May 2024 Africa Macroeconomic Outlook

Economic Overview: Nigeria, Kenya, South Africa, Egypt & Ghana 

In April 2024, the economic performance of African markets displayed notable variations. While inflation rates rose in Nigeria and Ghana, they declined in South Africa, Egypt, and Kenya. 

In Nigeria, inflation remains elevated (33.2% in March 2024) due to persistent bearish inflation expectations, the exchange rate pass-through effect on commodity prices, and ongoing food price pressures, with rates expected to rise further. In contrast, annual inflation figures are easing in countries like Kenya and Egypt. The April 2024 data from Kenya shows a decrease in annual inflation to 5%, significantly below our most conservative projections of 5.77%. This downward trend suggests that inflation risks in Kenya have notably dampened due to easing currency pressures. In Egypt, price pressures are also abating as March’s inflation figure cooled to 33.3% from a four-month high of 35.7% as food and energy costs reduced. 

Monthly inflation numbers present a different perspective, better reflecting current

Nigeria Country Analysis: Currency, Inflation and Interest Rate risk

Nigeria: Currency risk 

In April, the Nigerian naira reversed its gains at the official and parallel markets. The decline was primarily driven by low forex liquidity, evidenced by the decrease in forex turnover by 74% to $225.36 million from $857.78 million in March. Demand pressures coinciding with speculative activities and bearish investor sentiments also pervaded the FX markets. The CBN, drawing from its reserves and selling FX to BDCs, is expected to increase market liquidity in the near term. This will temporarily be supported by the gradual rebound in investor confidence towards the country, driven by Fitch’s recent credit rating revision to positive from stable. Still, the apex bank will be cautious with reserve drawdowns to stave off negative market sentiments. The CBN drawing on its reserves is not an uncommon practice for developing countries looking to manage an economic crisis. However, there are concerns that the burn rate has exceeded the Nigerian government's ability to attract essential dollar inflows needed to offset drawdowns used to defend the naira. 

Stears predicts the naira will depreciate towards ₦1,415.78/$ at the end of Q2’2024 from ₦1,300.03/$, despite expected funding from the World Bank ($2.25 billion) and continued CBN interventions. A significant risk to the naira’s outlook is that government revenue continues to trend lower as theft, vandalism, and lingering structural issues continue to affect the production of essential export commodities (cocoa and crude oil) from which Nigeria could benefit. Oil prices are over $80 per barrel, and cocoa prices are at multi-year highs. Government revenues are still tepid, as evidenced by the recent 46% decline in total federal allocation revenues disbursed in March for April. The fiscal deficit as a percentage of GDP is 5.3%, above the 3% Fiscal Responsibility Act (FRA) benchmark. The 71% debt service to revenue ratio remains higher than the 23% threshold stipulated by the IMF for developing economies. These metrics highlight the government’s fiscal constraints, emphasising the urgency of incentivising dollar inflows to support monetary policy measures. 

The naira’s recovery hangs in the balance because of the persistent dissonance between fiscal and monetary measures to encourage dollar inflows and support the currency. This risk will persist in the short term, barring any new policy pronouncements and implementations that state otherwise. 

Nigeria: Inflation and interest rate decisions 

Nigeria’s inflation climbed to 33.2%, a 28-year high, in March 2024. Rising prices have constrained consumer wallets, primarily driven by higher food and energy costs, leading to declining demand and consumption. Y-o-Y food inflation jumped to 40% from 37.92% in the previous month. The country’s core inflation rate also increased by 6.3 percentage points to 25.9% from 19.6% a year ago, spotlighting underlying structural issues fuelling inflationary pressures in Nigeria. Manufacturers continue to pass the burden of higher operating expenses to consumers through higher prices.  Elevated prices will stifle aggregate consumption in the near term, pointing to a price-resistant and sensitive consumer market heavily skewed to demanding necessities. It also means that the negative rate of returns on investments will persist. 

However, m-o-m inflation, a better reflection of market realities today, declined to 3.02% from 3.12%, signalling that the impact of the naira’s rally in March began to impact prices. Food inflation (m-o-m) also slowed by 0.1%. However, since April 17, the naira reversed its positive momentum, signalling a resurgence of inflation risks. Nigeria’s persistently high inflation rate will be a critical factor for the MPC at its meeting on May 21/22. We anticipate the MPC will maintain a tightening stance, potentially raising interest rates by 100-200 basis points. 

South Africa Country Analysis: Currency, Inflation and Interest Rate risk

South Africa: Currency risk

The South African rand has shown relative stability despite the pressures from a strong US dollar, which continues to influence global currency markets. While the rand benefited from a marginal increase in foreign exchange reserves and reduced load-shedding hours, it still lost 0.05% in April. This trend may persist as US interest rates remain elevated. The South African Reserve Bank (SARB) has indicated its intention to maintain high-interest rates, using forward guidance to support the currency while managing inflation and stabilising exchange rate expectations. However, any rand depreciation could exacerbate already high inflation risks, particularly as import costs rise.

