Setting the scene for SA’s budget, Zambia’s rate hike - Capital Economics
Africa Economics

Setting the scene for SA’s budget, Zambia’s rate hike

Africa Economics Weekly
Written by Virag Forizs
South Africa’s budget speech next Wednesday will be closely watched for any changes in the government’s fiscal consolidation plans – any signs that officials are wavering on austerity could trigger a backlash in the bond market. Meanwhile, we doubt that Zambia’s rate hike this week will be followed by a wave of monetary tightening across Sub-Saharan Africa.

SA budget the first test of austerity commitment

All eyes will be on Finance Minister Tito Mboweni when he delivers South Africa’s budget speech next Wednesday for any changes in the government’s fiscal consolidation plans. The poor public finances leave little room to ease off on austerity without triggering a backlash in the bond market.

In October’s medium-term budget policy statement, the authorities outlined a fiscal consolidation plan which largely relies on a contentious public sector wage freeze. Tax hikes amount to just ZAR25bn in the same period. Under the plan, the primary budget balance (i.e. excluding interest) is expected to turn positive by 2025/26, when debt is projected to peak at 95% of GDP.

A key question is whether the South African authorities will stick to these plans or start to veer off the austerity path. Much depends on public sector wage negotiations. In a connected case, a lower court ruled in the government’s favour. But the constitutional court may deliver a different verdict. And powerful trade unions have scheduled strikes, which could compel the authorities to shift tack.

At the same time, pressure on the public purse to support struggling state-owned enterprises, including Eskom and South African Airways, persists. The latest budget blueprint allocated ZAR75bn to Eskom over the next three years. While the IMF recently urged South Africa to avoid “ill-targeted subsidies and transfers to inefficient state-owned enterprises”, the latest government actions have sent mixed signals.

The nation’s vaccination campaign, which the Treasury estimated to cost around ZAR25bn, will further increase the government’s financing needs. A setback in the vaccine roll-out could hold back South Africa’s economic recovery and, in turn, any improvement in the public finances.

Top government officials, including President Cyril Ramaphosa and Finance Minister Tito Mboweni, appear to be committed to the current austerity plans and have warned about spiralling debt in their absence. Public debt probably reached around 80% of GDP last year and is on an unsustainable trajectory, with debt servicing costs making up 12% of total spending. Policymakers have little choice but to pursue fiscal consolidation.

Any sign of the government backsliding on its consolidation plans would probably trigger a sell-off in South African bonds and may result in further credit rating downgrades. Fitch and Moody’s hold a negative outlook on South African sovereign ratings. Worsening public debt dynamics may spark a move towards more interventionist financial repression policies to prevent borrowing costs from surging.

Zambian rate hike an outlier

The 50bp hike this week that took Zambia’s policy rate to 8.50% is unlikely to be followed by a wave of tightening elsewhere in Sub-Saharan Africa.

Surging inflation and a sliding currency probably prompted Zambian policymakers to intervene even though the move might harm the economic recovery. Ongoing negotiations with the IMF may have played a role too, with policymakers keen to signal that they are willing to make tough decisions.

Inflation is elevated elsewhere in the region too, and will rise temporarily in Q2 as last year’s oil price collapse creates unfavourable base effects. Some African central banks may be tempted to react by hiking rates, but we think that policymakers in the region’s largest economies will stay put. The South African Reserve Bank appears to have hunkered down for a long period of low rates. And in Nigeria, policymakers seem to be in no mood to tighten.

The week ahead

Data will probably show that Kenyan inflation eased from 5.7% y/y in January to 4.5% y/y in February.

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

23rd Feb

SA

Unemployment Rate (Q4)

(09.30)

30.8%

32.0%

25th Feb

Zam

CPI (Feb.)

(+21.5%)

(+22.2%)

26th Feb

Uga

CPI (Feb.)

(+3.7%)

(+3.9%)

Ken

CPI (Feb.)

+0.6%(+5.7%)

+1.2%(+5.7%)

+0.9%(+4.5%)

SA

Trade Balance (Jan., SAAR)

(12.00)

+32.0bn

SA

Budget (Jan., SAAR)

(12.00)

+5.1bn

Selected future data releases and events

1st March

SA

Absa Manufacturing PMI (Feb.)

