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Economic Insight: Africa

The ICAEW Economic Insight: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.

Africa region experiences mixed fortunes: Q3 summary

  • Oil producers like Nigeria, Angola and Gabon continue to suffer the harsh effects of lower crude prices on their trade balances and banking sectors.
  • South Africa continues to hold back growth in its region.
  • The ruling party in Ghana is expected to maintain a responsible policy direction

The two big oil producers, Nigeria and Angola, have continued to deal with the effects of a much lower oil price: foreign reserves are hard to come by, which complicates the operating environment for all firms, especially those that need imports. In both countries inflation is falling but still high (in July inflation was 29.0% year on year in Angola and 16.1% y-o-y in Nigeria), interest rates remain high and the governments have been cautious with their spending, meaning government expenditures have not contributed to the economy. The re-election of the ruling Popular Movement for the Liberation of Angola (MPLA) will do nothing to improve prospects for ordinary Angolans.

Ivory Coast is experiencing similar problems as a consequence of a fall in cocoa prices, and political risk sporadically takes the form of mutinies by soldiers, but its economy is still set to grow by 6.9% in 2017. Senegal is forecast to boast comparable output growth (6.8%) – thanks mostly to infrastructure spending undertaken as part of the Plan Emerging Senegal (PSE).

South Africa continues to hold back growth in Southern Africa, although the regional giant has emerged from recession with positive quarterly GDP growth in Q2. Zambia is forecast to show real GDP growth of 3.3% thanks to improved performances in the agriculture and industrial sectors. The ever-stable Botswana and Mauritius are expected to record stable growth of 4.1% and 3.8%, respectively. The smaller economies in the region continue to feel the effects of a severe drought last year, and South Africa’s weak economy.

The operating environment in Tanzania is becoming more complicated due to President John Magufuli’s economic nationalism. 

In Rwanda, President Paul Kagame was re-elected in early August – with 98.7% of votes cast – and can be expected to continue implementing business friendly policies to boost entrepreneurship. Ethiopia has lifted a state of emergency that was in place for 10 months, and there is a risk that social unrest may keep disrupting the state led development that has produced the country’s economic boom. Still, real GDP growth is forecast to come in at the very impressive rate of 7.1% in 2017.

Kenya outlook

On September 1st, the Supreme Court of Kenya became the first on the continent to annul a presidential election citing irregularities and illegalities by the Independent Electoral and Boundaries Commission (IEBC). Blame for the irregularities was placed squarely on the commissionand fresh elections must now be held within 60 days of the court’s decision. The initially announced date of October 17 was challenged and a new date eventually set for October 26th.

The news of the Supreme Court’s ruling came as a shock as international observers from the African Union (AU), European Union (EU), Commonwealth, and the Carter Centre had largely praised the polls, although with some reservations. Furthermore, no presidential election has ever been annulled in Africa.

The security implications of the court’s decision are still unclear. On the one hand, it reduces the risk of a backlash from opposition supporters who would have likely protested against the upholding of the results, while at the same time it increases tensions in the run-up to fresh elections as Mr Uhuru Kenyatta’s supporters are angered by the ruling. Overall, we tend to consider the ruling risk-neutral in the short term, however this may change closer to the new vote. 

Turnout is likely to be higher than on August 8 as supporters from both sides endeavour to cement their candidate as the legitimate winner. In this report, therefore, we consider the steps that the newly elected government needs to take to revive the economy following the vote.

A start would be to rethink the regulatory cap on commercial interest rates, which has starved small and medium enterprises of funding. Reining in expenditure, in order to ensure government debt does not get out of hand, would improve the economy’s future prospects. As things stand, the budget deficit as a proportion of GDP is forecast to widen again from this year before it narrows, mostly thanks to economic growth. The newly elected government would also need to lead the charge against corruption – something that was sorely lacking in the past.

Should Mr Raila Odinga of the National Super Alliance (Nasa) come to power, policy making and implementation will be affected by the fact that the Jubilee party has majorities in both the National Assembly and Senate and will more than likely use their advantage to stifle any policies that run contrary to their own goals.

Ghana outlook 

Ghana has struggled to contain fiscal spending in recent years, with the budget deficit as a percentage of GDP averaging 8.2% a year during the 2010-14 period. Weak State finances contributed to a widening current account deficit, a weaker currency, high levels of inflation and an increase in tax rates. These factors dragged real GDP growth down to just 4% in 2014.

Fortunately, the International Monetary Fund (IMF) approved a three-year arrangement under the Extended Credit Facility (ECF) programme for Ghana in April 2015.  The ECF programme aims to achieve a sizeable and front-loaded fiscal adjustment to restore debt sustainability. Ghana performed especially well in 2015, and exceeded consolidation targets: the fiscal deficit narrowed from 9.3% of GDP in 2014 to 7% of GDP that year. That said, 2016 proved more challenging and Ghana once again recorded substantial fiscal slippages in an election year, with the deficit widening to 8.8% of GDP, against a target equal to 5% of GDP. 

Ghana’s continued participation in the ECF programme has been characterised by significant uncertainty ever since the New Patriotic Party (NPP) took the reins by defeating the National Democratic Congress (NDC) in the 2016 elections. The substantial fiscal slippages uncovered by the NPP raised concern that Ghana’s failure to hit its targets could see the Fund disqualify the country from further participation in the programme. Market watchers were also initially concerned that the NPP’s strategy of reducing taxes to boost private sector activity might be interpreted by the multilateral organisation as not being aggressive enough. 

The IMF proved to be lenient even though Accra deviated from programme objectives when it ran a wider than budgeted deficit in the lead-up to the elections, and planned for a larger shortfall in the 2017 fiscal budget (6.5% of GDP for 2017) ,than originally targeted under the ECF programme (3.5% of GDP). 

President Akufo-Addo announced in July that authorities will only adhere to the original arrangement which implies that IMF support would end in March 2018. In August, however, the IMF released a statement highlighting that authorities had in fact agreed to extend Ghana’s participation in the programme by one year. 

Ghana has realised some progress in addressing fiscal imbalances in recent years. The rate at which debt is being accumulated has slowed, and preliminary figures suggest that Accra is maintaining a tight fiscal stance. Despite weak revenue performance, authorities managed to cut spending which contributed to a fiscal deficit (cash basis) of just 3% of GDP during 2017 H1, compared to a budgeted deficit of 3.5% of GDP for this period.

The fact that Accra is now focusing more on domestic funding sources should also lower exchange rate risk, making it easier for firms to plan ahead. Furthermore, domestic borrowing costs have declined in line with lower inflation and interest rates – not only will this reduce interest payments for government moving forward, which could free up fiscal resources to be directed elsewhere, it will also reduce working capital costs for the private sector.

Aside from the progress on the fiscal side, economic outlook has improved in general. Real GDP growth is expected to exceed 6% in 2017, driven by higher oil output and a recovery in consumer demand. Inflation, meanwhile, has trended steadily lower thus far this year, nudging ever closer to the upper band of the inflation target. In turn, easing price pressures have allowed the central bank to commence with a monetary policy easing cycle. International reserves also received a healthy boost due to robust foreign appetite for longer dated government securities. Finally, authorities have made significant progress with the implementation of the banking system roadmap. There are several reasons, to think that the operating environment is set to improve. 

Ghana’s debt situation does however remain precarious. Another key concern relates to the weak finances of state-owned enterprises (SOEs), referring specifically to energy utilities. In this regard, the Fund cautions that ongoing debt restructuring efforts are helpful but are no substitute to stemming the SOE ongoing financial losses. And in the banking sector, further reforms aimed at strengthening the supervisory and regulatory frameworks are required.

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