Nigeria’s limited fiscal space bites, SA banks in spotlight - Capital Economics
Africa Economics

Nigeria’s limited fiscal space bites, SA banks in spotlight

Africa Economics Weekly
Written by Virag Forizs
Nigerian government spending proposals for 2021, floated this week, signal just how much of a bind the authorities are in. Letting the naira weaken would be one way to address the large budget deficit, but policymakers are likely to remain reluctant to go down this path. Elsewhere, several of South Africa’s largest banks have, unsurprisingly, announced sharp falls in profits as the effects of the coronavirus crisis have rippled across the economy and bad loans have risen. More pain probably lies in store.

Nigeria’s public finances: walking a tightrope

Nigerian government spending proposals for 2021, floated this week, shine a light on the bind the authorities are in.

In preparation for next year’s budget, officials circulated a plan that would increase government spending by 17%, to N12.6trn. Projected revenues imply a budget deficit of N5.1trn (or 3.6% of GDP), essentially unchanged from this year’s target of a N5.0trn shortfall (that we think is optimistic).

A key proviso in the proposals was the focus on completing ongoing capital projects, in essence putting a stopgap on new capital expenditure unless sufficient resources are secured. This will inevitably put some public investment projects on hold. Together with the news this week of a delay in approving Nigeria’s World Bank loan request, the mounting pressure on the public finances is evident.

One way out of the government’s fiscal hole would be to let the naira weaken further. This would give a leg up to the local currency value of US dollar-denominated oil revenues and thus help to narrow the budget deficit. The naira also seems to be a key stumbling block in talks with the World Bank.

But policymakers appear to be sticking to their guns in trying to preserve a multi-tiered, heavily-managed FX regime. Indeed, the government’s budget proposals have used 360/$ as the naira benchmark (the central bank quotes the official rate at 379/$). And despite two devaluations since the onset of the pandemic, the gap between the official and the more widely used Nafex rates has not closed. We think that the naira needs to weaken closer to the black market rate, currently at 477/$, but resistance from policymakers will limit its fall and the government’s ability to plug a gaping fiscal hole.

Worse news to come for South African banks

Several of South Africa’s largest banks have, unsurprisingly, announced over the past week sharp falls in profits as the effects of the coronavirus crisis have rippled across the economy and bad loans have risen. More pain probably lies in store.

After all, the latest activity data suggests that South Africa suffered one of the steepest downturns in the world in Q2. A lot of economic damage had already been done by the time fiscal support arrived. The recovery is likely to be slow going and incomes of firms and households will remain depressed. Meanwhile, onerous terms have meant there has been limited take up of the government’s Covid-19 Loan Guarantee Scheme – only ZAR14bn out of a possible ZAR100bn has been lent out so far. This prompted an adjustment of the terms this week.

The banking association had previously estimated that the NPL ratio would reach 10% as a result of the crisis, up from 4.9% now and 4.0% at the start of the year. We’ve previously estimated that this would be enough to tip banks’ aggregate tier 1 capital ratio below the regulatory minimum, triggering the need for recapitalisations.

Debt service relief extension: definitely maybe?

G7 finance ministers this week concluded a meeting without agreeing to extend a debt service relief initiative backed by the G20. Only around half of eligible developing countries have applied to take up the deal, with many expressing concerns about potential credit rating downgrades which could follow were private creditors to participate – something that G7 members again called for. An extension of the deal is still possible, but slow progress may just push some African countries towards broader debt restructuring. Recent deals in Latin America offer some lessons. (See here.)

The week ahead

Q2 GDP figures from Nigeria are likely to show that the economy contracted by 8.0% y/y. Meanwhile, we think that inflation in South Africa rose further, to 2.8% y/y, in July. (See Previews.)


Data Preview

South Africa Consumer Prices (Jul.) Wed. 26th Aug.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

Consumer Prices (% y/y)

09.00

2.2

2.9

2.8

Inflation to edge higher

We think that figures due on Wednesday will show that inflation in South Africa rose to 2.8% y/y in July, but we still think that the Reserve Bank will deliver further interest rate cuts over the coming months.

The headline rate edged up from 2.1% y/y in May, its lowest level since 2004, to 2.2% y/y in June as higher transport inflation was only partially offset by weaker inflation in the other major price categories.

Inflation is likely to have risen further last month. The continued recovery in oil prices has triggered increases in local fuel prices and electricity tariff hikes came into effect at the start of July. Partially offsetting this, we think that core inflation eased further. Overall, we have pencilled in a rise in inflation from 2.2% y/y in June to 2.8% y/y in July.

That would still leave inflation below the lower bound of the central bank’s 3-6% target range. While the easing cycle seems to be nearing an end, we think that the backdrop of low inflation and a weak economic recovery will prompt a further 50bp of rate cuts, to 3.00%, by year-end. (See Chart 1.)

Chart 1: Consumer Prices & Repo Rate

Sources: Refinitiv, Capital Economics

Nigeria GDP (Q2) Wed. 26th Aug.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

GDP (% y/y)

1.9

-3.6

-8.0

Plunge in GDP in Q2 to herald in weak recovery

Figures due out next week will probably show that Nigeria’s economy contracted by a whopping 8% y/y in Q2. (See Chart 2.)

Activity held up relatively well in the early months of 2019, with GDP expanding by 1.9% y/y in Q1, supported by elevated oil production. But the collapse in oil prices triggered an OPEC deal that pushed down output in the key sector from 1.9mn bpd over Q1 to 1.7mn bpd over Q2, which probably shaved close to 1%-pts off GDP.