Eskom's recent improvements in operational efficiency have led to a positive outlook for the winter months when electricity demand spikes, reducing the stages of rolling blackouts. The utility has achieved a 9% reduction in unit breakdowns since April 2023. It has significantly cut diesel expenditures by 50% compared to last year, suggesting a structural improvement in the reliability of its power plants. This recovery coincides with heightened political activity as political parties intensify their campaigns before the May 29 election. 

With the ruling African National Congress (ANC) facing the possibility of losing its parliamentary majority for the first time in three decades, voter sentiment has been notably affected by power cuts. According to a BrandMapp-Silverstone survey, two-thirds of respondents indicated they might not vote for the ANC due to ongoing electricity issues, underscoring the critical link between economic management and political stability. The current improvement in power supply points to increased output that will boost investor sentiments, likely supporting dollar inflows and shoring up the rand’s value. However, this trend of better power supply will probably be temporary due to the recent political climate, keeping the rand’s performance influenced primarily by market sentiments and the US dollar’s movements in the near term. 

South Africa: Inflation and interest rate decisions 

In March, South Africa's headline inflation cooled to 5.3% from the four-month high of 5.6% in February due to easing food and energy prices. Food inflation reduced to 5.1% from 6.1%, and transport inflation fell by 0.1 percentage points to 5.3% from 5.4%. Core inflation, which excludes volatility in essentials like food and energy, decreased to 4.9%, suggesting a mitigation of other underlying inflationary factors. 

Month-on-month inflation dropped to 0.8% in March from 1.0% in February, indicating decreased price pressures. However, South Africa's inflation rate still exceeds the SARB's 4.5% target, suggesting a continued cautious monetary stance to mitigate inflation. At its last MPC meeting in March, the SARB expressed concerns over heightened inflation risks, citing anticipated food supply shocks from adverse weather conditions and persistent currency risks. This indicates that the SARB will maintain its tightening stance, leaving rates higher for longer. A hawkish SARB, with the attendant increase in effective interest rates, will remain attractive to investors who are still eyeing emerging markets, especially for short-dated investments. On April 30, the 12-month T-bill rate increased by 0.37 basis points to 8.36% from 7.99% in March, indicating better yields and a positive rate of return of around +3.06% for investors. 

Egypt Country Analysis: Currency, Inflation and Interest Rate risk

Egypt: Currency risk 

In April 2024, the Egyptian pound continued its downward trajectory, depreciating by 5% since March. This decline reflects ongoing concerns, heightened by the recent escalation of the Gaza war, which has negatively impacted investor confidence and disrupted key foreign exchange sources such as tourism and Suez Canal revenues. The ongoing conflict has declined Egypt’s revenue from the Suez Canal by about 50% this year, entrapping approximately $10 billion of annual earnings and straining the Egyptian pound. Moreover, the US dollar’s appreciation has compounded these challenges, contributing to the pound's decline.

However, there are emerging signs of currency stability. Following decisive economic reforms initiated in early March, including a 600-basis-point interest rate hike and the shift to a floating exchange rate as part of an agreement with the International Monetary Fund (IMF) for a $5 billion loan expansion to $8 billion, the Egyptian economy is at a critical juncture. On April 1, the IMF stated in its review of Egypt’s performance under the Extended Credit Facility program that authorities will have immediate access to $820 million to support its economic stabilisation plans and reform efforts. Recently, Fitch revised Egypt’s sovereign debt outlook to positive from stable, citing the short-medium-term positive impacts of the reforms. These measures, long advocated by the IMF, aim to rectify foreign currency shortages and enhance the competitiveness of Egyptian exports by aligning the pound's value more closely with the market realities.

These reforms mark a significant policy shift. The UAE's recent $35 billion commitment to land-development projects and additional investments from Gulf Cooperation Council countries have injected much-needed liquidity into Egypt's economy. This financial influx is expected to bolster Egypt's reserves and support the currency in the forthcoming months, alongside additional funding from the IMF. Nevertheless, the transition to a floating exchange rate remains fraught with challenges. The Egyptian government's tendency to return to a fixed exchange rate after devaluation raises concerns about the sustainability of its new economic strategy. As a result, markets will likely approach the government's reforms cautiously, waiting for longer-term benefits to materialise. This caution will lead to a risk premium being attached to investments. As a result, the Egyptian pound is anticipated to continue its downward trend, albeit slower than in April. This is because external financing will relieve the currency, bolstering the monetary authorities' ability to defend its value.

