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Africa will roll with the punches of global volatility
19 January 2012

Economic growth in sub-Saharan Africa will remain subdued at about 5% in 2012 in line with an expected slowdown in global growth activity, but none of the continent's key economies are expected to slip into recession. 

These are the views in Standard Bank Group's latest African Markets Revealed report. The report examines some of the key international and local factors that will drive markets in 21 African economies and covers strategies for investing in the continent across foreign exchange, interest rates, equities and Eurobonds. 

The report notes that the significant downward re-pricing of global growth since May 2011 fostered a jittery risk environment, which added to the very testing circumstances already faced by many African markets. However, Stephen Bailey-Smith, Standard Bank Group's Head of African Research, maintains that there are good reasons to believe that African markets will roll with the punches in 2012. 

"Although we are still cautious on global growth, we are more constructive on asset prices that have already discounted plenty of bad news and are benefiting from ample G4 liquidity. Such an outlook should prove more supportive for commodity prices and portfolio flows into Africa that have been extremely limited in recent years," says Mr Bailey-Smith. 

Standard Bank's latest economic growth forecast remains the same as that of 2011 and is below the International Monetary Fund's (IMF) 5.2% projection. 

"Since May 2011 we have been revising down our growth estimates for Africa predominantly in line with an expected slowdown in global growth activity. Our projection for weighted sub-Saharan African growth was 5% in 2011 (which is still below the IMF's expectation of 5.2% revised down from 5.6%) and a similar trajectory in 2012, which is well below the IMF's expectation of 5.8%." 

Mr Bailey-Smith explains that one of the key issues of disparity between the IMF and the Standard Bank Group view is with regards to South Africa, which remains the largest economy on the continent. Standard Bank Group expects South Africa's economic growth in 2012 to be lower than expected, which will drag down sub-Saharan African's weighted growth aggregate. 

The IMF expects South Africa to grow at 3.6% in 2012 (up from 3.4% in 2011), but Standard Bank Group expects both of these numbers to be lower than expected, pulling down the Sub-Saharan Africa aggregate, he says. 

The report notes that another potential complicating factor will be the likely sharp upward revision to GDP that Nigeria is likely to get from the result of new survey data. This will increase the weights of the faster growing sectors of the economy in a similar way to the process in Ghana in late 2010. 

"Interestingly, excluding South Africa and Nigeria, the IMF sees Sub-Saharan Africa growth of 6.8% year-on-year in 2012 from 5.4% in 2011. Once again we are more cautious, projecting a figure of 6.0% for 2012 as more likely, as we see SA as the key drain rather than Nigeria," says Mr Bailey-Smith. 

The report also cites political risk of a series of elections as one of the exogenous variables driving Africa's markets that will remain a key differentiator in 2012. 

"There is no shortage of election risks across Africa in 2012, with elections (or referendums) taking place in possibly 20 out of the 54 countries across the continent. The most closely followed by the international investor community will be the outcome of the ongoing electoral process in Egypt, presidential election in Senegal on 26 Feb 12, parliamentary and presidential elections in Kenya (although they may be delayed until 2013) and parliamentary and presidential elections in Ghana in December 2012", says Mr Bailey-Smith. 

The report is also upbeat about the performance of currencies, bonds and equities in key African markets. It notes that there has been marked improvement in recent months in the performance of Africa's currencies as the markets again pressed home the message that real interest rates matter. The sharp increases in interest rates have added significant protection to a number of currencies and made them extremely attractive from a carry trade prospective. 

Standard Bank Group's index of the most-tradeable African currencies (AF10) returned around 5% in the four months since early September 2011. This was a significant out-performance relative to emerging market benchmark bond indices, which were generally down around 5% over the same period. 

With regard to local bonds, the report says Standard Bank Group sees "huge yield compression in Uganda, Kenya, Zambia and possibly even in Egypt, if our core muddle-through political scenario materialises. We are relatively neutral on Nigeria, nervous on Ghana and we would be paying rates in South Africa at present." 

The report says it is modestly constructive on African equity markets seeing some value in Nigeria, Kenya and arguably Egypt in coming months. In Africa's Eurobonds, it is positive on Cote d'Ivoire 32s and Egypt's 20s and 40s, while it is neutral on Nigeria 21s and DRC 29s and negative on Gabon 17s, Senegal 21s, and Ghana 17s. 

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