US aid to Ethiopia on ice, debt relief state of play - Capital Economics
Africa Economics

US aid to Ethiopia on ice, debt relief state of play

Africa Economics Weekly
Written by Virag Forizs
The US’s move to suspend some aid to Ethiopia amid tensions over the Grand Ethiopian Renaissance Dam risks further actions that would limit Ethiopia’s fiscal space. Meanwhile, momentum to expand a global debt relief initiative appears to be waning. Finally, in South Africa, survey figures released this week point to an uneven and slow economic recovery.

Ethiopia nudged to progress on Nile dam talks

The United States move to partially suspend financial aid to Ethiopia due to the country’s dispute with Sudan and Egypt over the Grand Ethiopian Renaissance Dam (GERD) this week adds to uncertainty surrounding Ethiopia’s outlook.

Reports suggest that up to $130mn in US financial assistance (equal to 15% of total American aid to the country) will be cut, which would be painful for Ethiopia’s relatively aid-dependent economy. Official development assistance received in 2018 was equivalent to 54% of government spending. But relative to other measures aimed at boosting fiscal space, the suspended amount is somewhat smaller. The country received over $400mn in emergency financing from the IMF in April, and could save more than $500mn this year as a participant in the G20’s debt service suspension initiative.

It is unclear how this will affect strained talks between Ethiopia, Egypt and Sudan. A US-led dialogue broke down after Ethiopia walked away, but the parties are continuing to negotiate via the African Union. Uncertainty will probably remain high. What’s more, the US action could set a precedent for Ethiopia’s other bilateral partners to also withhold aid, which would increase the pressure on government finances. The United States may also ratchet up the stakes by using its leverage in multilateral institutions, posing a risk to Ethiopia’s $2.9bn IMF programme for instance.

Taking stock of debt relief efforts

In flurry of news related to debt relief efforts this week, it’s worth highlighting a few key points.

In its current form, the debt service suspension initiative (DSSI) by the G20 / Paris Club will probably reach around half of the nearly 80 eligible countries, and not much more. Comments by the chair of the Pairs Club suggest that the approval of Angola’s request to participate in deal by Paris Club members appears to be one of the last applications processed by the group of official creditors. As of July, approximately $5.3bn in debt service payments have been postponed at the G20 level, which is well below the initially floated figure of $20bn.

While we think that the extension of the DSSI programme is possible, a more comprehensive deal including private sector creditors seems increasingly unlikely. Private sector creditors appear in no rush to participate in the G20 deal – despite pressure from multilateral institutions.

Finally, clarity on China’s stance on debt relief remains elusive. Beijing has confirmed that it struck deals with ten (unnamed) low-income countries under the DSSI. But as China is not part of the Paris Club, Angola will have to continue servicing debt owed to China, its largest creditor.

PMIs in South Africa: Mixed messages?

Survey data released in South Africa sent mixed messages about the country’s economic recovery in August. The jump in the manufacturing PMI, from 51.2 in July to a 13-year high of 57.3 in August, probably reflects a boost from the lifting of remaining restrictions on the sector as the authorities relaxed the country’s lockdown in mid-August. By contrast, the whole-economy PMI remained well below pre-crisis levels (at 45.3). Car sales figures for August, and high-frequency data on visits to retail and recreation outlets chime in with a more subdued recovery that the whole-economy PMI points to. The pace of rebound in economic activity has probably diverged considerably between the manufacturing sector and services sectors like retail.

The week ahead

South African Q2 GDP figures are likely to show that output dropped by 22.0% q/q, and by 63% on an annualised basis. (See Data Preview.) And hard activity data from July will probably show that the recovery stalled at the beginning of Q3.


Data Preview

South Africa GDP (Q2) Tue. 8th Sep.

Forecasts

Time (BST)

Previous

Consensus

Capital Economics

GDP (% q/q saar)

10.30

-2.0

-45.0

-63.0

Colossal hit to GDP from stringent lockdown

We think that figures released on Tuesday will confirm that South Africa suffered one of the largest falls in output in Q2 anywhere in the world.

The country entered the coronavirus crisis on a very weak footing, GDP shrunk every quarter since Q3 last year when measured on a seasonally-adjusted, quarter-on-quarter rate. In Q1, the economy contracted by 2.0% q/q saar and key sectors already showed worrying signs of weakness.

South Africa imposed particularly stringent lockdown measures at the end of March, causing activity to tumble over the second quarter. Output in the key retail, mining and manufacturing sector dropped by 20-30% 3m/3m. And output in services sectors like transport and construction probably fell much more sharply.

All in all, we hold a below-consensus view that South Africa’s economy contracted by 22.0% q/q (see Chart 1) and 63.0% q/q on an annualised basis.

After imposing tighter rules to curb sharply rising coronavirus cases in July, the authorities eased containment measures more recently, which should give a lift to the economy. But even so, we think that the recovery will be very weak.

Chart 1: South Africa GDP (SA, % q/q)

Sources: Stats SA, Refinitiv, Capital Economics


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

7th Sep

Mau

CPI (Aug.)

(+1.5%)

+0.2%(+1.7%)

8th Sep

Tan

CPI (Aug)

(+3.3%)

+0.0%(+3.9%)

 

SA

GDP (Q2, q/q saar)

(10.30)

-2.0%

-45.0%

-63.0%

9th Sep

  

No Significant Data Released

10th Sep

SA

Current Account (Q2, ZAR)

(10.00)

+70bn

-39.0bn

 

SA

Mining Production (Jul)

(10.30)

-1.4%(-28.2%)

 

SA

Manufacturing Production (Jul.)

