“Vaccine boost” to take time, let’s talk about debt - Capital Economics
Africa Economics

“Vaccine boost” to take time, let’s talk about debt

Africa Economics Weekly
Written by Virag Forizs
A string of good news from COVID-19 vaccine producers may be followed by further positive updates in the coming weeks, but it is likely to take longer for the “vaccine boost” to reach much of Sub-Saharan Africa compared to other parts of the world. Meanwhile, debt problems continue to bubble across the region – South Africa is setting the ground for a turn to harsh austerity, which will weigh on growth. At the other end of the spectrum, Zambia has entered a messy default.

Crawling out of the pandemic era

A string of good news from COVID-19 vaccine producers may be followed by further positive updates in the coming weeks, but it is likely to take longer for the “vaccine boost” to reach much of Sub-Saharan Africa compared to other parts of the world.

The probable delay stems from the dual challenge of accessing and distributing vaccines. In the absence of bilateral deals with vaccine manufacturers, most African countries will have to rely on the multilateral COVAX facility with a slower expected roll-out of vaccinations. Even after securing doses – for up to 15% of COVAX participating countries’ populations by end-2021 – difficulties with distribution may push back the point at which widespread vaccination could enable the return to “normality”. (For a closer look at vaccine distribution in EMs, see here.)

That said, with restrictions on activity in advanced economies likely to be removed by Q2 2021 (see here), indirect benefits to Sub-Saharan Africa could filter through more quickly. A rebound in demand for exports, including commodities, and the potential return of tourists would provide a lift to recoveries.

Ramaphosa prepares the nation for austerity

South Africa’s President Cyril Ramaphosa asserted this week that the Rainbow Nation can avoid a sovereign debt crisis as he tries to keep ratings agencies onside but also prepares the populace for a tough period of fiscal austerity.

Mr. Ramaphosa said that he wanted to “draw a line in the debt sand”, warning that the nation has too much debt and was spending too much on debt servicing costs. Finance Minister Tito Mboweni has, of course, recently outlined harsh austerity plans that rest heavily on a three-year public sector wage freeze. Austerity will hold back the economic recovery over the coming quarters and prompt the Reserve Bank to keep monetary conditions loose for longer than is priced into markets.

But we maintain our view that the government is unlikely to stick with austerity for long. We noted last week that the president’s priorities seem to be shifting towards supporting the economy. And in light of the recent threat by the country’s largest trade union to pull its support for the ANC, Mr. Ramaphosa seems to have set the bar low for the talks – he said that he was encouraged none of the parties involved in the wage negotiations had walked away!

If austerity does get watered down, public debt – which is set to breach 80% of GDP this year – will continue to rise and policymakers will be forced into more drastic steps (e.g. financial repression) to keep the public finances on a sustainable footing.

Tough talk: debt negotiations in Africa

Zambia’s default on debt owed to private creditors last Friday was followed by finger-pointing from all sides, which presages potentially acrimonious debt restructuring negotiations. On the one hand, officials from Zambia argue that missing the Eurobond coupon was necessary in order to treat all creditors equally – Zambia has received some debt relief from Chinese creditors and is participating in the Debt Service Suspension Initiative (DSSI) involving bilateral debt owed to G20 creditors. On the other hand, bondholders were concerned that the playing field is not “level” given the lack of transparency surrounding Zambia’s debts owed to China.

We argued in a Focus this week that a wide array of creditors is making debt relief negotiations a lot more difficult than in the past. And while the G20’s “Common Framework” published last week is a step forwards, there are plenty of reasons to think that it will struggle to gain traction. It’s not all bad news, though. After previously rejecting the DSSI, Kenya looks set to do an about-turn and sign up to the deal.

The week ahead

See the Data Previews for the main releases next week from Nigeria and South Africa.

Data Preview

Nigeria GDP (Q3) Mon. 23rd Nov.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

GDP (% y/y)

-6.1

-4.8

-6.2

Another poor GDP reading

We think that figures due out on Monday will show that Nigeria’s economy contracted at a slightly sharper rate in Q3 than in Q2.

