AFRICAN MARKETS REVEALED SEPTEMBER 2020 • Steven Barrow • Ferishka Bharuth • Mulalo Madula • Angeline Moseki • Fausio Mussa • Jibran Qureishi • Dmitry Shishkin • Gbolahan Taiwo www.standardbank.com/research 1 Standard Bank African Markets Revealed September 2020 Recovering, but not out of the woods • The worst of the pandemic will arguably be reflected in Q2:20 GDP growth outcomes. Of the countries in our coverage, we see only a handful of economies escaping recession in 2020. • Economic growth in Q2:20 contracted by 6.1% y/y, 3.3% y/y, and 3.2% y/y in Nigeria, Mozambique and Uganda respectively. The Ghanaian economy too contracted by 3.2% y/y in Q2:20, even worse than the 0.4% y/y contraction that we forecast for our bear scenario in the May edition of this publication. • The more diversified economies and those with large subsistence agriculture sectors could post mild, yet positive, growth in 2020. Most East African countries fall into this bracket. Egypt too might also avoid a technical recession this year. • However, Nigeria, Angola, Zambia and even Botswana, being overly reliant on just a few sectors to drive growth, will most likely contract this year. The only question is by how much? • Tourism-dependent economies will take a hit. We still don’t see any meaningful recovery in tourism until a global vaccine is at hand. The weakness in the tourism sector is mostly a BOP problem rather than a growth problem for many African countries. However, the service value chain that relies on a robust tourism sector too, will most likely weigh down growth in these economies. • Despite leading economic indicators implying an improvement in business confidence and economic activity in H2:20, we ought to remain cautious given the many unknowns of the pandemic. Still, as most authorities have relaxed domestic containment measures and as external demand for exports has recovered, economic activity has picked up, albeit from a trough in Apr. The outlook though is clouded. • Fixed income strategy: as central bank MPCs have eased policy and as global risk appetite has improved, local fixed income markets have rallied since May. Of the markets in our coverage, Uganda, Egypt, Ghana and even Kenya have seen a resumption in foreign portfolio inflows. However, owing to the upcoming elections in Ghana and Uganda, fiscal slippage risks are elevated. Hence, we would wait for better entry levels on both FX and yields. We still favour the Kenya Infrastructure Bonds (KENIBs). Also, given the relative attractiveness of EGP real yields, it may be time to look at those government bonds more closely. • FX strategy: given that we see limited scope for the NGN being devalued, we are comfortable selling the USD/NGN NDFs. We see a higher probability of the CBN providing FX supply to the market without necessarily allowing the NAFEX rate to materially adjust higher. Of course, the CBN would be conscious of providing FX liquidity to investors, that would swiftly exit the market, thereby, compounding external account pressures. However, significantly lower OMO yields present little incentive for foreign portfolio investors to stay in the market. We also remain constructive on the EGP and are still sellers of the USD/EGP NDFs. But for the ETB and AOA, we see value in buying the NDFs given the historical appreciation of the real effective exchange rates, combined with the likely pressure that will manifest from the IMF to allow the exchange rates to adjust. 1 Standard Bank African Markets Revealed September 2020 GDP growth outlook: recovery expected but outlook clouded Macroeconomic forecasting inherently comes with its own complexities, now exacerbated by the unknowns of the pandemic. We therefore present a scenario-based analysis to outline the various pre-conditions for our forecasts to be accurate. The IMF now expects GDP growth in Sub-Saharan Africa (SSA) to contract by 3.2% y/y in 2020, before recovering to 3.4% y/y in 2021. Admittedly, the pandemic has brought about a confluence of factors that have weighed down growth in most economies in our coverage. The pandemic initially dislocated global supply chains which inevitably disrupted trade and subsequently made it cumbersome for most firms to source raw materials. This has been compounded by public health restrictions and lockdowns. An abrupt halt to cross- border travel has dented tourism-dependent economies, and the sharp slide in oil has spurred external and fiscal pressures for oil-exporting nations. However, most governments have now begun to ease curfews and lockdowns. So, off a low base, of course economic activity has started to recover. Figure 1 shows that since Jun and Jul, most Purchasing Managers Indexes (PMI) indicate some improvement in business confidence and private sector economic activity. Figure 1: Purchasing Managers Index 60 50 40 Index 30 20 Aug 17 Aug 18 Aug 19 Aug 20 Egypt Uganda Mozambique Kenya Nigeria Zambia Source: