South Africa’s budget brawl, no growth momentum in Nigeria - Capital Economics
Africa Economics

South Africa’s budget brawl, no growth momentum in Nigeria

Africa Economics Weekly
Written by Virag Forizs

South Africa’s budget speech this week struck a more realistic tone about the country’s dire economic situation, but we still think that there are a number of optimistic assumptions underpinning the fiscal projections. In Nigeria, the fallout from the coronavirus is another headwind to an already weak economy.

South Africa’s budget: an uphill fight

Finance Minister Tito Mboweni’s budget speech this week acknowledged the scale of the economic challenges facing South Africa, but we think that the minister’s outlook is still too rosy.

The government’s increased budget deficit target of 6.8% of GDP for fiscal year 2020/21 seems to rest on more realistic assumptions of stagnating revenue collection and ballooning support to state-owned enterprises in a context of weak economic growth.

But we still see three problematic areas. First, while the government dropped its 2020 GDP growth forecast from 1.2% to 0.9%, that is still stronger than the 0.5% that we expect. We think that Q4 growth figures, due out on Tuesday, will underscore the economy’s weakness. Our GDP Tracker suggests that output contracted by 0.1% q/q saar in the final quarter of 2019, dragging the economy into a technical recession. (See Chart 1.)

Chart 1: South Africa CE GDP Tracker

Sources: Stats SA, Capital Economics

Second, the notion that bailouts to state-owned firms will peak in the 2020/21 fiscal year seems optimistic given growing problems at Eskom.

And third, the difficulty of striking a deal with political stakeholders to reduce the public sector wage bill appears to be discounted. The largest labour union already flagged the budget speech as “provocative” and “reckless”, warning that its members will take to the streets if the government reneges on an upcoming wage increase due on 1st April. A lengthy political fight would make it more difficult to deliver the planned cuts to non-interest spending.

We don’t think that South Africa’s fiscal problems will spiral into an imminent debt crisis. Most of the country’s public debt is made up of long-term securities that are denominated in local currency and held by domestic investors. Even so, the public debt trajectory is still worrying. Drawing on Brazil’s recent experience, South Africa could face tighter financial conditions as debt concerns push up the country’s risk premium and bond yields.

Ultimately, the budget speech increased the chances that Moody’s will strip South Africa of its last investment grade rating on local currency debt in March. Even if the country does manage to dodge a downgrade, we think that the direction of travel is clear. But we doubt that the economic effects would be long-lasting because a downgrade is already priced into government bonds.

Nigeria: weak economy faces rising headwinds

Nigeria’s economy ended 2019 with weak underlying momentum. Figures released earlier this week showed that the pick-up in GDP growth in Q4 was not due to a broad-based improvement in economic conditions, but instead a surge in growth in the financial sector. And headwinds have grown more recently. The coronavirus has pushed down the price of oil, a key export. And the confirmation of a case in Nigeria raises the risk of further economic disruption as strains in a fragile health system mount.

The week ahead

South Africa’s Q4 GDP figures will be the main data release next week. And manufacturing PMI data will provide some insight into how the sector fared in February.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

2nd Mar

SA

Absa Manufacturing PMI (Feb)

(09.00)

45.2

3rd Mar

SA

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

(09.30)

-0.6%(-0.1%)

-0.2%(-02%)

-0.4%(-0.1%)

4th Mar

Ken

Markit/Stanbic Bank PMI (Feb)

(07.30)

49.7

5th Mar

SA

SAACI Business Confidence (Feb)

(09.30)

92.2

SA

Electricity Production (Jan)

(11.00)

(-4.0%)

6th Mar

Mau

CPI (Feb)

(+2.0%)

(+2.5%)

Also expected during this period:

2nd – 13th

Mau

Interest Rate Announcement

3.35%

Selected future data releases and events

11th Mar

SA

Manufacturing Production (Jan)

(11.00)

-2.8%(-5.9%)

Nga

Oil Production (Feb, bpd mn)

1.8

Ang

Oil Production (Feb, bpd mn)

1.4

12th Mar

SA

Mining Production (Jan)

(09.30)

-2.4%(+1.8%)

SA

Manufacturing Production (Jan)

(11.00)

(-5.9%)

16th Mar

Nga

CPI (Feb)

(+12.1%)

18th Mar

Gha

CPI (Feb)

(+7.8%)

SA

CPI (Feb)

(08.00)

+0.3%(+4.5%)

SA

Retail Sales (Jan)

(11.00)