Nigeria suffered a sizeable hit to GDP in Q2; output fell by 6.1% y/y as oil output was reduced on the back of an OPEC+ deal and containment measures weighed on the non-oil sector.

Average monthly oil production was lower in Q3, at 1.5mn bpd, compared to Q2 (at 1.7mn bpd). The authorities were slow to lift COVID-19 related restrictions on the economy, which probably kept activity subdued outside the oil sector too. Taken together, we think that GDP shrunk by 6.2% y/y in Q3. (See Chart 1.)

The oil sector will probably remain a drag in Q4 with no further easing of OPEC+ quotas. But the recovery in the non-oil sector should gain more momentum. Over 2020 as a whole, Nigeria’s GDP is likely to be 4% lower compared to 2019.

Chart 1: Nigeria GDP (% y/y)

Sources: NBS, Refinitiv, Capital Economics

Nigeria Interest Rate Announcement Tue. 24th Nov.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Policy Rate (%)

11.50

11.50

11.50

No rate cut.. yet

Policymakers in Nigeria are unlikely to deliver another interest rate cut when they meet next Tuesday, but more easing is on the horizon.

Price pressures have steadily climbed since mid-2019; the headline inflation rate jumped from 13.7% y/y in September to 14.2% y/y in October. This might spook policymakers and prevent another rate cut at Tuesday’s MPC meeting. The benchmark rate will probably remain at 11.50%. (See Chart 2.)

That said, policymakers at the Central Bank of Nigeria seem to be shifting away from concerns about inflation and towards supporting the economy. We think that a small easing of price pressures, probably in early 2021, will be sufficient for the resumption of the easing cycle. We have pencilled in 150bp of cuts, to 10.00%, by end-2021.

Chart 2: Nigeria Consumer Prices & Key Policy Rate

Sources: NBS, CBN, Refinitiv, Capital Economics

South Africa Consumer Prices (Oct.) Wed. 25th Nov.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Consumer Prices (% y/y)

+3.0

+3.0%

+3.1

Inflation to stay close of lower bound of SARB’s target

Figures due out on Wednesday are likely to show that South Africa’s headline inflation rate edged up to 3.1% y/y in October.

Inflation eased from 3.1% y/y in August to 3.0% y/y in September, leaving it at the bottom of the Reserves Bank’s (SARB’s) 3-6% target range. This was driven by weaker housing inflation as well as a drop in petrol price inflation.

The headline rate is likely to have picked up again last month as food inflation strengthened. Producer price inflation of food products has strengthened in recent months, partly reflecting higher global food prices. This is likely to have been partially offset by a further drop in petrol price inflation.

We think that inflation will rise further over the coming months but it is unlikely to breach the mid-point of the target range on a sustained basis. (See Chart 3.) This, combined with a weak economic recovery, means that monetary conditions will be kept loose for some time. our forecast is for the repo rate to stay at 3.50% until at least the end of 2022.

Chart 3: South Africa Consumer Prices (% y/y)

Sources: Refinitiv, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

23rd Nov

Nga

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

(-6.1%)

(-4.8%)

(-6.2%)

Gha

Interest Rate Announcement

14.50%

14.50%

14.50%

24th Nov

Nga

Interest Rate Announcement

11.50%

11.50%

11.50%

25th Nov

Mau

Interest Rate Announcement

1.85%

SA

CPI (Oct.)

(08.00)

+0.2%(+3.0%)

-0.1%(+3.0%)

+0.1%(+3.1%)

26th Nov

Zam

CPI (Nov.)

(+16.0%)

(+16.2%)

Ken

Interest Rate Announcement

7.00%

7.00%

7.00%

27th Nov

Ang

Interest Rate Announcement

15.50%

15.50%

Selected future data releases and events

30th Nov

Uga

CPI (Nov.)