Egypt: Inflation and interest rate decisions

In March, Egypt’s headline inflation fell to 33.3% from 35.7%, driven by lower food prices. Food accounts for 32% of Egypt’s inflation basket and largely dictates the pace of the headline inflation rate. Food inflation reduced sharply to 41.06% from 62.75%, while core inflation declined to 33.7% from 35.1%. 

Monthly, inflation decreased even more rapidly, signalling fast easing price pressures. The headline inflation rate moderated to 0.95% from 11.7% in February, primarily due to significantly lower food and non-food prices. Food inflation (m-o-m) eased to a deflationary figure of -3.2% from 6.2%. This means that inflationary pressures are quickly disappearing, a trend likely to continue in the coming month. Additionally, core inflation, which strips out food and energy prices, decreased from 13.2% to 1.4%, hinting at the reduced effect of structural issues feeding into consumer prices. Essentially, inflation in Egypt is expected to maintain a downward trend in the near term, though geopolitical risks and the attendant increase in import costs significantly threaten this outlook. This is because the impact of the Gaza conflict and disruptions in the Red Sea continues to undermine economic stability and contribute to heightened inflation risks. With businesses struggling with higher import costs, prices will increase further, squeezing consumer wallets and dampening aggregate demand/consumption levels. 

In addition to the existing risks, the headline inflation rate remains above the CBE’s target ceiling of 9%, indicating that the central bank will remain hawkish. 

As we look ahead, the Central Bank of Egypt's (CBE) continued tight monetary policy will be crucial in managing inflationary pressures and supporting the Egyptian pound. The international community's positive outlook on Egypt's economic reforms and the strategic use of incoming foreign investments will be vital in navigating the complex macroeconomic landscape. With GDP growth expected to slow to 3%, the effectiveness of Egypt's policy measures in fostering economic stability and growth will remain under scrutiny. We predict a further increase in the monetary policy rate by 100-200 basis points to rein inflation and keep short-term yields attractive to investors. In the short term, the relatively positive outlook on the Egyptian economy from multilateral and bilateral creditors is expected to support the currency amid the CBE’s tightening stance to narrow the inflationary gap. 

Ghana Country Analysis: Currency, Inflation and Interest Rate risk

Ghana: Currency risk 

The Ghanaian cedi consistently depreciated in April, shedding 3% of its value month-on-month. Currency pressures persisted due to the ongoing shortage of dollars, limiting the central bank's capacity to bolster the currency. Like Nigeria, foreign exchange earnings from crucial sources of income, including crude oil and cocoa, have been met with considerable structural shocks that have pervaded output levels, constraining the country’s ability to garner substantial revenue from higher cocoa and oil prices. According to the International Cocoa Organisation (ICCO), Ghana’s cocoa production as of March 2024 is 448,000 tonnes. This output level is 45 percentage points below the government’s target of 820,000 tonnes for the 2023/2024 cocoa season, indicating weak export earnings. 

Additionally, Ghana has been scrutinised by investors who are pricing in the country’s debt sustainability risks against its currency, leading to lower capital inflows, mainly from portfolio investors. Ghana is set to receive an additional $360 million from the IMF, but this finance is premised on the country coming to a mutual debt restructuring agreement with its international creditors. The possible delays in funding will strain the capacity of monetary authorities to defend the currency. Amid weak exports, bearish investor sentiment, and high exchange rate expectations hurting the cedi, the dollar's rise further affects its value. After the US Fed’s meeting on May 3, the cedi depreciated to ₵13.42 from ₵12.88 against the dollar. 

The Cedi’s short-term recovery is unlikely as the country struggles to generate substantial foreign exchange. Oil and cocoa revenues will remain tepid as Ghana struggles to improve production levels. Additionally, possible delays on the IMF support fund as debt restructuring talks with international creditors are yet to be finalised will trigger bearish market sentiments towards the Ghanaian economy despite improving economic fundamentals. Investors will keep pricing in rising debt risks against the country, reducing investment inflows. Ghana’s debt-to-GDP ratio is 86.07% as of 2023, ~36 percentage points above the IMF’s 50% threshold for developing countries. 

Ghana: Inflation and interest rate decisions

In March 2024, Ghana’s inflation rate increased to 25.8%, the highest level in four months. Rising food prices primarily drove the sharp increase. Annual food inflation climbed to 29.6% from 27% the previous month due to higher prices of fruits, protein, vegetables, cereals and coffee. For instance, vegetable prices rose from 37.9% in February to 41.1% in March, a 3.2 percentage point increase. Non-food inflation also surged 22.6% from 20% in February due to rising housing, hospitality, education and transport costs. However, like Nigeria, the month-on-month inflation rate slowed to 0.8% from 1.6% in February, indicating that inflationary pressures are slowing down. This can be attributed to the Bank of Ghana’s aggressive tightening measures that have mopped up excess market liquidity. Food and non-food inflation rates declined month-on-month to 1.0% and 0.7%, respectively. While this is positive, aligning with the IMF's optimistic view of the Ghanaian economy as evidenced by the decline in average inflation projections to 22.3% in 2024 from 37.5%, inflation risks remain high due to ongoing currency pressure.

