Important reading from the Standard Chartered Global Research on growth prospects for Africa :
On growth, green shoots and stabilisation – recent themes in Africa, Standard Chartered Global Research (subscription), Razia Khan, Commentary :As the market undergoes a reassessment of signs of green shoots elsewhere, African markets – which were perhaps late to benefit – have at least stabilised. While most were caught up in the volatility that gripped financial markets in Q4-2008, the picture that has since emerged on real GDP growth is not uniform.Quarterly GDP data is not available everywhere, and issues of data quality persist. But informal indicators help to shed some light on underlying growth momentum. It is ironic that the countries that do report quarterly statistics are the ones that are most likely to experience an outright contraction in growth in 2009. Both South Africa and Botswana experienced negative growth in Q1-2009, with their external sectors deeply impacted by the global slowdown. The situation in South Africa was not helped by the concurrent downturn in its domestic economy. Although recovery in consumption should follow the aggressive monetary easing initiated by the SARB, the depth of the recessions experienced in mining and manufacturing – with recent record contractions in each sector – suggests that this will not be enough to lift growth entirely. Botswana’s non-mining economy should still experience buoyant growth – but the country’s narrow economic base, with mining accounting for one-third of GDP – suggests that an outright contraction in growth, driven by resources, will still dominate. Kenya also experienced negative q/q growth in Q1-2009, but the economy grew in y/y terms, helped by the weak base, reflecting Kenya’s post-election political crisis in early 2008.Elsewhere growth appears to have been positive, with Nigerian Q1-2009 growth, provisionally estimated at 6.3% y/y by the National Bureau of Statistics, even surprising to the upside. (Nigerian growth has long been characterised by a contraction in the oil-sector, with non-oil growth sustaining overall momentum in the economy. Signs of a slowdown in the non-oil sector, driven by weaker statutory oil revenue allocations to the three tiers of government, and subdued credit growth are the new sources of concern.)In other frontier African economies – Ghana, Tanzania, and Uganda – initial indications are that positive growth will be sustained, if somewhat more subdued.FX market stabilisation does not match up with growth prospectsReal economies aside, a more uniform picture of stabilisation has emerged in FX markets. In some instances (South Africa) this has been helped by the bounce-back in risk appetite; and in the frontier space, by the relative stabilisation in commodity markets. The ZAR has been one of the best-performing currencies to date, at one point even prompting warnings by the SARB that it might “lean against the wind” in resisting further currency appreciation. (Recent examination of trends in South Africa’s FX reserves accumulation suggests, however, that this may have been an empty threat. While May reserves were boosted in part by the proceeds of foreign bond issuance by South Africa, June’s reserves – tellingly – displayed little sign of active market intervention by the SARB. The cost of sterilising any FX market intervention, at a time when the fiscal deficit is pressured, may make any significant FX market intervention improbable).In Nigeria, however, a recovery in oil prices, and less pressure on existing FX reserves, has prompted FX market deregulation – with a reversal of the emergency measures instituted earlier this year. Elsewhere in African frontier markets, currency themes are more mixed, with more of a two-way trend emerging, as opposed to the clear depreciation trend that had set in from the end of last year. Only in Ghana, where the rise in inflation has been most dramatic (CPI now stands at over 20% y/y), has the currency continued to weaken on a sustained basis.Could FX market trends offer a view on future growth prospects? This is still debatable. While it is clear that the most liquid markets have – other things being equal – gained the most, these markets are not necessarily the ones with the most favourable growth prospects. Near-term, the growth profiles of Africa’s non-resource-rich economies are likely to be more resilient. But recent FX market trends have largely benefited either the more liquid markets (which have benefited from recovery in risk appetite, but may be at risk of renewed outflows if risk appetite turns), or the commodity producers.Gauging reform momentum: The IFIs are back; so is ChinaOver the course of the cycle, policy influences should also play an important role in determining growth. Africa’s recent upswing was closely associated with reform and the achievement of macroeconomic stabilisation. Therefore renewed policy deterioration could result in structural damage to future growth prospects. From this perspective, however, recent evidence is at least encouraging. International Financial Institutions (IFIs) are showing signs of renewed engagement in Africa. In recent months, the IMF has pledged new funding for Kenya, Tanzania, and Zambia; while Ghana has benefi ted from World Bank funding. Other institutions are also playing a more forceful role in helping to avert a deeper economic crisis in Africa. The African Development Bank recently lent US$ 1.5bn to Botswana; it is also looking to increase