Grim budget in SA, Nigeria’s FX buzz and debt woes - Capital Economics
Africa Economics

Grim budget in SA, Nigeria’s FX buzz and debt woes

Africa Economics Weekly
Written by Virag Forizs

South Africa’s emergency budget highlighted that the government plans to turn to harsh austerity to try to deal with the legacy of higher debt, but this is unlikely to be politically sustainable in the long run. Nigeria’s debt problems are of a different kind – and both public and private debts are a growing concern. Meanwhile, the unification of the main exchange rates seems to be all talk but no action at this stage.

SA budget woes to become a permanent fixture

The weak state of South Africa’s public finances was underscored by this week’s emergency budget. Finance Minister Tito Mboweni painted a grim picture, revising the 2020/21 budget deficit to 14.6% of GDP (from 6.8%) with public debt estimated to soar to 81.8% of GDP in the same period.

While plans to borrow from the IMF to finance the budget deficit might grab the headlines, the government’s plans to impose harsh austerity in the immediate aftermath of the crisis to deal with the legacy of higher debt has gained surprisingly little attention. To stabilize the debt ratio, officials envisage a fiscal squeeze of 4.5% of GDP in the next two fiscal years, followed by further austerity. Such dramatic spending cuts and tax rises would hold back the economic recovery. But sustained austerity seems politically unpalatable, and a toned-down version could put the public debt ratio back on an unsustainable trajectory.

Naira unification: all talk but no action (yet)

Rumours of a unified Nigerian naira exchange rate carried on this week, but (so far at least) official confirmation or concrete actions are still pending.

Reports suggest that the central bank governor disclosed on a call to investors that the official exchange rate (at N360/$) would converge towards the more widely used Nafex rate (at N388/$).

It is perhaps telling that there hasn’t been an official confirmation of the move to unify the two exchange rates, suggesting that momentum might be thin on the ground. Rather than shifting towards a market-determined exchange rate regime, a recent central bank statement disclosing that foreign reserves will be boosted to protect the currency seem to reinforce interventionist tendencies instead.

In the same investor call, Governor Emefiele reportedly criticized the parallel rate (at N457/$), noting that it would not be the base for exchange rate convergence. We think that the parallel rate is closer to the fair value of the naira. So even if the central bank does push ahead with merging the official and Nafex rates around the latter, Nigeria would still be a long way from having a fully unified and flexible exchange rate.

Nigeria’s debt woes

Otherwise, Nigeria’s debt problems have made it into the headlines this week. On the private sector side, the World Bank was the latest institution to sound the alarm about the impact of the current crisis on Nigeria’s banking sector and the likely rise in bad loans. By the end of May, banks had requested the restructuring of about a third of the total industry loan portfolio. We warned about the vulnerabilities in the Nigerian banking sector some time ago. In short, bank recapitalisations might be needed which would add to the country’s fiscal woes.

On the public sector side, Nigerian officials gave mixed messages about servicing debt obligations due this year. A presidential economic advisor on Tuesday morning suggested that Nigeria is seeking a moratorium on some loans from official partners (in line with official comments as recently as April) as well as commercial debt relief. But by the afternoon, the finance minister instead asserted that the country will honour all its debt obligations.

While Nigeria’s public debt burden is relatively low, at 29% of GDP, a key point to note is that the government’s ability to service debt is severely constrained by limited revenues. According to a recent budget report, interest payments were equivalent to 99% of the federal government’s revenues in Q1.

The week ahead

South African Q1 GDP figures out next week are old news, but we suspect that they will show that the economy contracted by 2.3% q/q saar. Needless to say, Q2 will be a lot worse.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

29th Jun

Bot

GDP (Q1)

(+1.6%)

30th Jun

Uga

CPI (Jun)

(+2.8%)

(+2.8%)

Ken

CPI (Jun)

+0.6%(+5.5%)

+0.7%(+5.5%)

(+5.4%)

Ken

GDP (Q1)

(+5.5%)

(+4.5%)

(+4.5%)

SA

GDP (Q1, q/q saar (y/y))

(10.30)

-1.4%(-0.5%)

-4.4%(-1.0%)

-2.3%(-0.3%)

SA

Trade Balance (May, ZAR, saar)

(13.00)

-35.0bn

SA

Budget (May, ZAR, saar)

(13.00)

-51.2bn

1st Jul

SA

Absa Manufacturing PMI (Jun)

(10.00)

50.2

2nd Jul

SA

Current Account (Q1, ZAR)

(10.00)

-68.0bn

SA

Electricity Production (May)

(12.00)

(-22.8%)

3rd Jul

Ken

Markit/Stanbic Bank PMI (Jun)

(08.30)

36.7

Also expected during this period:

22nd – 10th

Nga

Current Account Balance (Q1)

-$7.0bn

29th – 3rd

Mau

Interest Rate Announcement

1.85%

1.85%

Selected future data releases and events

7th Jul

Mau

CPI (Jun)

(+2.8%)

9th Jul

SA

Manufacturing Production (Apr)

(12.00)

-1.2%(-5.4%)

14th Jul

Nga

Oil Production (May, bpd, mn)

1.6

Ang

Oil Production (May, bpd, mn)

1.3

SA

Mining Production (May)

(10.30)

-34.1%(-47.3%)

15th Jul

Nga

CPI (Jun)

(+12.4%)

Gha

CPI (Jun)

(+11.3%)

SA

CPI (May)

(09.00)

-0.5%(+3.0%)

-0.3%(+3.2%)

21st Jul

Nga

Interest Rate Announcement

12.5%

22nd Jul

SA

CPI (Jun)

(09.00)

SA

Retail Sales (May)

(12.00)

23rd Jul

SA

Interest Rate Announcement

3.75%

Also expected during this period:

5th – 12th

SA

SAACI Business Confidence (Jun)

9th – 16th

Tan

CPI (Jun)

(+3.2%)

12th – 13th

Ang

CPI (Jun)

(+21.1%)

12th – 19th

Bot

CPI (Jun)

(+2.4%)

16th – 23rd

Nam

CPI (Jun)

(+2.1%)

19th – 26th

Ken

Interest Rate Announcement

7.00%

20th – 24th

Ang

Interest Rate Announcement

15.5%

*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

0.86

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

-11.0

5.5

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

-3.8

4.3

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

(26th Jun.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

12.50

Down 100bp (May ’20)

Down 50bp (Sep. ’20)

12.00

12.00

South Africa

Repo Rate

3.75

Down 50bp (May ’20)

Down 50bp (Jul ’20)

3.00

3.00

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
(26th Jun.)

End

2020

End

2021

Stock Market

Latest

(26th Jun.)

End

2020

End
2021

Nigeria

NGN (Official)

360

400

400

NGSE

24,829

20,000

26,000

NGN (Nafex)

387

450

450

South Africa

ZAR

17.3

16.0

16.5

JALSH

53,720

49,850

60,600

Angola

AOA

574

625

625

n/a

Kenya

KES

106

110

110

NSE 20

1,939

2,300

2,700

Ghana

GHS

5.7

6.0

6.1

GSECI

1,873

2,000

2,300

Uganda

UGX

3,735

3,900

4,000

UGSE

1,379

1,600

1,800

Sources: Bloomberg, Capital Economics


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