Ethiopian tinderbox, soft South African recovery - Capital Economics
Africa Economics

Ethiopian tinderbox, soft South African recovery

Africa Economics Weekly
Written by Virag Forizs
Frictions between Ethiopia’s federal government and the Tigray region turned into military confrontation this week, which will inflict damage not only on the population but also on the economy. In South Africa, the latest data add to the evidence that the recovery is struggling to gather momentum, reinforcing our view that interest rates will stay at their current levels for some time and that the government will water down austerity plans. At least, the South African rand performed strongly this week on the back of improved risk appetite following the US elections.

Political tensions raise economic stakes

Frictions between Ethiopia’s federal government and the Tigray region turned into military confrontation this week, which will inflict damage not only on the population but also on the economy.

The relationship between the federal government and the region of Tigray has been fraught since Abiy Ahmed assumed the prime ministerial post in 2018 and the once powerful region’s influence has waned. This week’s slide into military conflict marks an escalation that threatens to descend into civil war. GDP growth dropped by around 2.5%-pts, to 8.0% in fiscal year 2015/16 when nation-wide protests rocked the country. In Cote d’Ivoire, which is also suffering from political uncertainty, there are already signs of economic disruption – cocoa beans arriving at local ports for shipment tumbled by 50% this week. An outright civil war in Ethiopia would almost certainly cause more economic damage.

Even if a prolonged internal conflict is avoided, Prime Minister Abiy Ahmed’s political capital to push through ambitious reforms is likely to take a severe hit. Foreign capital inflows are likely to dry up – spreads on sovereign dollar bonds over US Treasuries have widened by nearly 70bps since the start of November reflecting the dimmed outlook for Ethiopia’s economy. This could ultimately harm the country’s long-term economic prospects.

Soft SA recovery: rates stay low, austerity to wane

The latest data out of South Africa add to the evidence that the recovery is struggling to gather momentum, reinforcing our view that interest rates will stay at their current levels for some time and that the government will water down austerity plans.

Admittedly, the ABSA manufacturing PMI released this week rose in October to its highest level since the series began in 1999. But this was driven by a pick-up in supplier delivery times, most likely due to lingering supply chain disruptions rather than stronger demand. In contrast, the business activity and new orders components dropped back. The underlying downbeat message from the manufacturing PMI was reinforced by other low-level data. Electricity output fell in September and Eskom has continued with load-shedding. Business and consumer confidence are still depressed.

The recovery is likely to remain slow-going over the coming quarters and we expect GDP to be more than 5% below its pre-virus trend by end-2022. Against this backdrop, the Reserve Bank will probably keep interest rates at their current low levels for some time. Meanwhile, the government will find it increasingly difficult to stick to its fiscal austerity plans. It wouldn’t take much to knock the plans off course, pushing debt onto an unsustainable trajectory and forcing policymakers to resort more interventionist tools such as financial repression.

Africa and the fallout from the US election

This week’s US election has yet to reach a definitive result, although it looks increasingly likely that Joe Biden will secure the presidency but will lack control of the Senate. Our US and Global Markets services are the place to look for more detailed reaction.

For Africa, this outcome will probably be welcomed by the region’s oil producers. A major shift towards green policies under Mr. Biden that would have dampened US oil demand now seems unlikely. More generally, the result has given a shot in the arm to investor risk appetite. This has supported a rally in major EM currencies, including the South African rand which is up 3.5% against the dollar this week, and also helped to narrow dollar bond spreads. This will provide some relief to those countries that are emerging from the crisis with higher debt burdens.

The week ahead

South African hard activity data for September will probably show that the recovery received a boost from a loosening of virus containment measures.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

9th Nov

Mau

CPI (Oct.)

(+2.6%)

(+2.9%)

10th Nov

SA

Manufacturing Production (Sep.)

(11.00)

+3.6%

(-10.8%)

11th Nov

Gha

CPI (Oct.)

(+10.4%)

(+10.3%)

12th Nov

SA

Mining Production (Sep.)

(09.30)

+6.8%(-3.3%)

SA

Unemployment Rate (Q3)

(09.30)

23.3%

32.0%

13th Nov

No Significant Data Released

Also expected during this period:

11th – 17th

Tan

CPI (Oct.)

(+3.1%)

(+3.4%)

12th – 19th

Bot

CPI (Oct.)

