South Africa’s state guarantee snub, vaccine round-up - Capital Economics
Africa Economics

South Africa’s state guarantee snub, vaccine round-up

Africa Economics Weekly
Written by Virag Forizs

The South African government’s decision this week to provide no further debt guarantees to state-owned lender Land Bank underscores the mounting pressure on the public purse. And even with some positive news on the vaccine front this week, African policymakers still face the prospect of slow and limited vaccine roll-out that will hold back economic recoveries.

South Africa pulling the plug from SOEs?

The South African government’s decision this week to provide no further debt guarantees to state-owned lender Land Bank underscores the mounting pressure on the public purse.

Since defaulting on some of its debt last April, Land Bank has been tied up in debt restructuring talks that have centred on a two-part proposal including an extension of government guarantees and an additional equity injection by the state. The Treasury’s decision to walk back on the government guarantee signals that the authorities are increasingly reluctant to provide unconditional support to state-owned enterprises (SOEs) and instead prefer to boost equity stakes. Indeed, the equity injection part of the proposal to prop up Land Bank remains on the table.

South Africa’s strained public finances appear to be limiting policymakers’ room for manoeuvre, probably driving the shift away from measures that increase the government’s liabilities, such as state guarantees or outright bailouts, to support SOEs facing financial difficulties.

Such a policy transformation will have repercussions for other struggling SOEs, most notably the state-owned electricity firm Eskom. A plan to swap Eskom debt held by South Africa’s largest public pension fund, PIC, into equity has gathered support in recent months. That said, the government’s shift in tactics towards SOEs may be a sign that it is gearing up to focus on providing more support Eskom due to its systemic role in the economy.

Nonetheless, as we’ve argued before, resolving Eskom’s debt problem will be no cure for all of the firm’s challenges. Large investments are needed to overhaul its operations and boost electricity generating capacity. Little appetite from private investors, poor public finances, and strained relations between management and workers – the National Union of Mineworkers this week lamented Eskom’s management team – are likely to hold up revamp efforts. In the meantime, persistent power cuts – which have worsened in recent months – will continue to hamper South Africa’s economy.

Slow-walking into vaccine access

Even with some positive news on the vaccine front this week, African policymakers still face the prospect of slow and limited vaccine roll-out, that will weigh on economic recoveries.

The risk of failure at Covax, the multilateral scheme that is a key source of vaccines for most African economies, probably diminished this week after the US pledged its support under newly-inaugurated President Joe Biden – former President Trump had refused to join. And the World Health Organization, a co-leader of Covax, announced that regulatory approvals for COVID-19 vaccines (required under Covax rules) would be expedited. Reports suggest that Pfizer and BioNTech – whose jab has already been approved – have agreed to supply a limited amount of vaccines to the Covax scheme.

Still, the roll-out of vaccines in Sub-Saharan Africa is likely to remain slow. Vaccination campaigns are already underway in many emerging economies. And the first shipments under the Covax scheme, expected in February, will only cover a very small share of participating countries’ populations. In Nigeria, the figure is reportedly around 0.00025%. The bulk of vaccines will probably not arrive before mid-2021. Reaching herd immunity may take many years in Sub-Saharan Africa. The result is that economic recoveries will lag behind other EMs – see our forthcoming Outlook.

The week ahead

In a raft of interest rate decisions next week, we think that elevated inflation will prevent policymakers in Nigeria (see Data Preview), Kenya and Angola from delivering further monetary easing.

Data Preview

Nigeria Interest Rate Announcement Tue. 26th Jan.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Policy Rate (%)

11.50

11.50

11.50

Waiting for inflation to peak

In the face of elevated inflation, policymakers in Nigeria will probably keep their benchmark rate on hold at 11.50% on Tuesday.

The headline inflation rate has risen for seventeen consecutive months, jumping to a three-year high of 15.7% y/y in December. Inflation pressures have grown across all major price categories, but soaring food inflation seems to be the primary driver of the continued increase in the headline rate.