-3.1%(-0.4%)

19th Mar

SA

Interest Rate Announcement

6.25%

24th Mar

SA

Labour Market – Quarterly Employment Statistics (Q4)

-0.3%(+0.8%)

Nga

Interest Rate Announcement

13.50%

26th Mar

Zam

CPI (Mar)

SA

Current Account (Q4, ZAR)

(08.00)

-190.0bn

27th Mar

SA

South Africa Rated by Moody’s

Also expected during this period:

10th – 17th

Bot

GDP (Q4)

(+3.1%)

12th – 19th

Nga

Trade Balance (Q4, NGN)

+1,389.3bn

12th – 19th

Bot

CPI (Feb)

(+2.2%)

15th – 22nd

Ang

CPI (Feb)

16th – 27th

Ang

Interest Rate Announcement

15.50%

16th – 30th

Uga

GDP (Q4)

(+2.7%)

19th – 26th

Ken

Interest Rate Announcement

8.25%

*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

2008-17

Ave.

GDP

Consumer Prices

2018

2019

2020

2021

2018

2019

2020

2021

Nigeria

0.86

4.4

1.9

2.0

2.2

2.5

12.2

11.4

12.0

11.5

South Africa

0.57

1.5

0.8

0.3

0.5

1.0

4.6

4.1

4.6

4.7

Angola

0.14

2.4

-1.2

-0.5

-1.5

1.0

20.3

17.3

24.0

18.0

Kenya

0.14

5.6

6.3

5.5

6.0

6.0

4.7

5.2

5.5

5.5

Ethiopia

0.17

9.7

7.7

7.5

8.5

8.0

13.8

15.7

15.5

11.5

Ghana

0.15

7.0

6.5

6.0

7.0

6.0

9.8

8.7

8.0

8.0

Côte d’Ivoire

0.08

6.1

7.4

7.0

7.5

7.0

0.4

0.5

1.5

1.5

Tanzania

0.14

6.5

5.4

5.5

5.8

5.5

3.5

3.4

4.0

6.0

Mozambique

0.03

3.7

3.3

2.5

5.0

4.0

3.9

2.8

4.0

4.0

Uganda

0.07

5.3

5.8

5.5

5.5

5.0

2.6

2.9

5.5

6.5

Rwanda

0.02

7.2

8.6

10.0

9.0

8.0

1.4

2.4

6.0

4.0

Botswana

0.03

3.7

4.5

3.5

4.0

3.5

3.2

2.8

4.0

4.0

Zambia

0.05

5.6

3.7

2.0

3.0

3.5

7.5

9.1

8.5

8.0

Mauritius

0.02

3.7

3.8

3.5

4.0

4.0

3.2

0.4

2.0

3.0

Namibia

0.02

3.4

-0.1

-1.0

2.0

2.0

4.3

3.7

4.5

6.0

Sub-Saharan Africa

2.5

4.2

2.9

2.7

3.1

3.4

8.8

8.4

9.2

8.6

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2018, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(28th Feb.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

13.50

Down 50bp (Mar ’19)

Down 50bp (Q4 ’20)

13.00

12.50

South Africa

Repo Rate

6.25

Down 25bp (Jan ’20)

Down 25bp (Q2 ’20)

6.00

6.00

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Up 100bp (Q1 ’20)

20.00

17.00

Kenya

Central Bank Rate

8.25

Down 25bp (Jan ’20)

Down 25bp (Q2 ’20)

8.00

7.50

Ghana

Policy Rate

16.00

Down 100bp (Jan ‘19)

Down 50bp (Q3 ’21)

16.00

15.50

Uganda

Central Bank Rate

9.00

Down 100bp (Oct ’19)

Down 100bp (Q1 ’20)

9.00

10.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(28th Feb.)

End

2020

End

2021

Stock Market

Latest

(28th Feb.)

End

2020

End
2021

Nigeria

NGN (Official)

306

307

307

NGSE

26,216

32,000

34,000

NGN (Nafex)

365

365

365

South Africa

ZAR

15.6

16.25

16.50

JALSH

51,235

56,850

62,525

Angola

AOA

488

475

475

n/a

Kenya

KES

101

100

100

NSE 20

2,337

3,000

3,000

Ghana

GHS

5.35

6.50

6.50

GSECI

2,176

2,500

2,700

Uganda

UGX

3,705

4,300

4,500

UGSE

1,713

1,900

2,100

Sources: Bloomberg, Capital Economics


Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, virag.forizs@capitaleconomics.com