Africa: Policy risks cast shadow over fragile economies

Official data released over the past month mostly suggested that African economies improved a touch, but a series of political shocks has hit investor confidence. The most high-profile of these as been the latest dispute between South African President Jacob Zuma and his finance minister, Pravin Gordhan. Speculation that Mr. Gordhan will be dismissed caused the rand to sell off last week. This has complicated the task before the central bank, which we expect will be forced to raise rates despite the very weak economy. Also worrying was the Kenyan government’s decision to cap commercial interest rates. This has sent bank stocks tumbling and could well reduce the provision of loans in an economy where credit growth is already slowing. Worse, the move may signal a shift towards populist policymaking in the run up to Kenya’s 2017 election. Finally, Ghana’s parliament passed a law allowing the central bank to directly finance the government’s deficit, thus breaching the conditions of the country’s IMF deal. A breakdown in negotiations between Ghana and the Fund would be highly destabilising. None of these events were entirely foreseeable, and all provide a reminder of the risk that political surprises pose to fragile African economies.