Nigeria’s budget proposal, SA economy reawakening - Capital Economics
Africa Economics

Nigeria’s budget proposal, SA economy reawakening

Africa Economics Weekly
Written by Virag Forizs
The amendments to the 2020 budget approved by Nigeria’s cabinet this week suggest that the government is not yet fully facing up to the fiscal damage caused by the coronavirus. Elsewhere, flickers of life in South Africa’s economy are emerging.

Nigeria’s budget saga continues

The amendments to the 2020 budget approved by Nigeria’s cabinet this week suggest that the government is not yet fully facing up to the fiscal damage caused by the coronavirus.

The authorities revised the budget for the second time this year to incorporate a lower benchmark oil price (bonny light crude of $25pb). The government now expects to run a federal budget deficit this year of N5.4trn (3.3% of GDP), compared with the 1.2% of GDP estimated when it first revised the 2020 budget back in March.

The government no longer appears ready to enact the swingeing spending cuts (reportedly of some N1.5trn) that it had outlined in March. Spending this year will be N10.5trn, roughly what had been planned in the original version of the 2020 budget. The composition of spending will change, with a higher healthcare outlay offset by cuts elsewhere.

However, despite the revision to the oil price benchmark, the revenue assumptions look optimistic. Oil production is projected to be 1.94mn bpd this year, well above the country’s OPEC quota (1.4-1.5mn bpd). Even if Nigeria doesn’t fully comply with the OPEC deal (which seems likely), revenues from oil production will probably come in lower than the government’s latest blueprint.

Taking a step back, there are three key points to make. First, the oil price collapse has left the authorities cash-strapped and unable to support the economy through fiscal stimulus. Second, policymakers don’t appear to be budging on the exchange rate regime. The budget is based on the assumption that the official exchange rate will remain at its current level of N360/$.

Third, the budget deficit will be larger than the authorities estimate. We think the overall deficit will, once state and local governments are included, amount to 7% of GDP. That will leave a sizeable financing gap (the IMF estimate this at 1.9% of GDP).

There are several ways to plug the hole. One is much more austerity, but this would be unpopular. The central bank could resume deficit monetisation, although that would draw the ire of the IMF. An increasingly likely option is for the government to seek some form of halt on debt service payments. Interest payments alone cost the government 2% of GDP. In that light, the authorities’ support for global debt relief efforts comes as no surprise.

Flickers of life in South Africa’s economy

High frequency figures from South Africa suggest that the move to ease the country’s lockdown at the start of this month has helped to lift economic activity. Electricity distribution reported by Eskom, while still far below its pre-lockdown level, has risen in May. (See Chart 1.) Requests for routings using Apple Maps tells a similar story.

Chart 1: Eskom Electricity Sent Out (GWh)

Source: Eskom

Of course, the economy remains extremely weak. And with suggestions that the lockdown will only be eased further at the end of this month (and then only in certain parts of the country), activity is likely to stay depressed for some time. But after the horror show of the early data for April (see here), May’s survey and activity figures should look a little better.

The week ahead

We think the South African Reserve Bank will cut its repo rate by 50bp, to 3.75%, next week. Otherwise South African activity figures for February will help us to gauge the scale of the fall in GDP in Q1.


Data Previews

South Africa Interest Rate Announcement (May) Thu. 21st May

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Repo Rate

14.00

4.25%

3.75%

3.75%

Further easing in store

We think that the South African Reserve Bank (SABR) will cut its repo rate by a further 50bp, to 3.75%, when it meets next Thursday.

The SARB has thrown its usual caution to the wind in the current crisis, lowering the policy rate by 200bp in the past couple of months. Despite the fall in the rand, inflation is likely to decline further in the coming months. (See Chart 2.) The collapse in global oil prices will bring petrol inflation down further and the weakness of activity will weigh on core price pressures.

Moreover, policymakers in any case are paying more attention to the need for economic support rather than inflation concerns. Activity, while a bit stronger in the past couple of weeks than it was in April, is still extremely subdued (see main article).

Against this backdrop, we see scope for further monetary easing. We’ve pencilled in a 50bp cut at the upcoming meeting, followed by one more 25bp cut, which would take the policy rate to 3.50%.

Chart 2: South Africa Consumer Prices
& Repo Rate (%)

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

19th May

SA

Mining Production (Feb)

(10.30)

(+6.1%)

(+4.8%)

SA

Manufacturing Production (Feb)

(12.00)

(-2.0%)

(-2.8%)

20th May

Zam

Interest Rate Announcement

11.50%

11.50%

SA

Retail Sales (Feb)

(12.00)

(+1.2%)

(+1.1%)

21st May

SA

Interest Rate Announcement

4.25%

3.75%

3.75%

Also expected during this period:

15th – 22nd

Nga

CPI (Apr)

(12.3%)

(+12.3%)

(+12.2%)

16th – 23rd

Ang

CPI (Apr)

(+19.0%)

(+20.6%)

20th – 27th

Nga

GDP (Q1)

(+2.6%)

(+0.8%)

Selected future data releases and events

26th May

Nga

Interest Rate Announcement

13.50%

27th May

Ken

Interest Rate Announcement

7.00%

SA

CPI (Apr)

(09.00)

+0.3%(+4.1%)

28th May

Zam

CPI (May)

(+15.7%)

29th May

Uga

CPI (May)

(+3.2%)

Ken

CPI (May)

+0.9%(+5.6%)

SA

Trade Balance (Apr, SAAR, ZAR)

(13.00)

+24.2bn

SA

Budget Balance (Apr, SAAR, XAR)

(13.00)

-51.2bn

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)

(12.00)

SA

Mining Production (Apr)

(12.00)

SA

Manufacturing Production (Mar)

(12.00)

SA

Manufacturing Production (Apr)

(12.00)

Also expected during this period:

5th – 12th

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)

*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

-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

(15th 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

4.25

Down 100bp (Apr ’20)

Down 50bp (May ’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
(15th May)

End

2020

End

2021

Stock Market

Latest

(15th May)

End

2020

End
2021

Nigeria

NGN (Official)

360

400

400

NGSE

23,871

20,000

26,000

NGN (Nafex)

387

450

450

South Africa

ZAR

18.6

17.5

17.0

JALSH

49,629

49,850

60,600

Angola

AOA

563

625

625

n/a

Kenya

KES

107

110

110

NSE 20

1,975

2,300

2,700

Ghana

GHS

5.7

6.0

6.1

GSECI

1,984

2,000

2,300

Uganda

UGX

3,780

3,900

4,000

UGSE

1,345

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