Core Lines

SUB-SAHARAN AFRICA CORE LINES:  6 TO 10 JULY 2020

PREVIEW OF THE WEEK AHEAD

  • 7 July: AfDB African Economic Outlook 2020 Supplement; South Africa and Mauritius June FX reserves; June inflation in Mauritius and Seychelles. The AfDB will publish a mid-year update to its AEO 2020, the first in the Bank’s flagship report 19-year history. The document will entail revisions to the outlook presented in January, as necessitated by the global coronavirus pandemic. While African economies are also operating in an environment of increased uncertainty, particularly given unknowns on the duration and severity of the Covid-19 crisis, most countries in the region are expected to experience recession this year. Recently updated forecasts from the IMF and World Bank showed that the Sub-Saharan African economy will contract by about 3% this year, with deep recessions in South Africa and Nigeria. This will be the region’s worst growth performance on record. The AfDB has indicated that the AEO Supplement will further include recommendations on workable policy responses to safely re-open economies and accelerate the recovery in growth. Looking at in-country data due today – the South African Reserve Bank will publish gross FX reserves numbers for June. Short-term moves in reserves are of little consequence for markets here given the SARB’s standing flexible exchange rate system. However, we think there are three overarching points to keep in mind when looking at the movement in reserves in recent history. 1) FX reserves received a big boost from the record eurobond issuance last September. 2) Reserves subsequently rose to a record of just over USD55bn in December, before declining to USD52.8bn in May. This decline was primarily driven by a large foreign debt repayment in March. 3) Higher gold prices have boosted the evaluation of gold holdings which amounted to about USD7bn in May from USD5.2bn a year earlier. Hereon, growth in reserves will be mainly underpinned by increased external issuance. The government intends to borrow about USD7bn externally this fiscal year, particularly from international financial institutions. The NDB already approved a USD1bn loan for the country. The lion share of the external borrowings will probably be from the IMF through a RFI (USD4.2bn at 100% of quota). The Fund has already disbursed emergency lending (through RCFs, RFIs or augmented access under existing programs) to over thirty countries in the continent. In Mauritius, increased intervention in the FX market by the BoM has seen reserves decline from the record high of nearly USD7.6bn in January 2020. Gross reserves stood at about USD6.9bn in May, but still covered a health 12.5 months of imports. Mauritius and Seychelles will also publish their June inflation numbers. In Mauritius, volatile food prices have been mainly responsible for inflation trend in recent history. Food prices fell 4.4% m/m in May pulling food inflation lower to 7.5% y/y (April: 12.3%). Further monthly deflation in food prices would underpin a decline in headline inflation from 2.8% in May. In Seychelles, headline inflation re-entered deflation territory in May (-0.2% y/y) with both food and non-food inflation at subdued levels.   

 

  • 8 July: Mauritius rate decision; Tanzania June CPI. The Bank of Mauritius MPC will hold its first meeting since cutting the key repo rate by 100bp to a record low of 1.85% in April. This was a pre-emptive move as the economy faced its sharpest contraction on record and inflation was set to ease. The economy has already shown early effects of the global Covid-19 crisis contracting 2.0% y/y in Q1. Q2 is set to be much worse with the tourism sector seeing only 30 arrivals in April-May (down from over 205k in the same two months in 2019). Meanwhile, the rise in overall inflation this year to a peak of 4.2% in April has been mainly a function of higher food prices (especially vegetables). All in all, the with a prolonged and deep recession on the cards, it suffices to say that the monetary policy will stay accommodative for some time. In Tanzania, headline inflation has been within the 5% medium-term target since late 2017, printing 3.2% y/y in May. Disinflation so far this year has been primarily underpinned by lower food inflation, which has eased from 6.3% y/y at end-2019 to 4.4% in May. Underlying inflation has been subdued, with non-food inflation remaining at about 2.4% y/y since last November. Accounting for the largest share of the consumer basket (38.5%), food will mainly dictate which direction the headline rate took in June. But further large cuts in fuel prices in the month (-18.6% m/m for petrol and -16.3% for diesel) are an added factor favouring an even lower headline print.    

 

  • 9 July: South Africa April manufacturing output. The manufacturing sector experienced a third successive quarter of decline in Q1 registering a growth rate of -3.5% y/y. This was also the sector’s largest decline since the Great Recession. The last monthly release showed that manufacturing production contracted 5.4% y/y in March, with sharp decreases in output in several divisions. Statistics South Africa highlighted that the data collection rate for the month was also relatively low (71.8%, due to the lockdown) which implies that upcoming revisions to this data may be larger than the norm. The upcoming release is set to show a much worse outcome for April where the Covid-19 strict lockdown lasted for the whole month. Most of the economy was shut down with only designated essential activities allowed. What’s to come for the month can be drawn from the Absa Manufacturing PMI, wherein the business activity (April: 5.5 index points) and new sales orders (8.9) components plunged to record lows. Further context can be drawn from the auto industry, where aggregate domestic sales were steeply down at 574 in April (-98.4% y/y). In view of the unprecedented shock to the sector and the broader economy, projecting the monthly changes in output is more complex than normal. Nevertheless, this piece of data will help in shaping the story of the damage on the domestic economy stemming from the Covid-19 crisis, especially in the second quarter.    