(4.5%)

Ken

CPI (Nov.)

1.0%(+4.8%)

SA

Trade Balance (SAAR)

(12.00)

+33.5bn

SA

Budget (Oct., SAAR)

(12.00)

-42.9bn

1st Dec

SA

Absa Manufacturing PMI (Nov.)

(09.00)

60.9

3rd Dec

Ken

Markit/Stanbic Bank PMI (Nov.)

(07.30)

59.1

SA

Electricity Production (Oct.)

(11.00)

(-3.1%)

Bot

Interest Rate Announcement

3.75%

7th Dec

Mau

CPI (Nov.)

(+3.2%)

8th Dec

SA

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

(10.30)

-51.0%(-17.1%)

9th Dec

Nam

Interest Rate Announcement

3.75%

SA

CPI (Nov.)

(08.00)

SA

Retail Sales (Oct.)

(09.30)

+1.1%

SA

Real Retail Sales (Oct.)

(11.00)

(-2.7%)

10th Dec

SA

Current Account (Q3, ZAR)

(09.00)

-104bn

SA

Manufacturing Production (Oct.)

(11.00)

+3.2%(-2.6%)

11th Dec

Uga

Interest Rate Announcement

7.0%

15th Dec

Nga

CPI (Nov.)

(+14.2%)

16th Dec

Gha

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

(-3.2%)

Gha

CPI (Nov.)

(+10.1%)

Moz

Interest Rate Announcement

13.25%

Also expected during this period: December

6th – 17th

Ken

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

(-5.7%)

7th – 19th

SA

Mining Production (Oct.)

-0.3%(-2.8%)

10th – 17th

Nam

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

(-11.1%)

10th – 17th

Bot

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

(-24.0%)

10th – 17th

Tan

CPI (Nov.)

(+3.1%)

11th – 18th

Uga

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

(-6.0%)

*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

0.80

4.4

2.2

-4.0

3.0

2.5

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-8.5

4.0

2.0

4.1

3.3

3.8

3.5

Ethiopia

0.20

9.7

9.0

6.1

2.0

9.5

15.7

20.0

14.0

12.0

Kenya

0.18

5.6

5.4

-0.5

6.5

6.0

5.2

5.0

5.0

4.5

Angola

0.17

2.4

-0.9

-5.0

3.0

2.0

17.1

22.0

19.0

16.0

Ghana

0.13

7.0

6.5

3.0

6.5

6.0

8.7

10.0

9.5

8.5

Tanzania

0.12

6.5

5.8

1.5

6.0

6.0

3.4

3.5

4.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.0

7.0

0.8

2.5

1.0

1.0

Uganda

0.08

5.3

6.7

-1.5

6.5

5.5

2.9

4.0

4.5

5.5

Zambia

0.05

5.6

1.4

-4.5

3.5

4.0

9.1

15.0

12.0

10.0

Botswana

0.03

3.7

3.0

-10.5

6.0

3.5

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

-4.0

10.0

9.0

2.4

8.5

5.5

4.5

Mauritius

0.02

3.7

3.0

-15.0

9.0

4.5

0.4

2.5

3.0

3.0

Namibia

0.02

3.4

-1.0

-5.5

4.0

3.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.0

-3.2

4.2

4.0

8.3

9.5

8.8

8.2

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

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(20th Nov.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Jan. ’21)

11.50

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 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
(20th Nov.)

End

2020

End

2021

Stock Market

Latest

(20th Nov.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

34,137

36,000

43,000

NGN (Nafex)

386

400

425

South Africa

ZAR

15.3

15.5

14.5

JALSH

56,615

58,950

74,250

Angola

AOA

649

680

700

Kenya

KES

109

110

115

NSE 20

1,786

1,850

2,250

Ghana

GHS

5.78

5.80

5.90

GSECI

1,823

1,900

2,300

Uganda

UGX

3,701

3,750

3,850

UGSE

1,306

1,375

1,650

Sources: Refinitiv, Capital Economics


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