SA’s slump, SOE problems, naira still struggling - Capital Economics
Africa Economics

SA’s slump, SOE problems, naira still struggling

Africa Economics Weekly
Written by William Jackson

The activity figures coming out of South Africa continue to make for depressing reading and the economic slump is causing growing problems at SOEs. Eskom remains the main risk for the public finances, which are on an alarming trajectory. Elsewhere, the rise in oil prices has supported Nigeria’s stock market, but not the naira, which still looks overvalued. Policymakers will have to loosen their grip on the currency.

SA: Downturn starting from a point of weakness

South Africa’s usual run of activity figures is behind schedule due to the lockdown. (See here.) The data for February, published this week, were of course outdated. But they showed that the economy was doing poorly even before the nationwide lockdown began in March. Overall, the data are consistent with a fall in GDP of about 2% q/q saar. (See Chart 1.)

Chart 1: South Africa GDP & CE GDP Tracker

Sources: Refinitiv, Capital Economics

The Q1 GDP figures, with March included, will be a lot worse. And activity fell off a cliff in April. The good news is that economic conditions have started to improve this month, but activity remains at very depressed levels. (See last week’s Africa Weekly.)

SA’s SOE debt burden in the spotlight

One consequence of the downturn in South Africa’s economy is that state-owned enterprises are facing growing financial difficulties. Arms manufacturer Denel joined South African Airways and Land Bank in finding itself in trouble. These put South Africa’s government on the hook through its guarantees for SOEs’ borrowings – the contingent liabilities of the government amount to around 18% of GDP.

As it happens the government’s exposure to the companies mentioned above is relatively small. The main concern remains energy firm Eskom, the single largest contingent liability. (See Chart 2.) The good news is that Eskom has taken advantage of the recent reduction in demand for electricity to undertake much needed repairs. Load shedding this year is likely to be smaller than in previous years.

Chart 2: South Africa Govt. Selected Contingent Liabilities* (% of GDP, 2019/20)

Source: South Africa Treasury. *Exposure, not size of guarantee.

But none of this changes the company’s weak financial position. Tariff rates are too low and significant investment in upgrading plants is still needed. (See here.) Eskom has been granted permission to raise tariffs in September. But given the scale of the economic collapse, it’s hard to believe that tariffs would rise over the next year to two to a sufficiently high level that would alleviate the need for more state support. That will worsen troubles in South Africa’s public finances. (See here.)

Nigeria: Naira missing out on market rally

This week’s rally in the global oil market translated into a recovery in price of the Nigerian headline crude Bonny light and buoyed local stocks. The main equity index is up by 8% m/m. In contrast, the currency hasn’t gained. The official exchange rate and the more widely used Nafex rate have not budged, and the naira has weakened on the black market. That’s because the naira still looks overvalued. Policymakers will have to let it weaken further, but hopes of a unified, flexible exchange rate regime will probably be dashed. (See here.)

The week ahead

We think that central banks in Nigeria and Kenya will cut their policy rates next week.


Data Previews

Nigeria Interest Rate Announcement (May) Thu. 28th May

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Key Policy Rate (%)

13.50

13.00

CBN to loosen policy

We think that policymakers at the Central Bank of Nigeria (CBN) will cut their benchmark rate from 13.50% to 13.00% next Thursday.

Over the past year, price pressures have slowly crept up. But in April, inflation was essentially unchanged at 12.3% y/y – the same as in March (at least when measured to one decimal place).

Meanwhile, the economy is in dire straits as the collapse in oil prices has slashed export earnings and government revenues. The finance minister warned about GDP contracting by as much as 8.9% this year in the absence of stimulus.

It’s always tricky to gauge the CBN’s intentions. But we suspect that it will opt to provide more support to the struggling economy; we expect a 50bp cut next Thursday, to 13.00%. (See Chart 3.) Elevated inflation will probably not stop policymakers from lowering the benchmark rate – it hasn’t done so in the past.

In the coming months, inflation will probably rise further as the weaker currency pushes up prices. Even so, the CBN is likely to cut interest rates by an additional 50bp, to 12.50%, as concern over the economic damage caused by the coronavirus and lower oil prices mounts.

Chart 3: Nigeria Consumer Prices & Key Policy Rate

Sources: CBN, NBS, Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

27th May

Ken

Interest Rate Announcement

7.00%

6.75%

6.75%

28th May

Zam

CPI (May)

(+15.7%)

(+15.8%)

Nga

Interest Rate Announcement

13.50%

13.00%

29th May

Uga

CPI (May)

(+3.2%)

(+3.2%)

Ken

CPI (May)

+0.9%(+5.6%)

(+5.7%)

SA

Trade Balance (Apr, SAAR, ZAR)

(13.00)

+24.2bn

+19.3bn

SA

Budget Balance (Apr, SAAR, XAR)

(13.00)

-51.2bn

Also expected during this period:

20th – 27th

Nga

GDP (Q1)

(+2.6%)

(+0.8%)

(+0.8%)

Selected future data releases and events

1st Jun

SA

Absa Manufacturing PMI (Apr)

(10.00)