 

  • 10 July: Rwanda and Mozambique June inflation; Mauritius tourism statistics. Rwanda’s headline inflation (urban areas) reverted higher to 9.2% y/y in May from 8.0% in April, mainly due to a sharp Covid-19-related upward adjustment in transport fares. The increase in fares was implemented as buses were required to operate at half their capacity in support of social distancing. Favourably, after rising to nearly 20% y/y in February food inflation continued to track downwards (May: 11.5% y/y). Disinflation in the food index is expected to underpin a decline in inflation in the foreseeable future, notwithstanding higher transport costs. In taking the decision to reduce its policy rate further in April, the National Bank of Rwanda indicated that inflation was likely to ease in H22020 into 2021 partly due to reduced aggregate demand. In Mozambique, inflation has been subdued with the national rate at 3.0% y/y in May and the headline rate (Maputo) at 1.7%. Domestic inflation is expected to stay well below the medium-term objective of 5-6%. Statistics Mauritius is set to publish tourist arrival numbers for June sometime this week. These will reflect the most obvious effects of the coronavirus pandemic (including associated restrictions on international travel across the world) – the country saw only 30 arrivals in April-May, compared with 205,379 in the same months in 2019.

FIXED-RATE BOND AUCTIONS

  • Treasury bills: Tanzania (8-July), Kenya (9-July), Namibia (9-July), South Africa (10-July), Ghana (10-July)
  • Treasury bonds: South Africa (7-July), Uganda (8-July)
  • Short-dated yields maintained a downward bias at last week’s Treasury bill auctions. This was underpinned by healthy demand, amid favourable liquidity conditions. Market participants appear convinced that inflationary pressures will largely remain in check, which would favour continued growth-supportive policy stances by monetary authorities. There was notably strong auction demand in some countries last week with bid/offer ratios of 5.1x and 4.2x for 91-day paper in Kenya and Nigeria. Increased liquidity is also making its way into the primary market in Zambia, which has seen renewed interest in its bi-weekly auctions. Here, yields declined across all tenors at the latest auction, with the 91-day rate coming in 98bp lower at 16.02%. This helped pull the average SSA-10 91-day day yield lower to 5.99% last week from 6.11% in the week ending 26 June. Variability in yields across the region remains fairly large – the lowest 91-day auction yield is in Mauritius (0.91%), the highest is in Zambia (16.02%) while the median rate is 4.19%. Increased liquidity levels will contribute in keeping yields anchored in the immediate future. This week, auctions are scheduled in fewer countries in the region. Amongst the markets we track, bond auctions will take place in South Africa and Uganda only. In South Africa, issuance will be in the R186 (ZAR2.1bn), R2030 (ZAR2bn) and R2035 (ZAR2bn) tenors. In the first auction of the 2020/21 fiscal year, Uganda has increased its total offer amount to UGX370bn from UGX285bn in recent months. Issuance is set to be in the Jan’24s (UGX130bn) and Jun’34s (UGX240bn).

