African markets: navigating slowing global growth currents
16 September 2011
Standard Bank Group says that the downward pressure on global economic growth will almost certainly impact the growth outlook for the African continent.
We expect economic growth to slow during H2:11 and that the loss in momentum will spill over to 2012. We GDP growth is likely to be between 3.3% and 3.5% y/y in 2011 and remain relatively lackluster, at 3.4%, in 2012.
The ZAR remains vulnerable to global growth concerns and thus we expect upside pressure on USD/ZAR until there is evidence that global economic activity has returned to a firmer footing. We expect the USD/ZAR to reach 7.6 by Dec 11, from 7.35 at present with increased volatility along the way.
External developments remain key in determining the level of the SA yield curve, butdomestic risks are building more in favour of an upside correction over themedium-term, than continued compression from these levels.
Angola: better prepared for a global storm
We have decreased our growth forecasts for 2011 predominantly on the back of disappointing oil production (contribution of the oil sector to GDP is close to 50%). For 2011, we are now looking for expansion of 5.5%.
While we remain cautious of the downside risks to oil prices, we remain relatively sanguine on Angola's external sector, we expect the current account surplus to reach 3.8% of GDP in 2011. As a result of the strong performance of financial inflows,which in combination with fiscal restraint have allowed for strong foreign exchange reserve accumulation, the balance of payments is likely to remain healthy in the event of a sharp decline in oil prices.
The central bank is likely to continue to focus on the role of the stable exchange rate in bolstering confidence and reducing inflation to 12% y/y by December 2011. On the other hand, the Bank of Angola is likely to continue to favour lower interest rates over the next four months in line with its commitment to ease the provision of financing to the real economy.
Namibia: diamond mining to the rescue
We expect the economy to grow by 4.3% y/y in 2011, with growth likely to be negatively impacted by the recent resurgence of the global growth pessimism and the sovereign debt problems in the US and the EU. However, the steep and sustained increase in polished diamond prices, which reached a record high in Jul, will boost the diamond mining industry. Rising demand for diamonds in China and India is offsetting lacklustre consumer demand in the US, the traditional price driver.
We expect the C/A surplus to rise to 2.1% of GDP in 2011, assisted by a recovery in transfersfrom the Southern African Customs Union revenue pool in FY2011/12. According to South Africa's National Treasury forecasts. Indeed, in FY2012/13, the revenue pool is expected to reach a record high.
Namibia's inflation rate is likely to rise marginally over the next few months. We forecast inflation to average 4.7% y/y in 2011 from 4.5% y/y in 2010. The interest rate cycle has bottomed as inflation is likely to start an upward trend for the rest of the year.
Kenya: restoring market confidence a policy priority
GDP growth of 5.0% y/y on average over 2011 and 2012 appears most likely, a slight decline from the 5.6% growth achieved in 2010.
If combined with a restrictive policy stance, a pending disbursement from the IMF could curb KES depreciation pressures, if not lead to its appreciation, by bolstering flagging market confidence. Nonetheless, the supply-demand balance in the FX market is likely to favour further near term depreciation of the KES. We expect USD/KES to remain in the vicinity of 95.0 by end of Dec 11.
Inflation developments over the next 12-18-m will likely still require the Central Bank of Kenya to tighten monetary policy. Inflation is likely to reach a peak of 18.0% y/y during the fourth quarter, with food inflation already showing signs that it will not accelerate much from current levels.
Ghana: fastest-growing economy in the world
We see growth moderating to an annual average of 16.3% y/y in 2011, easing further to around 8.25% in 2012. According to provisional figures for the first quarter of 2011, Ghana's real GDP grew 23.0% y/y up from 9.5% y/y in the fourth quarter of 2010 making it the fastest growing economy in the world.
The fundamental equity story for Ghana remains appealing: the economy is arguably the fastest growing in the world and fiscal and monetary policy continues to promote a relatively stable backdrop for future growth. Ghana's all share equity index has dropped 2.0% taking the year-to-date performance to a positive 12.5%. This compares with downside of 12.2% and 11.2% year-to-date for the MSCI Emerging Markets index.
The Ghanaian cedi has basically traded sideways against the dollar in a 1.50-1.54 range since the sharp move in January 2011. Our core scenario is for this range to persist in coming months and probably into next year.
In its September 2011 outlook for African markets research paper, it says the growth outlook for the whole Africa (weighted) should drop by 0.5 percentage points to around 3.5% in 2011 and 2012.
Stephen Bailey-Smith, Standard Bank Group's Head of Africa Research, says: "The relative isolation of sub-Saharan Africa (excluding South Africa) to global markets and trade flows will however, again serve it well, limiting macroeconomic instability and downward growthpressures."
Standard Bank Group projects a similar slide in the weighted sub-Saharan African growth outlook to around 5.0%, from around 5.5% in 2011 and a similar trajectory for 2012.
Almost half of the twenty African economies included in Standard Bank's Africa outlook are expected to grow in excess of 6.0% in 2011, with growth in the fastest growing economy in the world, Ghana, reaching 16.3%.
Lower commodity prices will place some pressure on African exchange rates, although benefiting oil importers. Perhaps more importantly, there has been a huge discrepancy between the performances of the various African exchange rates suggesting African currencies offer genuine idiosyncratic low beta risk. Indeed, going forward the outlook for Africa's currencies looks extremely mixed, but with some offering exceptional trading opportunities, like the Ugandan Shilling.
Standard Bank Research identifies its favourite African asset allocation choice for the coming few months as duration in local curves in line with the repricing down of growth, inflation and thus rates. "We have seen this across a number of DM and EM economies (including South Africa) but think there is further to go," says Bailey-Smith.
Standard Bank's African outlook includes comprehensive data and analysis for twenty African economies across the continent. These include Angola, Botswana, Côte d'Ivoire, DRC, Egypt, Gabon, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Rep of Congo, Senegal, South Africa, Tanzania, Tunisia, Uganda and Zambia.
Here are some key points out of the research.
South Africa: economy set to slow
Nigeria: the jury is still out on the reform process
We forecast economic growth at a still robust 7.1% for 2011. Growth in agriculture will remain strong, while increased oil production, combined with an elevated oil price in 2011, should support the demand side of the economy, but the oil price outlook will be constrained by the deteriorating global conditions.
The Central Bank of Nigeria (CBN) is keen to keep a stable USD/NGN (if not a stronger NGN), as it sees the exchange rate as its main monetary policy anchor. We forecast USD/NGN at 154.0 and 152.5 for 2011 and 2012, but the main upside risks to the outlook come from the fiscal policy path and apotential correction in the oil prices.
We expect inflation to remain in single-digits in most of the second half of 2011. Despite this, we think the central bank will probably raise rates again this month and in November. This is because the CBN is struggling to contain the sizeable fiscally sponsored systemic liquidity, which poses a risk to its USD/NGN monetary policy anchor.