The ICAEW Economic Insight: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.
In North Africa, real GDP growth is forecast at 3.2% for this year, driven mainly by stronger growth in Egypt. Egypt’s economy is forecast to expand by 4.5% in 2018, with growth largely driven by strong exports and investment. In Morocco, which is highly dependent on the agricultural sector, a smaller harvest will see growth easing to 3.2% this year from 4.1% in 2017. The outlook for Tunisia (2.1%) is broadly unchanged from last year.
The outlook for the Franc Zone is positive: GDP growth is forecast at 4.8% for this year, from 4.0% in 2017. Growth in Cameroon (4.2%) will be supported by a rise in natural gas production, while the agro-industrial sector will keep Ivory Coast on a strong economic growth path of 7% this year. Gabon is projected to grow at a faster pace of 2.2% this year, thanks to higher oil prices.
Central and West Africa’s growth for this year is projected at 3.8%, from 2.3% in 2017. The powerhouse in the region, Nigeria, is forecast to expand at a healthier 2.6% this year, from a mere 0.9% last year, as oil prices recover and forex liquidity improves. The Democratic Republic of Congo is also expected to grow at a faster pace (3.5%) on the back of higher international copper and cobalt prices.
East Africa is forecast to record robust growth of 6.0% this year, again making it the fastest-growing region on the continent. In Kenya, where political uncertainty is steadily declining, GDP is projected to increase by 5.7%. Tanzania and Ethiopia are expected to remain two of the continent’s fastest growing economies this year, with growth reaching 6.9% and 7.5% respectively. In Uganda, a marked recovery in the agricultural sector pushed growth from a dismal 2.5% in 2016 to an estimated 6.3% last year, and growth is projected to remain strong at 6.0% in 2018.
Growth in Southern Africa is forecast to improve to 2.2% in 2018, as the two main engines in the region, namely South Africa and Angola, record better growth this year, albeit still below potential. Zambia’s (4.6%) economic growth is also set to improve due to higher copper prices, while the Namibian economy (3.0%) is expected to rebound this year as production from new gold and uranium mines and offshore diamond operations ramps up, in addition to increases in manufacturing and retail activity. The uptick in global demand will bode well for Botswana’s diamond exports – with GDP growth forecast at 4.3% for 2018 – while growth in Mozambique (4.8%) is projected to increase as investment in the liquefied natural gas sector begins.
2017 turned out to be another challenging year for the South African economy. S&P Global Ratings, Fitch Ratings and Moody’s Investors Service all downgraded South Africa’s sovereign credit ratings, in two of the three cases to sub-investment grade. Instead of using the opportunity to address some of the concerns that credit ratings agencies have voiced numerous times in the past 18 months, the government allowed the economic outlook (and consequently the fiscal outlook) in South Africa to deteriorate further amid a policy vacuum, more evidence of State capture, malgovernance in state-owned enterprises (SOEs) and the political infighting that was taking up most of the governing party’s time and attention.
However, the economy managed to recover somewhat towards the end of 2017, with a positive growth outcome in Q3 marking the second-consecutive quarter of growth following a short two-quarter recession: real GDP increased by 2.0% on a seasonally-adjusted, annualised q/q rate (SAAR) in Q3 compared to 2.8% SAAR during Q2 2017. The recovery in Q3 was concentrated in three sectors of the economy, namely agriculture, mining and manufacturing. Together these three sectors, which cumulatively account for only 25% of (nominal) GDP, contributed 1.9 of the 2.0 percentage point q/q increase. Thus, with 4 of the 10 sectors contracting, this was clearly not a broad-based recovery. For the years 2017 and 2018, we forecast economic growth of 1.0% and 1.7%, respectively, better than growth of 0.3% in 2016 but not a strong performance compared to the growth forecast in other African countries.
On the political front, Deputy President Cyril Ramaphosa was elected the new president of the ruling African National Congress (ANC) at the much-anticipated ANC National Conference in mid-December, and then became State President on 15 February after Jacob Zuma announced his resignation on television. The outcome is considered market-friendly, and the rand appreciated notably after the conference. The result has prompted us to revise our economic growth forecasts slightly upwards, as we believe that positive political change could trigger a much-needed recovery in confidence levels among households, corporates and foreign investors, which will in due time lead to higher spending and renewed interest in investment in South Africa. Mr Ramaphosa has already started to take concrete action which has included the replacement of the Board of Directors and CEO at the beleaguered Eskom, and some action from the National Prosecuting Authority’s Asset Forfeiture Unit. This unit, together with the Treasury, is pursuing 17 separate cases of corporate malfeasance by businesses close to Mr Zuma. The investigations target some $4.2bn in assets. Then his State of the Nation Address, delivered on 16 February, hit all the right notes on plans to streamline government and address problems in SOEs. These and hopefully more to come in terms of credible plans to revive the economy, including structural reforms, clear policy and regulatory direction, further clean-up actions at mismanaged SOEs, addressing corruption and waste in the economy and stemming the tide in terms of fiscal slippage, would go a long way in convincing the ratings agencies that South Africa’s downward spiral could be turned around. If these developments prevent Moody’s Investors Service from downgrading South Africa’s local-currency debt, South African government bonds will remain part of the Citibank World Government Bond Index.
