further above the critical threshold separating expansion from contraction in private-sector activity. Economic growth has been buoyed by rising confidence following the end of a protracted election cycle, along with buoyant exports and rising remittances. On 30 August, Kenya’s parliament voted to maintain the long-standing interest rate cap on commercial bank lending rates. Since coming into effect in September 2016, the cap has significantly curbed private credit growth. Parliament’s decision rejected a bid by the Treasury to scrap or modify the policy, as well as defying calls from the IMF to do so, thus failing to qualifying for a new standby arrangement. The Treasury confirmed that it would allow the existing USD 1.5 billion IMF standby credit facility to expire. Removal of the balance of payments’ support is seen increasing the economy’s vulnerability to external shocks.
The economy is expected to accelerate next year, thanks to continued solid export growth and strong expansion in domestic demand. If it remains in place, the long-standing interest rate cap will continue to restrain private-sector credit growth, however. The government’s fiscal consolidation plans should help to reduce the heavy debt burden, but at the same time could also drag on the pace of economic activity. FocusEconomics analysts project GDP growth of 5.6% in 2018 and 5.9% in 2019, which is unchanged from last month’s forecast.
MONETARY SECTOR | Inflation upends downward trend into Q3
Initial estimates had inflation stable through the first two months of the third quarter, upending the downward trend observed since last September. Regional inflation came in at 9.2% in August, in line with July’s revised reading (previously reported: 9.1%) but a notch higher than June’s. Stronger inflationary pressures were recorded in six economies, including major-player Nigeria. Higher fuel costs and growing pass-through pressures amid the global risk-off contributed to the recent uptick. Notwithstanding higher third-quarter readings, however, improved agricultural output this year has helped bring down food-price pressures across most of the region.
As inflation has trended lower, it has created space for some of the region’s central banks to loosen monetary policy in a bid to support economic activity. In July, central banks in both Angola and Kenya trimmed their policy rates. That said, still-high inflation led the Central Bank of Nigeria to strike a cautious tone in the same month and leave the policy rate at a record-high 14.00%. Meanwhile, policymakers in Ghana and South Africa left their policy rates unchanged in July, as did the Bank of Uganda in August.
FocusEconomics expects regional inflation to average 9.8% this year. Moreover, easing food-price pressures should keep regional inflation in check next year; it is seen averaging 8.8% in 2019, down 0.2 percentage points from last month’s projection.