(12.00)

+16.8%

(-16.3%)

+5.0%

(-14.9%)

11th Sep

  

No Significant Data Released

Also expected during this period:

4th – 11th

SA

SACCI Business Confidence (Aug.)

82.8

4th – 11th

Nga

Trade Balance (Q2, NGN)

-139.0bn

7th – 25th

Nga

Current Account (Q2, USD)

-4.9bn

10th – 17th

Nam

GDP (Q2, q/q(y/y))

(-0.8%)

10th – 17th

Bot

GDP (Q2, q/q(y/y))

(+2.6%)

11th – 18th

Uga

GDP (Q2, q/q(y/y))

(+1.8%)

11th – 18th

Bot

CPI (Aug.)

(+0.9%)

Selected future data releases and events

15th Sep

Nga

CPI (Aug.)

(+12.8%)

16th Sep

Gha

GDP (Aug.)

(+4.9%)

 

Gha

CPI (Aug.)

(+11.4%)

 

SA

Retail Sales (Jul.)

(19.00)

+6.4%(-7.5%)

17th Sep

SA

Interest Rate Announcement (Sep.)

3.50%

22nd Sep

Nga

Interest Rate Announcement (Sep.)

12.50%

23rd Sep

Mau

Interest Rate Announcement (Sep.)

1.85%

 

SA

CPI (Aug.)

(09.00)

24th Sep

Zam

CPI (Sep.)

28th Sep

Ang

Interest Rate Announcement (Sep.)

15.50%

 

Gha

Interest Rate Announcement (Sep.)

14.50%

29th Sep

Ken

Interest Rate Announcement (Sep.)

7.00%

30th Sep

SA

CPI (Aug.)

(09.00)

+1.3%(+3.2%)

 

SA

Trade Balance (Aug., SAAR)

(13.00)

+37.4b

 

SA

Budget (Aug., SAAR)

(13.00)

-134.5b

 

Uga

CPI (Sep.)

(+4.6%)

 

Ken

CPI (Sep.)

+0.2%(+4.4%)

 

Ken

GDP (Q2)

(+4.9%)

1st Oct

SA

Absa Manufacturing PMI (Sep.)

(10.00)

57.3

 

SA

Electricity Production (Aug.)

(12.00)

*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

2020f

2021f

2022f

2019

2020f

2021f

2022f

Nigeria

0.86

4.4

2.2

-5.5

3.5

3.0

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-11.0

4.5

2.5

4.1

3.0

3.0

3.3

Ethiopia

0.17

9.7

9.0

2.5

8.0

9.0

15.7

19.0

14.0

10.0

Ghana

0.15

7.0

6.5

0.0

6.5

6.0

8.7

10.0

9.0

8.0

Angola

0.14

2.4

-0.3

-6.0

3.0

2.0

17.3

22.5

20.0

17.5

Kenya

0.14

5.6

5.6

0.5

5.5

6.5

5.2

5.0

5.0

5.0

Tanzania

0.14

6.5

5.6

1.5

6.0

6.0

3.4

4.0

5.0

4.5

Côte d’Ivoire

0.08

6.1

7.5

1.0

7.0

7.0

0.8

2.0

1.0

1.0

Uganda

0.07

5.3

6.7

1.0

6.0

5.5

2.9

4.5

5.5

6.0

Zambia

0.05

5.6

1.5

-4.5

3.5

4.0

9.1

15.0

11.5

10.0

Mozambique

0.03

3.7

2.2

1.0

5.0

4.0

2.8

3.5

4.0

4.0

Botswana

0.03

3.7

3.5

-6.5

4.0

3.5

2.8

2.0

2.5

3.0

Rwanda

0.02

7.2

9.4

-2.5

10.0

9.0

2.4

8.0

5.5

5.0

Mauritius

0.02

3.7

3.5

-10.0

6.0

4.5

0.4

2.5

3.0

3.5

Namibia

0.02

3.4

-1.4

-5.5

4.0

3.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

2.9

-4.8

4.7

4.1

8.4

9.5

8.8

8.1

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

Table 2: Central Bank Policy Rates

 

Policy Rate

Latest

(4th Sep.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

12.50

Down 100bp (May ’20)

Down 50bp (Nov. ’20)

12.00

11.50

South Africa

Repo Rate

3.50

Down 25bp (Jul ’20)

Down 25bp (Sep ’20)

3.00

3.00

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Down 75bp (Q3 ’21)

15.50

14.00

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)

14.50

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
(4th Sep.)

End

2020

End

2021

Stock Market

Latest

(4th Sep.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

25,606

25,500

30,000

NGN (Nafex)

386

450

450

 

South Africa

ZAR

16.6

16.0

16.5

JALSH

53,879

59,425

71,300

Angola

AOA

614

625

625

n/a

 

Kenya

KES

108

110

115

NSE 20

1,855

2,300

2,700

Ghana

GHS

5.8

6.0

6.1

GSECI

1,838

2,000

2,300

Uganda

UGX

3,682

3,900

4,000

UGSE

1,377

1,600

1,800

Sources: Refinitiv, Capital Economics


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