However, we acknowledge that Mr Ramaphosa faces an arduous task in his attempts to clean up the deeply corrupted structures of the ruling party, and to oversee the prosecution of figures linked to the former president. These networks are deeply rooted, and intertwine with state structures and a governance system in which many corrupt figures are still present, who can be expected to resist and obstruct all attempts to end the practices.
Inflationary pressures eased in the opening months of 2017, consistent with subdued consumer demand, moderating food prices and a strengthening rand. Headline consumer price inflation slowed from a peak of 6.8% y/y in December 2016 to 4.7% y/y in December 2017, averaging 5.3% last year, compared to 6.4% in 2016. We forecast headline CPI inflation to average 4.8% and 5.2% in 2018 and 2019, respectively.
Although the CPI outlook remains favourable and signals that there is indeed scope for further monetary policy loosening (there was a 25 basis point cut in the policy rate in July 2017), the South African Reserve Bank (Sarb) opted to remain conservative by maintaining the repo rate at 6.75% at its previous three meetings (in September, November and January). It remains clear that the Bank does not view monetary policy as the sole solution to the structural growth constraints in the economy, nor does it believe that a reduction in interest rates will provide a significant stimulus to growth in the current environment of low confidence and political uncertainty.
Zimbabwe underwent possibly the biggest change in its post-democratic history in November 2017, as President Robert Mugabe stepped down in the face of determined military support for his former vice-president and comrade in the liberation war, Emmerson Mnangagwa. The crisis had been years in the making, but two key developments precipitated it: Mr Mugabe’s sacking of Mr Mnangagwa, and his disregard for his military chief, Constantine Chiwenga. Troop movements were reported on 14 November, and early the following morning Major General SB Moyo, speaking on State television, told Zimbabweans: “The situation in our country has moved to another level.” On 21 November Mr Mugabe resigned, and Mr Mnangagwa was sworn in as his successor three days later. In early December he named his cabinet, purged of ‘Generation 40’ cadres close to former First Lady Grace Mugabe, and packed with military men.
Since then, a number of policy announcements by Mr Mnangagwa’s team have indicated that his government will be friendlier to foreign investors and lenders than Mr Mugabe’s was. The most important policy announcement to date was the announcement by Finance Minister Patrick Chinamasa in early December, when he presented the 2018 Budget, that indigenisation policy would henceforth apply only to diamond and platinum mining. Indigenisation regulations that required all companies operating in Zimbabwe to be 51% or more owned by black Zimbabweans had acted as a serious brake on investment from foreign sources, and rolling back those rules will tend to attract foreign direct investment (FDI) into the agricultural and services sectors, which are currently underperforming woefully and where investment could make a valuable economic contribution in a short time. On the same occasion Mr Chinamasa introduced a ceiling for government expenditure, said that a planned export tax on processed platinum would be deferred to 2019.
More concessions to economic orthodoxy have followed. Early in January, Mr Chinamasa announced that the government was assessing 24 of 93 SOEs with the intention of either diluting its shareholding or divesting entirely, and invited companies to bid for them. In his December budget speech he had already promised that “technically insolvent” SOEs would be shut down. Later in the month, import duties on petrol and diesel were slashed to ease inflation and to improve the operating environment for businesses. Towards the end of the month, the minister of lands, agriculture and rural resettlement ruled that all remaining white farmers (about 200 to 300) be issued 99-year leases instead of the five-year leases as per the previous arrangement, and the government promised to compensate farmers for improvements that were made to any seized land. Given the role that the messy land reform programme played in Zimbabwe’s economic disaster in the 2000s, the moves will help in restoring confidence in property rights and in turn create a more favourable environment for commercial farmers and companies alike.
Also in January, Mr Mnangagwa attended the World Economic Forum (WEF) gathering in Davos, where he sent the right signals about opening Zimbabwe up for foreign investment, and received promising signals from potential investors in return. The EU informed the government that it was ready to review its ties with Zimbabwe and support its re-engagement with international financial institutions, on the basis that there is a clear plan for political and economic reform. Most recently, in early February, Reserve Bank of Zimbabwe (RBZ) Governor John Mangudya announced that the RBZ was increasing stabilisation facilities by $400m, and that negotiations with the African Export-Import Bank (Afrexim Bank) were underway to ensure a $1.5bn facility to guarantee investments flowing into the country and for liquidity backing. The sudden return to inflation towards the end of 2017 was a sign, we think, that Zimbabweans did not have faith in the unpopular ‘bond notes’, and these inflows of hard currency are very welcome indeed.
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