(+1.8%)

(+2.1%)

Selected future data releases and events

16th Nov

Nga

CPI (Oct.)

(+13.7%)

SA

Retail Sales (Sep.)

(11.00)

+4.0%(-4.2%)

Zam

Interest Rate Announcement

8.00%

19th Nov

SA

Interest Rate Announcement

3.50%

23rd Nov

Nga

GDP (Q3)

(-6.1%)

Gha

Interest Rate Announcement

14.50%

24th Nov

Nga

Interest Rate Announcement

11.5%

25th Nov

SA

CPI (Oct.)

(08.00)

+0.2%(+3.0%)

Mau

Interest Rate Announcement

1.85%

26th Nov

Zam

CPI (Nov.)

Ken

Interest Rate Announcement

7.00%

27th Nov

Ang

Interest Rate Announcement

15.50%

30th Nov

SA

Trade Balance (SAAR)

(12.00)

+33.5bn

Uga

CPI (Nov.)

4.5%

Ken

CPI (Nov.)

1.0%

1st Dec

SA

Absa Manufacturing PMI (Nov.)

(09.00)

60.9

3rd Dec

Ken

Markit/Stanbic Bank PMI (Nov.)

(07.30)

59.1

SA

Electricity Production (Oct.)

(11.00)

Bot

Interest Rate Announcement

3.75%

Also expected during this period:

15th – 22nd

Nam

CPI (Oct.)

(+2.4%)

15th – 22nd

Ang

CPI (Oct.)

(+23.3%)

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

Sources: Bloomberg, Capital Economics


Main Economic & Market Forecasts

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

Share of

World (1)

2009-18

Ave.

GDP

Inflation

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Nigeria

0.80

4.4

2.2

-4.0

3.0

2.5

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-8.5

4.0

2.0

4.1

3.3

3.8

3.5

Ethiopia

0.20

9.7

9.0

6.1

2.0

9.5

15.7

20.0

14.0

12.0

Kenya

0.18

5.6

5.4

-0.5

6.5

6.0

5.2

5.0

5.0

4.5

Angola

0.17

2.4

-0.9

-5.0

3.0

2.0

17.1

22.0

19.0

16.0

Ghana

0.13

7.0

6.5

3.0

6.5

6.0

8.7

10.0

9.5

8.5

Tanzania

0.12

6.5

5.8

1.5

6.0

6.0

3.4

3.5

4.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.0

7.0

0.8

2.5

1.0

1.0

Uganda

0.08

5.3

6.7

-1.5

6.5

5.5

2.9

4.0

4.5

5.5

Zambia

0.05

5.6

1.4

-4.5

3.5

4.0

9.1

15.0

12.0

10.0

Botswana

0.03

3.7

3.0

-10.5

6.0

3.5

2.8

2.0

3.5

3.0

Mozambique

0.03

3.7

2.3

-0.5

4.0

4.5

2.8

3.0

3.0

3.5

Rwanda

0.02

7.2

9.4

-4.0

10.0

9.0

2.4

8.5

5.5

4.5

Mauritius

0.02

3.7

3.0

-15.0

9.0

4.5

0.4

2.5

3.0

3.0

Namibia

0.02

3.4

-1.0

-5.5

4.0

3.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.0

-3.2

4.2

4.0

8.3

9.5

8.8

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

(6th Nov.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Jan. ’21)

11.50

10.00

South Africa

Repo Rate

3.50

Down 25bp (Jul. ’20)

None on horizon

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)

None on horizon

7.00

7.00

Ghana

Policy Rate

14.50

Down 150bp (Mar. ‘20)

Down 100bp (Q2 ’21)

14.50

13.50

Uganda

Central Bank Rate

7.00

Down 100bp (Jun. ’20)

None on horizon

7.00

7.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(6th Nov.)

End

2020

End

2021

Stock Market

Latest

(6th Nov.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

31,016

29,000

31,500

NGN (Nafex)

386

400

425

South Africa

ZAR

15.7

16.0

16.5

JALSH

56,282

56,300

63,050

Angola

AOA

660

680

700

Kenya

KES

109

110

115

NSE 20

1,770

1,850

2,150

Ghana

GHS

5.78

5.80

5.90

GSECI

1,820

1,900

2,200

Uganda

UGX

3,705

3,750

3,850

UGSE

1,301

1,375

1,600

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com