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SA rand, third wave risks, power problems

The South African rand has been a star performer amongst major EM currencies so far this year, but we think that it will suffer one of the biggest losses against the US dollar by year-end. Meanwhile, South Africa is suffering from a renewed rise in COVID-19 cases and another slow response from policymakers would risk renewed strains on the health system and the need for tighter restrictions, keeping activity depressed. Adding to the downside risks facing the economy, plans to secure emergency power are at risk of being derailed. Poor rains mean that power problems are also afflicting Côte d’Ivoire and Ghana and disrupting the processing of key cocoa exports.
Jason Tuvey Senior Emerging Markets Economist
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Africa Economics Weekly

Markets and monetary policy, mounting pressure on naira

Recent investor risk-off sentiment has pushed up sovereign dollar bond yields across Sub-Saharan Africa, fuelling debt risks further, and has put currencies under pressure. Central banks appear to be taking note, with some policymakers turning tightening cycles up a notch. In Nigeria, the recent weakness of the currency on the black market was attributed to election-related spending, but the bigger issue is that downward pressure on the naira stems from the central bank’s unorthodox FX policies.

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Policymakers in South Africa upped the pace of tightening today, raising the repo rate by 50bp to 4.75%, as concerns about inflation (and inflation expectations in particular) have grown. We don’t think that the hawks will have their way for long though as the tightening cycle is likely to revert to a more gradual pace from the second half of this year.

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Africa Data Response

South Africa Activity Data (Mar.)

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Emerging Europe Economics Update

Turkey’s inflation risks mount, CBRT to delay rate cuts

Turkish inflation hit a two-year high in June and recent domestic energy price hikes will cause it to rise even further over the next couple of months. High inflation and signs of a quick recovery from May’s lockdown mean that the central bank will probably delay the start of its easing cycle until later this year. We now expect the one-week repo rate to be lowered to 17.00% by end-2021 (previously 14.00%).

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Emerging Europe Data Response

Turkey Consumer Prices (Jun.)

The fresh rise in Turkey’s headline inflation rate to 17.5% y/y in June, coupled with signs of a strong rebound in activity after May’s three-week lockdown, means that an interest rate cut in the next couple of months is increasingly unlikely. An easing cycle is now more likely to commence later this year when inflation looks set to fall sharply.

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Emerging Europe Economics Weekly

Turkey dollarisation, Ukraine-IMF, Russia & Poland rates

Turkey’s central bank took steps this week to tackle deposit dollarisation in the banking sector, although these efforts will fail to make headway in the absence of a stronger commitment to rein in high inflation. Meanwhile, Ukraine’s government still has work to do to secure the next tranche of its IMF loan, but the economy can muddle through without help from the Fund for some time. Finally, other developments this week suggest that Poland’s central bank may stick to its recent dovish rhetoric while Russia looks like it could accelerate the pace of monetary tightening.

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