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
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. | ||||||||||
Policy Rate | Latest (19th Feb.) | Last Change | Next Change | Forecasts | ||
End | 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 | End 2021 | End 2022 | Stock Market | Latest (19th Feb.) | End | 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