Meanwhile, coronavirus containment measures are likely to have hit the non-oil economy hard. According to a survey by the Nigerian National Bureau of Statistics, 15.5% of respondents stopped working since the beginning of the outbreak. Loss of employment and income will probably keep the recovery in the coming quarters weak, even if oil production begins to rise.

Chart 2: Nigeria GDP (% y/y)

Sources: Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

24th Aug

No Significant Data Released

25th Aug

No Significant Data Released

26th Aug

Nga

GDP (Q2)

(+1.9%)

(-3.6%)

(-8.0%)

SA

CPI (Jul.)

(09.00)

+0.5%(+2.2%)

+1.2%(+2.9%)

+0.9%(+2.8%)

27th Aug

Zam

CPI (Aug.)

(+15.8%)

(+15.7%)

28th Aug

SA

Budget (SAAR, Jul.)

(13.00)

-22.3bn

Also expected during this period:

24th – 31st

SA

Unemployment Rate (Q2)

30.1%

35.0%

Selected future data releases and events

31st Aug

Uga

CPI (Aug.)

(+4.7%)

Ken

CPI (Aug.)

+0.1%(+4.4%)

1st Sep

SA

Absa Manufacturing PMI (Aug.)

(10.00)

51.2

3rd Sep

Ken

Markit/Stanbic Bank PMI (Aug.)

(08.30)

SA

Electricity Production (Jul.)

(12.00)

(-5.8%)

6th Sep

Ken

GDP (Q2, q/q(y/y))

(+4.9%)

7th Sep

Mau

CPI (Aug.)

(1.5%)

8th Sep

SA

GDP (Q2, q/q(y/y))

(10.30)

-2.0%(-0.1%)

10th Sep

SA

Current Account (Q2, ZAR)

(10.00)

+70bn

SA

Mining Production (Jul)

(10.30)

-1.4%(-28.2%)

SA

Manufacturing Production (Jul.)

(12.00)

+16.8%

(-16.3%)

15th Sep

Nga

CPI (Aug.)

(+12.8%)

16th Sep

Gha

GDP (Aug.)

(+4.9%)

Gha

CPI (Aug.)

(+11.4%)

SA

Retail Sales (Jul.)

(19.00)

+6.4%(-7.5%)

17th Sep

SA

Interest Rate Announcement (Sep.)

3.50%

Also expected during this period:

4th Sep– 11th Sep

SA

SACCI Business Confidence (Aug.)

82.8

4th – 11th

Nga

Trade Balance (Q2, NGN)

-139.0bn

7th – 25th

Nga

Current Account (Q2, USD)

-4.9bn

9th – 16th

Tan

CPI (Aug)

(+3.3%)

10th – 17th

Nam

GDP (Q2, q/q(y/y))

(-0.8%)

10th – 17th

Bot

GDP (Q2, q/q(y/y))

(+2.6%)

11th – 18th

Uga

GDP (Q2, q/q(y/y))

(+1.8%)

11th – 18th

Bot

CPI (Aug.)

(+0.9%)

15th – 22nd

Nam

CPI (Aug.)

(+2.1%)

15th – 22nd

Ang

CPI (Aug.)

(+22.2%)

*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

-5.5

3.5

3.0

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-11.0

4.5

2.5

4.1

3.0

3.0

3.3

Ethiopia

0.17

9.7

9.0

2.5

8.0

9.0

15.7

19.0

14.0

10.0

Ghana

0.15

7.0

6.5

0.0

6.5

6.0

8.7

10.0

9.0

8.0

Angola

0.14

2.4

-0.3

-6.0

3.0

2.0

17.3

22.5

20.0

17.5

Kenya

0.14

5.6

5.6

0.5

5.5

6.5

5.2

5.0

5.0

5.0

Tanzania

0.14

6.5

5.6

1.5

6.0

6.0

3.4

4.0

5.0

4.5

Côte d’Ivoire

0.08

6.1

7.5

1.0

7.0

7.0

0.8

2.0

1.0

1.0

Uganda

0.07

5.3

6.7

1.0

6.0

5.5

2.9

4.5

5.5

6.0

Zambia

0.05

5.6

1.5

-4.5

3.5

4.0

9.1

15.0

11.5

10.0

Mozambique

0.03

3.7

2.2

1.0

5.0

4.0

2.8

3.5

4.0

4.0

Botswana

0.03

3.7

3.5

-6.5

4.0

3.5

2.8

2.0

2.5

3.0

Rwanda

0.02

7.2

9.4

-2.5

10.0

9.0

2.4

8.0

5.5

5.0

Mauritius

0.02

3.7

3.5

-10.0

6.0

4.5

0.4

2.5

3.0

3.5

Namibia

0.02

3.4

-1.4

-5.5

4.0

3.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

2.9

-4.8

4.7

4.1

8.4

9.5

8.8

8.1

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

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(21st Aug.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

12.50

Down 100bp (May ’20)

Down 50bp (Sep. ’20)

12.00

11.50

South Africa

Repo Rate

3.50

Down 25bp (Jul ’20)

Down 25bp (Sep ’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
(21st Aug.)

End

2020

End

2021

Stock Market

Latest

(21st Aug.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

25,222

25,500

30,000

NGN (Nafex)

386

450

450

South Africa

ZAR

17.1

16.0

16.5

JALSH

55,950

59,425

71,300

Angola

AOA

584

625

625

n/a

Kenya

KES

108

110

115

NSE 20

1,724

2,300

2,700

Ghana

GHS

5.7

6.0

6.1

GSECI

1,855

2,000

2,300

Uganda

UGX

3,667

3,900

4,000

UGSE

1,269

1,600

1,800

Sources: Bloomberg, Capital Economics


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