Renaissance Capital:
It has been downhill for the global economy since financial markets
tumbled in August, while the West was on its summer holiday, on the
back of economic data releases that revealed weaknesses in the
economies of the West. Revisions to the US GDP numbers revealed that
the 2008 recession was more severe than initially estimated and that
the recovery thereafter was weak. The US economy only grew by 1.1% in
1H11, in annualised terms, implying that quantitative easing had not
been as effective in kick-starting the economy as the Federal Reserve
would have liked. Moreover, the heavily indebted EU is not growing –
and may never grow strongly if its debt is not restructured. Concerns
about the funding of European banks add to the poor sentiment in the
EU. The indications are that we are in for a double-dip recession,
though mild compared to 2008. However, Sub-Saharan Africa’s (SSA)
buffers are not as strong as they were in 2008, implying that some in
the region may be more vulnerable going into a recession, although
still strongly outperforming developed markets (DM). The one
mitigating factor is that this recession could be much milder than
that of 2008/2009. Here we explore the likely implications of weak
global growth, and even weaker EU growth, on SSA. We are moderating
our 2011 and 2012 forecasts for Nigeria and Zimbabwe and our 2012
forecasts for Kenya and Zambia, but hiking our 2011 forecast for
Ghana. We still see the SSA region as one of the strongest globally in
a recessionary environment. In this environment, we expect producers
of consumer goods, which depend on internal demand, to outperform
export-oriented industries, including the extractive industries.
Nigeria – we are revising down our growth projections to 7.2% and 7.0%
in 2011 and 2012, respectively, from 7.6% and 7.8%. Nigeria enters
this downturn with a smaller current account surplus (3.7% of GDP in
2010, compared with 15.8% of GDP in 2008), a federal budget deficit of
(5.1% of GDP in 2010, compared with a surplus of 1% of GDP in 2008)
and lower official reserves (at about eight months of merchandise
imports in September 2011, down from 23 months at YE08). Our downward
adjustment of Nigeria’s real GDP growth in 2011 is due more to the
downward revision of growth in 1Q11 to 6.6%, from 7.4%, than to the
global economic downturn. The upside for Nigeria’s growth outlook is
that the non-oil sector, which produces 80% of GDP, is the primary
growth driver, so the impact of a lower oil price on growth is likely
to be limited. Moreover, Nigeria’s economic growth is mainly
internally driven, which is evident from the sectors that drive growth
– including commerce, telecommunications and agriculture, which is the
biggest employer. However, the impact of this global economic downturn
will, in our view, be more pronounced for Nigeria’s external sector
and budget than for its real economy. We expect export earnings to
fall by about 10% in 2012, owing to a lower oil price (we project an
average price of $100/bbl in 2012). As oil generates over 95% of
export earnings, is the biggest source of FX inflows and generates 75%
of federal tax revenue, we think a decline in oil export earnings will
delay the recovery of the current account surplus and challenge fiscal
consolidation.
Kenya – we are maintaining our 2011 growth projection of 4.3%, and
cutting our 2012 projection to 4.5%, from 5.1%. Similarly to 2008, the
global downturn is hitting Kenya when it is particularly fragile. In
2008 the economy had been battered by the post-2007 election violence
and was in the early stages of a drought. Three years later, the
Kenyan economy is approaching a global economic downturn in an even
weaker condition than it was at the onset of the previous crisis. A
severe drought is undermining economic growth. Inflation has
accelerated to the high teens YtD. The twin deficits are worryingly
wide (with a current account deficit of 14.4% of GDP in 1Q11, on our
estimates). The shilling is in freefall (having depreciated 25% YtD),
and public debt is rising to dangerous levels (at 56% of GDP at 3M11).
We believe growth slowed in the subsequent quarters of 2011, from 4.7%
YoY in 1Q11, due to poor agricultural production. However, we expect
the projected return of good rains in 4Q11 to allow for a recovery in
the agriculture and hydroelectricity sectors in 2012. Reduced imports
should help to narrow the current account deficit and boost the effect
of net exports on GDP growth. But the economy will, in our view,
remain fragile, as it is entering this downturn with wider twin
deficits, a weaker FX reserves position and higher public debt than it
did in 2008. The government therefore has limited fiscal space to
stimulate the sectors that would be adversely affected by a global
recession. Moreover, the recent switch to stronger tightening of
monetary policy implies downside risk to our 2012 growth projection.
Zimbabwe – we are revising down our 2011 and 2012 growth projections
to 7.0% and 6.6%, respectively, from 7.5% and 7.0%. Zimbabwe is one of
the few SSA economies entering the global economic downturn with a
moderately stronger economy than it had in 2008. When the 2008 global
crisis hit, Zimbabwe’s economy was in its seventh year of decline.
However, the global crisis compounded the decline – Zimbabwe’s economy
contracted 14.8% in 2008. This time around, it is growing, largely due
to strong recoveries in the agriculture and mining sectors. FX
reserves have increased, but remain low, implying the economy is still
vulnerable to external shocks. The government’s adoption of a cash
budget system has allowed for the containment of the fiscal deficit.
However, fiscal space is severely constrained by the lack of access to
external financing (due to the government’s massive debt) and the
absence of donor support. The current account deficit remains wide
owing to a high dependence on imports, partly due to the decline of
the manufacturing sector. Dangerously low FX reserves (less than a
month of import cover), a highly constrained fiscal space, massive
public debt (almost 100% of GDP) and a wide current account deficit
imply that Zimbabwe has very limited buffers to withstand a potential
global recession in 2012. Softer commodity prices will, in our view,
subdue growth in mining, but agriculture is likely to continue to
exhibit robust growth in 2012, as long as good rains continue.
If you have any questions or comments regarding this report, please
contact Yvonne Mhango.