(09.00)

50.9

3rd March

Ken

Markit/Stanbic Bank PMI (Feb.)

(07.30)

53.2

4th March

SA

Electricity Production (Jan.)

(11.00)

(+1.1%)

5th March

Mau

CPI (Feb.)

(+1.0%)

Nga

Trade Balance (Q4, NGN)

-2,389bn

8th March

Tan

CPI (Feb.)

(+3.5%)

9th March

SA

GDP (Q4, q/q saar (y/y))

+66.1%(-6.0%)

10th March

Gha

CPI (Feb.)

(+9.9%)

11th March

SA

Current Account (Q4, ZAR)

(09.00)

+297bn

SA

Mining Production (Jan.)

(09.30)

+0.5%(+0.1%)

15th March

Nam

CPI (Feb.)

Bot

CPI (Feb.)

(+2.3%)

16th March

Nga

CPI (Feb.)

(+16.5%)

17th March

Moz

Interest Rate Announcement

16.25%

Also expected during this period: March

7th – 14th

SA

SACCI Business Confidence (Feb.)

94.5

9th – 20th

Ken

GDP (Q4, q/q(y/y))

(-1.1%)

10th – 17th

Nam

GDP (Q4, q/q(y/y))

(-10.5%)

11th – 18th

SA

Manufacturing Production (Jan.)

-0.1%(+1.8%)

11th – 18th

SA

Retail Sales (Jan.)

14th – 21st

Uga

GDP (Q4, q/q(y/y))

(-2.2%)

15th – 26th

Mau

Interest Rate Announcement

1.85%

15th – 29th

Nga

Current Account (Q4, USD)

-3.3bn

16th – 27th

Ang

CPI (Feb.)

(+25.3%)

*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

2020e

2021f

2022f

2019

2020e

2021f

2022f

Nigeria

0.80

4.4

2.2

-2.0

3.5

3.0

11.4

13.2

15.0

13.0

South Africa

0.57

1.5

0.2

-7.3

4.3

4.0

4.1

3.3

3.8

3.3

Ethiopia2

0.20

9.7

9.0

6.1

3.0

9.0

15.7

20.4

14.5

12.5

Kenya

0.18

5.6

5.4

-0.5

6.0

6.5

5.2

5.3

5.5

5.0

Angola

0.17

2.4

-0.9

-5.0

3.5

2.5

17.1

22.2

21.0

16.0

Ghana

0.13

7.0

6.5

0.5

5.5

6.5

8.7

10.0

9.0

8.5

Tanzania

0.12

6.5

5.8

1.5

6.5

6.5

3.4

3.3

3.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.5

7.5

0.8

2.5

0.5

1.0

Uganda

0.08

5.3

6.7

-1.5

7.0

6.0

2.9

3.8

4.0

5.5

Zambia

0.05

5.6

1.4

-2.5

3.0

4.0

9.1

15.7

16.5

10.0

Botswana

0.03

3.7

3.0

-10.5

8.5

5.5

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

-3.5

11.5

11.0

2.4

7.8

3.0

4.5

Mauritius

0.02

3.7

3.0

-15.0

12.5

6.5

0.4

2.5

3.0

3.0

Namibia

0.02

3.4

-1.0

-7.5

6.0

5.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.1

-2.4

4.6

4.8

8.3

9.7

9.8

8.5

Sources: Refinitiv, National Sources, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates); 2) Fiscal Years.

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(19th Feb.)

Last Change

Next Change

Forecasts

End
2021

End

2022

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Q2 ’21)

10.00

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 100bp (Q4 ’21)

14.50

13.00

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)

13.50

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
(19th Feb.)

End

2021

End

2022

Stock Market

Latest

(19th Feb.)

End
2021

End

2022

Nigeria

NGN (Official)

381

400

400

NGSE

40,187

49,000

55,000

NGN (Nafex)

408

425

425

South Africa

ZAR

14.6

14.5

15.0

JALSH

67,465

75,650

91,550

Angola

AOA

647

700

750

Kenya

KES

110

115

120

NSE 20

1,888

2,250

2,650

Ghana

GHS

5.75

5.90

6.00

GSECI

2,177

2,400

2,800

Uganda

UGX

3,665

3,850

3,950

UGSE

1,389

1,500

1,700

Sources: Refinitiv, Capital Economics


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