Zambia’s dance with the IMF, restrictions looming in SA - Capital Economics
Africa Economics

Zambia’s dance with the IMF, restrictions looming in SA

Africa Economics Weekly
Written by Virag Forizs
The confirmation this week that Zambia requested an IMF funding program is a positive step, which is likely to improve the chances of a wider debt restructuring deal with external creditors. Meanwhile, the international community is seeking to step up financial pressure on Ethiopia over human rights violations, which could destabilise the country’s fragile balance sheets. And in South Africa, the risk of a fresh downturn is rising as the government is battling to curb a second wave of COVID-19.

Zambia and the IMF: high hopes

The confirmation this week that Zambia is seeking an IMF funding program is a positive step, which is likely to improve the chances of a wider debt restructuring deal with external creditors.

An IMF deal would lend more credibility to the authorities’ plans to undertake fiscal austerity to return the debt position to a sustainable path. Scepticism about the plans appeared to be one of the reasons behind private creditors’ rejection of the government’s debt service suspension request that ultimately resulted in Zambia’s default.

IMF involvement, and the increased transparency that would come with it, might reduce mistrust between Zambia’s external creditors too. Concerns that the playing field is not “level” given the lack of clarity surrounding Zambia’s debt owed to China seemed to be another reason behind private bondholders’ reluctance to grant debt relief. Building bridges between Zambia’s various external lenders through IMF facilitation is likely to make a wider debt restructuring process less acrimonious.

That said, some questions remain around Zambia’s IMF request. It’s difficult to know if and when a deal will be struck, especially as elections in mid-2021 are likely to complicate negotiations. On top of that, there is no guarantee that an IMF package would be enough to defuse tensions between external creditors and pave the way to a grand debt bargain.

Ethiopia: aid and investments on the line

The international community has raised the prospect of applying financial pressure on Ethiopia as concerns over human rights violations in the country’s internal conflict mount, which could destabilise Ethiopia’s fragile balance sheets.

The European Union is considering suspending budget support worth nearly $110mn, which would increase strains on Ethiopia’s public finances. Foreign aid is equivalent to about 10% of the budget, and nearly 0.5% of GDP. Default fears could resurface too given the precarious debt position.

US senators are also pushing for sanctions on Ethiopian officials found responsible for breaching human rights. If approved, the sanctions are unlikely to have major direct economic consequences. But investor sentiment could sour, further dampening the country’s long-term prospects.

SA: tighter restrictions look increasingly inevitable

South Africa’s health minister declared this week that the country has “officially” entered a second wave of COVID-19, raising the chances that the government will be forced to tighten containment measures.

Daily new virus infections have continued to climb over the past week, surpassing 6,000 on Wednesday. The health minister pinned part of the blame on large parties of young people involving alcohol, just weeks after the government relaxed restrictions on alcohol sales, and warned that the latest wave could prove to be worse than the initial wave that peaked in July.

Last week, President Cyril Ramaphosa shied away from imposing tighter restrictions with the exception of Nelson Mandela Bay in Eastern Cape province. But as the outbreak worsens and the burden on the healthcare system increases, the government’s prioritisation of the economy over battling the virus will be difficult to sustain. A more widespread tightening of containment measures looks inevitable.

With data this week showing that the economic recovery was already struggling at the start of Q4, tighter restrictions would raise the risk that South Africa suffers a fresh downturn. Scarring effects from the crisis may intensify and efforts to put the public finances on a sustainable footing could be derailed.

The week ahead

Figures due out on Tuesday will probably show that inflation in Nigeria rose from 14.2% y/y in October to 14.7% y/y in November. (See Data Preview.)

Data Preview

Nigeria Consumer Prices (Nov) Tue. 15th Dec.

Forecasts

Time (GMT)

Previous

Consensus

Capital Economics

Consumer Prices (% y/y)

+14.2

+14.9

+14.7

Elevated food inflation to keep headline rate high

We expect that figures due out on Tuesday will show another sharp rise in Nigerian inflation, probably to 14.7% y/y in November.

The headline rate has risen for fifteen consecutive months, jumping from 13.7% y/y in September to 14.2% y/y in October. A sharp rise in food inflation was the main driver, although price pressures rose in other major price categories too.

