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Opinion

SSA: Upside growth surprises are very likely

Phumelele Mbiyo, Head - Africa Research, Standard Bank
June 16, 2017, midnight
890

Word count: 659

An uptick in Africa’s economic growth seems well underway. This will most likely prompt forecasters like the International Monetary Fund (IMF) to upgrade their growth forecasts for 2017 and 2018. The laggards are likely to be those commodity exporters that are not allowing their economies to adjust to a low commodity price environment. These countries have been consistently employing a whole host of measures to restrict imports and, perhaps inadvertently, capital flows. These measures have included FX rationing and market segmentation.

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An uptick in Africa’s economic growth seems well underway. This will most likely prompt forecasters like the International Monetary Fund (IMF) to upgrade their growth forecasts for 2017 and 2018. The laggards are likely to be those commodity exporters that are not allowing their economies to adjust to a low commodity price environment. These countries have been consistently employing a whole host of measures to restrict imports and, perhaps inadvertently, capital flows. These measures have included FX rationing and market segmentation.

Even the IMF has written favourably about capital account controls. The Fund sees them as being helpful in dealing with shocks, allowing macroeconomic policies to run their course, or in instances where a country does not have the scope to change macroeconomic policy. However, the IMF still insists that these measures should be temporary. Therein lies the challenge for Africa’s commodity exporters that have chosen to continue imposing capital controls.

Global risk appetite remains elevated, with the VIX index, our preferred measure of global risk aversion, at multi-year lows. Of course, it is not as if there aren’t any plausible risks globally. But the markets seem to be discounting those risks. It still appears that markets are focusing mostly on the US economy, and the potential impact of macroeconomic policy there. So long as risk appetite remains elevated, risk assets, including commodities, are likely to be supported by investor appetite.

At the beginning of the year it seemed plausible that commodity prices would trend mostly sideways. We didn’t believe that there would be enough to push prices higher on a sustainable basis. Sure, we noted that some prices, especially oil, had increased notably since bottoming out in early 2016. But even for oil prices the supply-demand dynamics didn’t seem to be amenable to sustained increases in prices.

As it has turned out, oil prices have been hemmed in a $45/bbl - $55/bbl range. The attempt by OPEC and some non-OPEC members to reduce supply doesn’t seem to be working. Remarkably, despite a well-known tendency for OPEC members not to comply with production quotas, they seem to have broadly stuck to the agreement this time. Yet prices are not showing any sign that they will rise consistently.

Hence, it is highly doubtful that a resurgence of commodity prices will prove to be a palliative for commodity-producing countries on the continent. Hence, so long as policy makers are not prepared to allow their currencies to bring about macroeconomic rebalancing, the cost will come in the form of lower than potential economic growth.

There are a number of upcoming elections that could turn out to be pivotal. The Rwandan presidential elections, to be held on August 4, will probably not have many policy or economic repercussions. In a referendum in December 15, Rwandans overwhelmingly approved, with 98% of the votes, a constitutional amendment that allows the president to run again for another 7-y term. Nonetheless, there is still the likelihood that some aid partners will express their disapproval of the fact that President Kagame has not stepped down. There may even be some cuts in aid too.

Rather than being a potential source of major instability, the Kenyan elections to be held on August 8 will be yet another test of institutional maturity. This year marks the end of the second medium term plan developed under the auspices of Vision 2030, the long term development plan that the country adopted in 2008. A key aspect of that vision is a political pillar that seeks to entrench the rule of law and protect individual rights and freedoms. All indications thus far suggest that institutions, like the courts, the electoral commission and others, are being stretched to ensure that these goals are met.

It still remains highly probable that the Angolan elections, on August 23, will be relatively uneventful. The ruling Movement for the Liberation of Angola (MPLA) finally announced that its vice-president, and former Defence Minister, would be the presidential flag bearer.

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