Sub Sahara Africa: Country Risk
For the four big countries (S Africa, Nigeria, Kenya and Ethophia) positive progress remains alongside a difficult political backdrop.
South Africa economic problems remain acute with large power cuts during the winter season and the logistic and transport crisis restraining production and exports. The government is trying to make progress on both fronts, but progress remains slow. Though the G7 and China has separately offered help to scale up renewables energy production, this will take years. Thus the two crisis are likely to spill over into 2024. This means ultra-low growth in 2023 and low growth in 2024, though at least inflation has been brought closer to the South African Reserve Bank target and the interest rate tightening cycle will likely turn to easing in 2024. Progress also depends on the outcome of the 2024 general election (scheduled between May and August). Opinion polls currently suggest that the ANC will likely have less than 50% of the vote in the 2024 election and may possibly need to form a coalition with the Democratic Alliance or with other small parties. However, previous elections have seen the ANC do better in the vote than opinion polls, as dissatisfaction with the ANC has translated to not voting rather than voting for opposition parties or a decision to vote ANC at the final moment. This means that the election will be close and it is still possible for the ANC to have a small majority. We think a small ANC majority or coalition government could slow decision making on dealing with the power cuts, while a surprise healthy ANC victory could allow the ANC to continue to reduce power cuts and the reduce the adverse growth and inflation impacts. Besides, the risk of political violence also remain high, as the left wing Economic Freedom Fighters agitate for radical change. Elsewhere, South Africa has regained regional credibility after a successful BRICS summit, which saw other African countries join the BRICS group and South Africa acting as a power broker.
Nigeria policy shifts have slowed after the initial flurry from the new president Bola Tinuba in March (e.g. scrapping of the hugely expensive fuel subsidy and large devaluation to reduce overvaluation).International markets still like this shift away from statist policy under the previous president but the difficult part is that the devaluation has boosted already high inflation. Whether the central bank slows monetary financing of the budget deficit, and credibly brings down inflation into 2024 remain the key focal points. Nigeria also struggles to bring theft and corruption under control, which means that oil exports fall short of what OPEC+ production quota allow. Finally, vested interests and corruption make it difficult for new business to establish and existing business to operate, which restrain the growth of the non-fossil fuel sector and does eventually need to be addressed by the government. Meanwhile, the domestic security situation remain very high risk, with various militia groups operating across and causing violence/fear and oppression, which also impacts the economy, and we think not enough has yet been done by the new government on this matter. Overall, the next 6 months will be key in the new government achieving success or struggling.
Kenya is swinging back to 5% plus growth, but upside surprises are unlikely given a number of headwinds. Protests against the cost of living and government tax plans (e.g. doubling VAT on fuel) have led to talks with the opposition to help the population, but the summer’s deadly protests have produced some domestic caution in economic activity. Tourism rebound has also been restrained by intermittent power cuts, despite renewables forming a large part of electricity production. Finally, the overhang of domestic and foreign debts is a restraining influence on business investment. Though the IMF package helps to ease these problems from a timing standpoint, the government has to improve competitiveness and business environment. Kenya’s overall foreign debt/GDP is not excessive, but plans are still required for a $2bln bond repayment in June 2024 and current USD borrowing costs are high. Cash flows are also important and Kenya PM Ruto is to request $1bln of funds from China to help complete existing infrastructure projects (with $6.3bln, China forms around 17% of external debt).
For Ethiopia, internal security has improved a lot since the November 2022 peace agreement between the government and the Tigray people liberation army (TPLA).However, clashes in Amhara between Fano militia and Federal troops have been evident over the summer, while differences remain over the old Western Tigray province within Amhara. Finally, the Eritrean government still has troops in Tigray and the Eritrean president is strongly opposed to the TPLA and Eretria was not part of the 2022 agreement. On the economic front, the broader picture is that the government wants to get growth back on track, where the population dividend is a big tailwind. Even so, Ethiopia needs to also bring inflation under control (projected to be 29.1% in 2023 by the IMF), both for domestic macroeconomic stability put also to slow the currency depreciation. Meanwhile, progress on external debt has been slow, with private bondholders and the government not progressing discussion and Ethiopia request for up to $2bln from the IMF having stalled. A further complexity for Ethiopia is that the U.S. has previously pushed for transitional justice for victims of the recent war in Tigray to come first, before support for IMF and U.S. bilateral aid are forthcoming while a UN panel of experts has recently been critical of the process. One major improvement has been the surprise BRICS membership from January 2024 for Ethiopia, which will benefit external trade long-term and could also bring soft loans from the BRICS development bank. These need to occur first, before a wider restructuring of Ethiopia’s external debt can occur under the G20 framework – Zambia and Ghana provide a template in this context. We consider a partial default is a growing risk in 2024.