Food inflation probably remained elevated in November due to ongoing disruptions in the food supply chain caused by heavy flooding in September. We think that the headline rate rose to 14.7% y/y in November.

Looking ahead, inflation will probably remain high in the coming months as food price pressures take some time to ease. We expect that policymakers at the Central Bank of Nigeria will resume their easing cycle once inflation has peaked, probably in early 2021. (See Chart 1.)

Chart 1: Nigeria Consumer Prices & Policy Rate

Sources: CBN, NBS, Refinitiv, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

14th Dec

Uga

Interest Rate Announcement

7.0%

7.0%

15th Dec

Nam

CPI (Nov.)

(+2.3%)

(+2.4%)

Bot

CPI (Nov.)

(+2.2%)

(+2.6%)

Nga

CPI (Nov.)

(+14.2%)

(+14.9%)

(+14.7%)

16th Dec

Gha

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

(-3.2%)

(+5.0%)

Moz

Interest Rate Announcement

13.25%

13.25%

17th Dec

Nam

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

(-11.1%)

(-6.5%)

Also expected during this period:

11th – 18th

Uga

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

(-6.0%)

14th – 21st

Mau

Interest Rate Announcement

1.85%

16th – 23rd

Ang

CPI (Nov.)

(+24.1%)

Selected future data releases and events

22nd Dec

SA

Budget (Nov., SAAR)

(12.00)

-49.7bn

23rd Dec

Bot

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

(-24.0%)

31st Dec

Uga

CPI (Dec.)

(+3.7%)

Ken

CPI (Dec.)

+1.2%(_5.5%)

Zam

CPI (Dec.)

(+17.4%)

SA

Trade Balance (Nov., SAAR)

(12.00)

+36.1bn

6th Jan

Ken

Markit/Stanbic Bank PMI (dec.)

(07.30)

51.3

7th Jan

SA

Electricity Production (Nov.)

(11.00)

(-2.8%)

8th Jan

Tan

CPI (Dec.)

(+3.0%)

Mau

CPI (Dec.)

(+3.1%)

SA

Absa Manufacturing PMI (Dec.)

(09.00)

52.6

Also expected during this period:

21st – 4th

Ken

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

(-5.7%)

*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

-2.0

3.5

3.0

11.4

13.0

13.5

12.0

South Africa

0.57

1.5

0.2

-8.0

5.0

4.0

4.1

3.2

3.8

3.5

Ethiopia2

0.20

9.7

9.0

6.1

3.0

9.0

15.7

20.5

15.5

12.0

Kenya

0.18

5.6

5.4

-0.5

7.0

7.0

5.2

5.0

5.0

4.5

Angola

0.17

2.4

-0.9

-5.0

3.5

2.5

17.1

22.0

18.5

16.0

Ghana

0.13

7.0

6.5

3.0

7.0

6.5

8.7

10.0

9.5

8.5

Tanzania

0.12

6.5

5.8

1.5

6.5

6.5

3.4

3.5

4.0

4.5

Côte d’Ivoire

0.10

6.1

6.5

2.5

7.5

7.5

0.8

2.3

0.5

1.0

Uganda

0.08

5.3

6.7

-1.5

7.0

6.0

2.9

4.0

4.5

5.5

Zambia

0.05

5.6

1.4

-4.5

3.5

4.5

9.1

15.5

13.0

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

-4.0

11.5

11.0

2.4

8.5

5.5

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

-5.5

5.0

4.5

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

3.0

-2.5

4.9

4.8

8.4

9.7

9.2

8.1

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

(11th Dec.)

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
(11th Dec.)

End

2020

End

2021

Stock Market

Latest

(11th Dec.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

34,251

36,000

43,000

NGN (Nafex)

392

400

425

South Africa

ZAR

15.1

15.5

14.5

JALSH

59,413

58,950

74,250

Angola

AOA

648

680

700

Kenya

KES

111

110

115

NSE 20

1,794

1,850

2,250

Ghana

GHS

5.81

5.80

5.90

GSECI

1,854

1,900

2,300

Uganda

UGX

3,670

3,750

3,850

UGSE

1,275

1,375

1,650

Sources: Refinitiv, Capital Economics


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