Since the last MPC meeting in November, economic conditions have deteriorated due to a sharp rise in COVID-19 cases that probably weighed on activity. Policymakers expressed concern about the weak recovery late last year, but high inflation has stayed their hand.

We think that policymakers’ dual concerns about a weak recovery and high inflation will play out similarly next week. The Central Bank of Nigeria (CBN) is likely to square the circle by keeping the policy rate unchanged at 11.50%. (See Chart 1.)

But once inflation drops back, probably in a few months, the CBN will be keen to provide more support to the economy. We expect 150bp of cuts in the second half of 2021, taking the policy rate to 10.00% by the end of the year.

Chart 1: Nigeria Consumer Prices & Key Policy Rate

Sources: Refinitiv, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

26th Jan

Nga

Interest Rate Announcement

11.5%

11.5%

11.50%

27th Jan

Moz

Interest Rate Announcement

13.25%

13.25%

Ken

Interest Rate Announcement

7.00%

7.00%

7.00%

28th Jan

Ang

Interest Rate Announcement

15.50%

15.50%

Zam

CPI (Jan.)

(+19.2%)

(+19.4%)

29th Jan

Uga

CPI (Jan.)

(+3.6%)

(+3.6%)

Ken

CPI (Jan.)

+1.1%(+5.6%)

+0.8%(+6.0%)

SA

Trade Balance (Dec., SAAR)

(12.00)

+36.7bn

+30.0bn

SA

Budget (Dec., SAAR)

(12.00)

-21.4bn

+3.9bn

Also expected during this period:

19th – 25th

Ken

GDP (Q3, q/q(y/y)

(-5.7%)

(-1.1%)

(-0.7%)

Selected future data releases and events

1st Feb

Gha

Interest Rate Announcement

14.5%

SA

Absa Manufacturing PMI (Jan.)

(09.00)

50.3

3rd Feb

Ken

Markit/Stanbic Bank PMI (Jan.)

(07.30)

51.4

4th Feb

SA

Electricity Production (Dec.)

(11.00)

(-2.4%)

5th Feb

Mau

CPI (Jan.)

(+2.7%)

8th Feb

Tan

CPI (Jan.)

(+3.2%)

10th Feb

Gha

CPI (Jan.)

(+10.4%)

11th Feb

SA

Mining Production (Dec.)

(09.30)

SA

Manufacturing Production (Dec.)

(11.00)

-1.3%(-3.5%)

15th Feb

Nam

CPI (Jan.)

(+2.4%)

Bot

CPI (Jan.)

(+2.2%)

16th Feb

Zam

Interest Rate Announcement

8.0%

17th Feb

Nam

Interest Rate Announcement

3.75%

SA

CPI (Jan.)

(08.00)

+0.2%(+3.1%)

SA

Retail Sales (Dec.)

(11.00)

Also expected during this period:

1st – 12th

Mau

Interest Rate Announcement

1.85%

4th – 11th

SA

SACCI Business Confidence (Jan.)

8th – 15th

SA

Unemployment Rate (Q4)

30.8%

11th – 18th

Nga

CPI (Jan.)

14th – 21st

Uga

Interest Rate Announcement

7.0%

14th – 25th

Ang

CPI (Jan.)

(+25.2%)

*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

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

20.5

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

5.0

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

9.6

9.2

8.2

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

(22nd Jan.)

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
(22nd Jan.)

End

2021

End

2022

Stock Market

Latest

(22nd Jan.)

End
2021

End

2022

Nigeria

NGN (Official)

381

400

400

NGSE

41,002

43,000

48,000

NGN (Nafex)

394

425

425

South Africa

ZAR

15.1

14.5

15.0

JALSH

63,988

73,750

89,225

Angola

AOA

647

700

750

Kenya

KES

110

115

120

NSE 20

1,887

2,250

2,600

Ghana

GHS

5.82

5.90

6.00

GSECI

2,002

2,300

2,600

Uganda

UGX

3,685

3,850

3,850

UGSE

1,308

1,650

1,900

Sources: Refinitiv, Capital Economics


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