With the Ghanaian cedi steadily losing steam, imported inflation, especially on food and energy items, will rise further due to the exchange rate pass-through effect. This implies that businesses will continue transferring the burden of increased operating costs to consumers by raising prices and heightening inflation risks. To bolster the cedi and stabilise inflation and exchange rate expectations positively during ongoing debt restructuring talks, the BoG will maintain a hawkish stance. We anticipate the bank to hold rates at its May meeting once again to ensure effective rates remain sufficiently high to sustain short-term investor interest and stimulate dollar inflows.

Kenya Country Analysis: Currency, Inflation and Interest Rate risk

Kenya: Currency risk 

Compared to March, the Kenyan shilling appreciated in April, on average, by 4.4%, to trade at Ksh131.57/$ from Ksh137.35/$. However, the currency was volatile in the month, depreciating by 2.29% from Ksh 130.22/$ on April 9 to Ksh 133.28/$ on April 30, indicating renewed currency pressures and fewer interventions from the Central Bank of Kenya to support the currency despite the ~2% increase in foreign exchange reserves to $7.23 billion from $7.09 billion in March. The markets foresee the currency undergoing a correction, gravitating towards its fair value after substantial interventions by the Central Bank, supported by IMF funds, to stabilise the foreign exchange markets. Inflation risks are higher with mildly elevated currency risks, though less aggressive than the past year and recent flooding events likely to impact food production. While these risks are primary considerations for the CBK to anchor exchange rate expectations positively, Kenya's lingering optimistic outlook from the IMF and World Bank and stabilising macroeconomic fundamentals will further support the Bank’s exchange rate stabilisation efforts. In addition to foreign dollar inflows, export earnings are to keep improving, bolstering the government’s coffers.

According to the latest available data from the Kenya Bureau of Statistics (KNBS), export earnings in Q3’2023 rose by ~20 percentage points from Q3’2022 due to bumper tea, horticulture and coffee earnings. Export revenues from all three commodities, contributing over 30% to total exports, increased by an average of 25 percentage points in Q3’2023 from Q3’2022, leading to the current account deficit narrowing by 42%. Additionally, remittance inflows have increased by 36 percentage points between Q3’2022 and Q3’2023 as the US economy rebounded. Inflows from the US account for over 50% of Kenya’s remittance inflows. The international community's optimistic view of Kenya’s economy supports the currency. The IMF and World Bank support funds and positive outlooks on the country are expected to keep incentivising investment into Kenya, increasing dollar inflows and aiding the shilling’s value in the short term. 

Kenya: Inflation and interest rate decisions

The shilling’s downward movement in April and its potential impact on future inflation will be a significant consideration for the Central Bank at its upcoming meeting. In April 2024, Kenya’s inflation eased for the third consecutive month to 5%, within the CBK’s target range of 5±2%. The decline was primarily driven by easing food and energy prices. In April, diesel, petrol, kerosene and electricity (200 kilowatts) prices decreased by 5.2, 2.7, 9.7, and 7.7 percentage points compared to March, leading to a sharp decline in the fuel sub-index to 3.8% from 8.0%. Food price inflation also decreased to 5.6% from 5.8%, as major staples like beans, cooking oil, maise, kale, and sugar witnessed considerable price decreases. 

Month-on-month inflation declined to -0.2% from 0.2% in March on reducing currency pressures, leading to decreased import expenses on food and energy items. The monthly inflation rate declined on anchored inflation expectations as the CBK maintained its tightening stance. All sub-indices, including food, energy, housing and transportation, declined m-o-m. With inflationary pressures subsiding, consumer spending is expected to rebound gradually, supporting business revenues. The IMF projects a three percentage point increase in real GDP per capita (PPP) to $5,571 in 2024 from $5,400 in 2023. Moreover, based on the latest PMI data, firms are optimistic about the upcoming months, anticipating a continued appreciation trend in the shilling. This trend will likely alleviate import costs, while consumer spending will likely increase as wallets reopen, driving up demand and consumption levels.

While inflation risks are dampened, the CBK is unlikely to cut rates at its meeting as the committee will continue considering Kenya’s vulnerability to global economic shocks. The bank will factor in April's downward exchange rate trend and prioritise maintaining high rates to curb exchange rate expectations further. This strategy will uphold favourable rates of return, ensuring Kenya's effective rates remain attractive to investors amid globally high-interest rates.