PUBLIC HOLIDAYS

  • Monday, 6 July: Rwanda, Zambia
  • Tuesday, 7 July: Tanzania, Zambia

REVIEW OF LAST WEEK’S ECONOMIC RELEASES

  • Botswana: Economic growth rose to 2.6% y/y in Q1 from 1.6% y/y in Q4 2019, with a smaller contraction of the key mining sector and higher growth in several other sectors including finance, tourism and manufacturing. Despite somewhat higher growth in Q1, the economy is widely expected to experience outright recession in 2020 given the ramifications of the Covid-19 crisis.
  • Ethiopia: Fitch affirmed its B long-term foreign currency rating on the country, with a negative outlook. The agency noted that the (negative) outlook largely reflects the risks emanating from the COVID-19 pandemic. Considerable political uncertainties also remain a risk to the country’s credit metrics. Fitch’s rating matches that of S&P, which changed its outlook to negative on 10 April, and Moody’s, which downgraded the country to B2 on 7 May (outlook negative).   
  • Ghana: The IHS-Markit Ghana PMI rose closer to the 50-neutral level, printing at 49.7 in June. Although the index still showed a marginal deterioration in business conditions over the month, it is visibly up from the record low 31.7 in April (May: 46.7). Amid easing of Covid-19 containment measures, Markit highlighted that new sales orders rose for the first time in four months, boosting business activity. Nonetheless, spare capacity remains evident, keeping employment under pressure.
  • Kenya: Real GDP growth eased to 4.9% y/y in Q1 from 5.5% y/y in Q4 2019, the lowest rate in eight quarters. Favourably, the agricultural sector (c. 33% of GDP) saw firmer growth of 4.9% y/y. There was a weaker performance in several sectors including accommodation and restaurants (‘tourism’) which saw its first contraction (-9.3% y/y) since 2015. As elsewhere in the region and the world, Q2 is expected to show much weaker growth. The Stanbic Bank Kenya PMI provided some further insight into the Covid-19-related shock to growth in Q2. IHS-Markit’s release showed that the PMI stayed in contraction territory in June (46.6) even as it was significantly higher from the near record low of 34.8 in April. Alongside Q1 GDP numbers, the KNBS also published June inflation figures showing a lower headline rate of 4.6% y/y as food price inflation returned into the single digits.
  • Mauritius: The unemployment rate rose to 7.1% in Q1 from 6.4% in Q4 2019, primarily due to seasonal factors. In a labour force of 591.8k persons, 41.9k were unemployed. Higher frequency activity data, particularly on the all-important tourism sector, affirm that the unemployment situation was much worse in Q2. Separately, the country joined Seychelles by becoming the second African country to be classified as ‘high income’ by the World Bank. The annual classification exercise is based on 2019 data, implying that Mauritius could revert to the ‘upper-middle income’ category next year due to the Covid-19 induced recession this year. Under the Bank’s method, Mauritius had a GNI/capita of $12,740 just above this year’s threshold of > $12,535.
  • Mozambique: The Standard Bank Mozambique PMI showed a further deterioration in private sector business conditions in June, printing at 41.7. Although the PMI came in below 50, it once again tracked higher from the record low of 37.1 in April. Markit’s release highlighted that output and new orders fell sharply in the month while there was a lockdown-driven record rise in delivery times.
  • Nigeria: The Stanbic IBTC Bank Nigeria PMI remained in contraction territory in June, corroborating numbers published by the CBN earlier in the month. The PMI reading was 46.4, rising from 40.7 in May. Markit reported a sustained decline in output and new orders, while confidence regarding the 12-month outlook for business activity dropped to a record low.
  • Rwanda: Real GDP growth dropped to 3.6% y/y in Q1 from 8.4% in Q4 2019, the lowest expansion in eleven quarters. Agricultural output contracted 1% y/y, growth in the secondary sector dropped from the low teens to just 2% while the services sector expanded at a lower rate of 6%. Like other SSA countries, the Q1 outturn is the first in a string of weak quarterly growth numbers expected this year.
  • Seychelles: The economy expanded 1.9% y/y in Q1 versus 4.5% in Q4 2019. Growth held positive despite a sharp contraction in tourism activity and negative growth in several other sectors. This was on the back of strong growth in the financial services (9.0% y/y), ICT (16.3% y/y), construction (17.8% y/y) and health (20.7%) sectors. Nonetheless, small economy is set to contract in 2020 given the impact of the novel coronavirus (which effectively brought tourism activity to a standstill).
  • South Africa: There was a slew of data published in the week, including Q1 GDP, June PMIs and external accounts. National accounts statistics confirmed that the economy contracted for a third successive quarter registering a headline growth rate of -2.0% q/q (saar) compared with -1.4% in Q4 2019. The related year-on-year numbers where -0.1% y/y and -0.5%, respectively. The IHS-Markit PMI showed that business conditions continued to worsen in June, although the month’s reading (42.5) was visibly up from the record low in May. The Absa Manufacturing PMI rose further to 53.2 in June mainly as new orders and output improved relative to June. This was in light of further easing of lockdown restrictions. Data published by the SARB confirmed that the country recorded its first current account surplus since 2003 in Q1 (1.3% of GDP), given a sizeable trade surplus (4.0% of GDP versus 2% in Q4 2019). The National Treasury’s fiscal update revealed that the main budget deficit amounted to ZAR104bn over the first two months of FY 2020/21 versus ZAR81bn in the same period in FY 2019/20. June will be an important month in weighing the evolving scale of fiscal deterioration given that this month is when a large portion of corporate tax payments are typically paid. Finally, new vehicle sales statistics for June were released. At 31,867, sales increased from May but were still down substantially from a year ago (-30.7% y/y).   
  • Uganda: The current account deficit widened significantly to USD706mn in Q1, from USD384mn and USD602mn in Q4 and Q1 2019, respectively. The larger deficit was mainly due to a larger deficit in the services account. The trade deficit saw a limited changed from Q1 2019, with decline in both exports (-12.3% y/y) and imports (-9.0%). Meanwhile, the Stanbic Bank Uganda PMI came in at 46.5 in June, staying below the 50-neutral mark.
  • Zambia: The Stanbic Bank Zambia PMI indicated that operating conditions continued to deteriorate in June. The index rose from the record low of 34.8 in May, but at 42.3 it remained within contraction territory. Except for February 2019, the PMI has been below 50 since August 2018. Business condition have been worsened by the coronavirus pandemic.

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