46.1

4th Jun

Ken

Markit/Stanbic Bank PMI (May)

(08.30)

34.8

SA

Current Account Balance (Q1, ZAR)

(10.00)

-68bn

SA

Electricity Production (Apr)

(12.00)

(-4.1%)

5th Jun

Mau

CPI (May)

(+4.2%)

9th Jun

SA

Labour Market – Quarterly Employment Statistics (Q1)

(10.30)

29.1%

11th Jun

Uga

Interest Rate Announcement

8.00%

SA

Mining Production (Mar)

(10.30)

-1.0%(+7.0%)

SA

Mining Production (Apr)

(10.30)

SA

Manufacturing Production (Mar)

(12.00)

-2.3%(-2.1%)

SA

Manufacturing Production (Apr)

(12.00)

15th Jun

Nga

CPI (May)

(+12.3%)

17th Jun

Nam

Interest Rate Announcement

4.25%

Gha

GDP (Q1)

(+7.9%)

Gha

CPI (May)

(+10.6%)

Moz

Interest Rate Announcement

14.25%

SA

Retail Sales (Mar)

(12.00)

-0.4%(+2.0%)

SA

Retail Sales (Apr)

(12.00)

18th Jun

Bot

Interest Rate Announcement

4.25%

19th Jun

Mau

Interest Rate Announcement

1.85%

Also expected during this period:

5th – 12th Jun

SA

SAACI Business Confidence (May)

77.8

7th – 18th

Ken

GDP (Q1)

(+5.5%)

9th – 16th

Tan

CPI (May)

(+3.3%)

10th – 17th

Bot

GDP (Q1)

(+1.6%)

12th – 19th

Uga

GDP (Q1)

(+3.6%)

12th – 19th

Bot

CPI (May)

(+2.5%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics

Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share ofWorld 1

2009-18

Ave.

GDP

Inflation

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Nigeria

0.86

4.4

2.2

-3.0

2.5

2.0

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-6.5

3.5

1.8

4.1

3.8

4.3

3.8

Angola

0.14

2.4

-0.3

-6.0

3.0

2.0

17.3

25.0

20.0

17.5

Kenya

0.14

5.6

5.6

1.5

5.5

6.5

5.2

6.0

5.5

5.0

Ethiopia

0.17

9.7

9.0

3.0

7.0

8.5

15.7

17.0

14.0

10.0

Ghana

0.15

7.0

6.5

0.0

5.5

6.0

8.7

9.0

8.5

8.0

Côte d’Ivoire

0.08

6.1

7.5

1.0

7.0

7.0

0.8

1.5

1.0

1.0

Tanzania

0.14

6.5

5.6

1.5

5.0

5.0

3.4

3.5

5.0

4.5

Mozambique

0.03

3.7

2.2

1.0

5.0

4.0

2.8

4.0

4.5

4.0

Uganda

0.07

5.3

5.6

1.0

5.0

5.0

2.9

4.0

5.5

6.0

Rwanda

0.02

7.2

9.4

2.5

7.5

9.0

2.4

7.0

5.5

5.0

Botswana

0.03

3.7

3.5

-3.5

3.0

3.5

2.8

2.0

3.0

3.0

Zambia

0.05

5.6

2.0

-3.0

3.0

4.0

9.1

14.5

11.5

9.5

Mauritius

0.02

3.7

3.5

-10.0

3.5

4.0

0.4

4.5

4.5

3.5

Namibia

0.02

3.4

-1.4

-3.0

2.0

3.0

3.7

4.5

4.0

3.5

Sub-Saharan Africa

2.5

4.2

3.0

-2.6

3.9

3.5

8.4

9.7

9.1

8.2

Sources: Refinitiv, National Sources, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(22nd May)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

13.50

Down 50bp (Mar ’19)

Down 50bp (May ’20)

12.50

12.00

South Africa

Repo Rate

3.75

Down 50bp (May ’20)

Down 25bp (Jul ’20)

3.50

3.50

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Down 75bp (Q3 ’21)

15.50

14.00

Kenya

Central Bank Rate

7.00

Down 25bp (Apr ’20)

Down 25bp (May ’20)

6.75

6.75

Ghana

Policy Rate

14.50

Down 150bp (Mar ‘20)

Down 100bp (Q2 ’21)

14.50

13.50

Uganda

Central Bank Rate

9.00

Down 100bp (Oct ’19)

Down 100bp (Jun ’20)

8.00

8.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(22nd May)

End

2020

End

2021

Stock Market

Latest

(22nd May)

End

2020

End
2021

Nigeria

NGN (Official)

361

400

400

NGSE

24,981

20,000

26,000

NGN (Nafex)

387

450

450

South Africa

ZAR

17.6

17.5

17.0

JALSH

49,832

49,850

60,600

Angola

AOA

571

625

625

n/a

Kenya

KES

107

110

110

NSE 20

2,004

2,300

2,700

Ghana

GHS

5.7

6.0

6.1

GSECI

2,015

2,000

2,300

Uganda

UGX

3,765

3,900

4,000

UGSE

1,371

1,600

1,800

Sources: Bloomberg, Capital Economics


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com
Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com

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