IHS Markit The IMF turned even more bearish on its outlook for SSA when it reviewed its growth projections in Jun. The expected 3.2% y/y contraction for 2020 is the worst on record since data collection began. Arguably, Q2:20 GDP growth will probably reflect the worst of the pandemic. So far, from the latest available data, GDP growth in Q2:20 has contracted by 6.1% y/y, 3.3% y/y, and 3.2% y/y in Nigeria, Mozambique and Uganda respectively. Notably, economic growth in Ghana and Rwanda contracted by 3.2% y/y and 12.4% y/y respectively in Q2:20. These outcomes were far worse that our bearish scenario estimates. Even for economies for which we currently don’t anticipate a contraction for the full year 2020, it is highly probable that GDP growth would have contracted in Q2:20. Figure 2 shows that while we expect growth in Kenya, Uganda, Tanzania, and Côte d’Ivoire to decline meaningfully from 2019 levels, we don’t expect them to contract in 2020. But African countries can’t be said to be a one size fits all. Those economies more diversified than others, such as the ones above, will probably be a lot more resilient. But others such as Nigeria, Angola and even Botswana that are heavily concentrated and 2 Standard Bank African Markets Revealed September 2020 reliant on one or a few sectors, don’t really have a hedging mechanism to weather the storm. All three are set to contract in 2020, it is just a question of how much. Other economies such as Zambia, Mozambique and even Namibia came into 2020 with longstanding macroeconomic vulnerabilities, now exacerbated by the pandemic. For them, economic growth recovering will be protracted. It would seem wiser to await Q2:20 GDP outcomes before forecasting 2020 GDP growth for the countries we cover but we choose the more pre-emptive route. Whilst the growth outlook for 2020 would depend on just how poor Q2:20 GDP was, we also ought to appreciate certain idiosyncrasies, in various economies across the continent, that could underpin their resilience despite the pandemic. For instance, East African economies, being well diversified, also have large subsistence agricultural sectors accounting for nearly a third of economic activity. So, while the dislocation of global supply chains in the immediate aftermath of the pandemic had disrupted commercial agricultural exports, subsistence farming has remained robust. Figure 2: Standard Bank Research growth forecasts vs the IMF Tanzania Ethiopia Cote d'ivoire Kenya Egypt Ghana Uganda Senegal Malawi Rwanda Mozambique Angola Nigeria DRC Zambia Namibia South Africa Mauritius Botswana -15 -10 -5 0 5 10 % y/y 2020 GDP growth (IMF) 2020 GDP growth (SB Research) Source: IMF; Standard Bank Research Notwithstanding desert locust invasions potentially destroying harvests in the Eastern and Horn of Africa region, the weather has been broadly favourable for the agricultural sub-sector this year. The pandemic hasn’t truly affected subsistence farming. Admittedly, some economies will face severe headwinds associated with lower oil prices. For instance, the Angolan economy has been contracting since 2016. Hence, given the sharp decline in oil prices, structural deficiencies will most likely be exacerbated, which thereby will result in a rather protracted economic recovery path. To reiterate, other economies that rely on the tourism sector too could suffer. Despite many African economies opting to re-open their international airspace between Jul and Sep, we’d foresee little meaningful pick-up in tourist arrivals until a vaccine is in effect. Economic activity should modestly recover from H2:20 as domestic containment measures are lifted and as external demand from key trade partners recovers. However, the damage during Q2:20 could prove protracted. Jobs lost then are unlikely to be 3 Standard Bank African Markets Revealed September 2020 restored soon, considering the acute cashflow shortages. Scaling back on wage costs could be a primary strategy to safeguard profitability. One should therefore be most cautious about GDP growth numbers for H2:20 and even H1:21 where significant and favourable base effects would unwind. Critically, the nature of the pandemic crisis still spells a highly uncertain outlook, notwithstanding the recent pick-up in most leading economic indicators from Jun 20. Has viral testing been adequate? From the outset here, we must point out that we’re neither epidemiologists nor virus specialists. However, arguably any further domestic curfews or lockdowns would present notable downside risks to our economic growth outlook for H2:20 and 2021. Still, our base case scenarios do not factor in recurring lockdowns. The Oxford Stringency Index in Figure 3 indicates the severity of various countries’ public health restrictions. Uganda, Kenya, Ethiopia, Morocco, Rwanda and Angola have had quite stringent restrictions — but Tanzania, Zambia, Senegal, Côte d’Ivoire, Mauritius and Ghana less so.