significantly its funding elsewhere, through the provision of an emergency liquidity facility for African countries that find themselves cut off from international capital markets, as well as through more financing for trade.While there are some signs of the traditional conditionality focused on fiscal consolidation being relaxed, renewed IFI engagement has also helped to counter fears of a structural setback to the reform effort. (There appears to be a new acceptance that in the short term at least, a counter-cyclical fiscal response is needed. The focus is on maintaining a sound fiscal position over the course of the cycle.) This has already provided some reassurance to investors, that the gains of Africa’s recent reform will not be entirely lost in response to the current crisis. However, it is also clear that while the IFIs are back, they are not the only option for external financing open to African economies. Recent months have seen signs of equally strong engagement by China in a number of African countries, whether the flows have been official – or, as is increasingly common, on commercial terms – with bank financing available for longer-term infrastructure projects. The receipt of Chinese funding for a power sector project in Botswana for example, talk (as yet unsubstantiated) that economies such as Nigeria – which had planned to borrow from international capital markets – are considering Chinese funding instead, are indicative of longer-term trends that might replace traditional models of support post-crisis.African fiscal deficits widen further, in generalThe return of IFI engagement in Africa will not – in the short term – be sufficient to prevent fiscal deterioration. Across the continent, there is evidence of more expansionary fiscal policy being put in place. In South Africa, much of the deterioration in the budgetary position will stem from the shortfall in revenue collection, as a result of the economic downturn. South Africa’s new Finance Minister, Pravin Gordhan, recently spoke of a -ZAR 19bn shortfall in revenue in the first quarter of FY09-10. If extrapolated over the full year, this could result in a shortfall of as much as -ZAR 60bn for the current fiscal year, which, according to our rough calculations, may even signal a deficit of more than -6% of GDP. We do not, however, expect the economy to continue to contract at the same pace as it did between April and June 2009 – so there may be some upside to the estimates of revenue lost as a consequence of the downturn. Moreover, higher-than-expected inflation suggests that nominal GDP – which is what matters for revenue collection – may not perform as badly as the expectations for a contraction in real GDP would otherwise suggest.Elsewhere in Africa, evidence of fiscal deterioration is more closely tied to the counter-cyclical policy effort – where there is room, governments are doing more to avert a deeper economic contraction. It is correct that they should do so, as this will help avert a deeper downturn over the coming year. Across East Africa, where budgets for FY09-10 were recently announced, stimulus packages were a key theme. Kenya is to run a deficit of -6.6% of GDP, but has already implemented measures to make domestic financing of this deficit easier (including mandating pension funds to invest in government securities, and rescheduling the auctions for short-term borrowing – the 91-day and 182-day T-bill auctions – to each consecutive week in order to encourage more flows into longer-term bonds). Even these numbers do not look alarming in comparison with Botswana’s predicted -18% of GDP fiscal deficit; but the hope is that this will be closed over the course of the cycle. Botswana’s government is also in the fortunate position of being able to afford such borrowing in the very short term, having operated fiscal surpluses over most of its recent history.To date, it is only Ghana, where the deficit at the end of last year was already an estimated -15% of GDP, that there are signs of stress in deficit financing. Unsurprisingly, short-term interest rates have spiked higher, and the threat of a further rise in inflation dominates. For Ghana, the hope is that once oil production gets underway in 2011, the country will be structurally stronger. But ahead of that point, difficult economic decisions need to be taken to preserve macroeconomic stability and the gains of previous reform.How will all of this play out in the growth profile? Although the situation in Africa varies by country, big-picture themes for the region are apparent. In our view, growth in 2009 will be subdued, and the extent of macroeconomic deterioration in response to the current crisis suggests it may be a while before trend growth resumes. Nonetheless, growth will be positive – an important differentiator from other regions. As our previous GDP forecasts demonstrates, even by 2011 we do not expect a resumption of recent trend growth, although we should certainly see an improvement from current levels. Only the oil producers, benefiting from potentially higher prices, will be in a position to benefit strongly. But against this bigger picture, it would be wrong to lose sight of the encouraging news from recent weeks. As the scale of the crisis becomes clear, governments across the region are showing signs of being more proactive in dealing with it. We think Africa will not see the worst of the fallout. Although it will be a while before the region recovers fully, positive momentum, at least, remains.