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Sub-Saharan Africa: Eight key issues to focus on in 2017

Nairobi, Kenya

1. Economic growth in sub-Saharan Africa is likely to quicken this year to 2.8%, after a lacklustre growth rate of 1.6% in 2016.

– With the world economy expected to grow at 3.4% in this year (Chart 1), up from an estimated 3.1% in 2016, this is likely to put sub-Saharan African countries on a stronger footing in 2017.

Source: IMF

– Growth will be supported by improved weather prospects in some parts of the region (west and southern Africa), strong population growth, large investments in infrastructure and mining (which will boost the energy, construction and transport sectors), and robust demand for goods and services (particularly ICT, fintech and FMCG), and a rebound in demand for exports amid an improving global commodity price outlook. Strengthening macroeconomic policies in some economies will also support sub-Saharan African growth.

2. An expected rise in oil (and metals) prices in 2017 will bode well for oil exporters, but pose risks to net oil importers.

– The ongoing, yet modest, recovery in oil prices in particular (Chart 2) is expected to help Nigeria’s real GDP shift to positive territory (albeit remaining weak) after it fell into recession last year.

Source: Bloomberg and Ecobank Research

– However, as most countries in sub-Saharan Africa are net oil importers, higher oil prices will stoke inflationary pressures in much of the region.

– This is specifically for major oil importers such as Kenya, Ghana and West African Economic and Monetary Union, as higher oil prices erode consumers’ purchasing power, undermining prospects in consumer goods sector.

– Higher prices will also see monetary policy makers continue with their tight policies or even tighten policies further (Chart 3), increasing the cost of funds.

Source: BCEAO, BoG, CBN and CBK

– Higher oil prices will also increase external sector pressures as import costs continue to outstrip exports. This suggest that demand for FX will remain high, putting downward pressure on sub-Saharan African currencies.

3. Assuming that newly-elected Donald Trump delivers on his election campaign rhetoric of fiscal stimulus and increase infrastructure spending, we expect the US economic recovery to strengthen further in 2017.

– This will bode well for FDI into sub-Saharan Africa (the US was the top source country for FDI projects into Africa in 2015).

– However, a protectionist approach under President Trump would undermine world growth prospects, with negative implications for sub-Saharan Africa.

  • Such a move would result in higher US inflation (given the possible imposition of higher tariffs), higher US interest rates, a loss of US competitiveness and a possible slowdown in US economy, thus undermining world growth and prospects for African FDI inflows and trade.

4. US Federal Reserve’s monetary policy normalisation will continue to create headwinds in the capital and currency markets in emerging and frontier markets and increase financing conditions. The US Federal Reserve Bank has raised its Federal Funds rate twice by a total of 50bp since December 2015 and we expect this tightening policy stance to continue in 2017, especially against the backdrop of the US president-elect’s fiscal stimulus rhetoric and subsequent reflation in the economy. Higher US interest rates will draw some investors into US Treasuries, potentially weakening prospects for portfolio flows into Africa and maintain upwards pressures on sub-Saharan African yields.

– While Africa will continue to benefit from ongoing investor appetite in search for higher yields, such benefits will be countered to some extent by US’ renewed appeal as a haven for relatively less risky, and more recently, rising returns on investments.

– Key liquid capital markets in sub-Saharan Africa, notably Nigeria, Ghana, Kenya and South Africa will be hit hardest by this negative shock, undermining their FX liquidity situation.

  • Amid this, exchange rate volatility in sub-Saharan Africa’s exchange rates will persist (Chart 4), partly due to investors’ anticipation of further US rate hike.

Source: Bloomberg and Ecobank Research Note: *Exchange rate volatility is measured by standard deviation.

5. Eurozone’s economic challenges (deflation pressures that the ECB’s QE programme aims to address, depressed growth forecasts, and large fiscal deficits and debt stocks) and rising political tensions alongside USD fundamental strength, will continue to undermine EUR outlook, boding ill for sub-Saharan African currencies that are pegged to it, i.e. XOF/XAF.

– Currency volatility will increase amid concerns over Brexit-linked effects, the EU’s migrant crisis and economic challenges and growing political tensions in EU.

6. Improving prospects for China bode well for Africa’s export receipts, government revenue and exchange rates.

– The IMF recently upwardly revised China’s 2017 growth forecast to 6.5%, from 6.2%. As a key trading partner for many sub-Saharan African economies, improving economic prospects in China will bode well for the region. China’s president Xi Jinping has already announced plans to import US$8tn worth of goods and services over the next five years, potentially boosting Africa’s export sector.

7. Heightened insecurity will persist.

– Boko Haram, although on the back foot, will continue to operate across Nigeria, Niger, Chad and Cameroon, while Al-Qaeda in the Maghreb (AQIM) could increase its activity across the Sahel (notably in Mali). Al-Shabab could also step up cross-border incursions into Kenya as it attempts to influence the outcome of elections there (and, provisionally, in neighbouring Somalia too).

8. Elections will increase risk in a number of sub-Saharan African markets.

– In August 2017 presidential elections are scheduled in Angola and Rwanda, as well as general elections in Kenya. Angola’s election will formalise the handover of power from President Dos Santos, who has ruled Angola since 1979, and could stir up political tensions as rival factions seek to benefit from the new order. Kenya’s elections carry the risk of violence both before and after the polls, although there is no issue over term limits which could poison the process.

This ‘Speed Note’ was originally published by Ecobank. Read the original document here.

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