BMI Foresees Better Growth in South Africa, Despite Disruptions at Local Ports

Andreu PaddackIn the current discourse, as articulated by BMI sub-Saharan Africa Country Risk Analyst Andreu Paddack in a recent publication sourced from Creamer Media, it is forecasted that Nigeria and South Africa, having exerted a retarding influence on sub-Saharan African economic advancement in 2023, are poised to invert this trajectory in the ongoing annum. This reversal is anticipated as both nations mitigate the impacts of adverse factors that precipitated the deceleration observed in the preceding year.

The research company expects overall growth in sub-Saharan Africa to accelerate to 3.7%, up from 2.8% in 2023. This is also higher than previously forecast global growth of 2.3%. “Eastern and Central Africa will again be the locus of economic growth in sub-Saharan Africa, with key markets including the Democratic Republic of Congo (DRC), Ethiopia and Rwanda forecast to experience high growth of above 6%, with other markets like Kenya following close behind,” he said.

The sizeable nature of the markets such as the DRC, Ethiopia and Kenya would cause East African growth to contribute significantly to the overall growth prospects for sub-Saharan Africa, Paddack added. A key driver of sub-Saharan African growth will be a broad disinflationary trend that is forecast to support private consumption across the region, and BMI also expects to see the levels of fixed investment growth accelerate during this year.

BMI broadly expects inflation to fall from 2023 levels across sub-Saharan Africa markets, driven by the easing of energy prices and favourable base effects.

“Consequently, we think this creates room for the majority of central banks in the region to ease monetary policy. Similar dovish pivots are expected from developed country central banks in 2024,” Paddack said.

This will see a narrowing of the interest rate differential between developed and sub-Saharan African markets, and gradually increase the risk appetite for emerging market debt, and reduce the downside pressure on sub-Saharan African currencies, as demand for dollar and safe-haven assets recede.

These factors combined presented a suitable environment for rate cuts in sub-Saharan Africa in the coming year, which was forecast for most large markets, he said.

“However, we note that monetary easing is likely to be cautious in light of the risk of resurgent inflation. Notably, one factor that can drive risk is El Niño, which drives abnormal weather in Africa and negatively impacts on crop production.

“While our core view is that this El Niño will remain moderate historically, it is likely that it may place a floor on food prices. We will monitor the effects of this closely,” he added.

Meanwhile, BMI expects the trend of rising debt servicing costs of the majority of the sub-Saharan African market to continue this year, with expensive debt servicing putting pressure on fiscal balances, he said.

This is also likely to be driven by looming debt maturities, as a number of Eurobonds reach maturity. Kenya, for example, has about $2-billion in Eurobonds that are expiring this year.

“This means that a considerable portion of sub-Saharan African government revenues will be allocated to debt repayments, as opposed to stimulating domestic economies. We believe this will place a cap on government expenditure contributing to real gross domestic product growth,” said Paddack.

Further, the high Eurobond yields will continue to lock most sub-Saharan African markets out of international debt markets, with a few exceptions. Markets that are priced out are likely to turn to domestic debt markets, which are shallower and demand a higher premium on debt. BMI believes this will act as a headwind to investor sentiment towards sub-Saharan Africa debt.

“We generally expect fiscal balances to continue to feel the squeeze in 2024, and fiscal balances as a percentage of gross domestic product are forecast to remain high by historical standards.”

Shipping Changes

The increased number of port calls to South African ports recently is likely to only exacerbate disruptions to the country’s ports, said BMI sub-Saharan Africa country risk analyst Lara Wolfe.

Following attacks on ships in the Red Sea by Houthis, a significant portion of container ships have been redirected around the Cape of Good Hope.

“One of the risks we are flagging for sub-Saharan Africa in terms of the Red Sea attacks is in terms of the risks of increased port disruptions, particularly in South Africa, as a result of container ships travelling around the continent.

“While this is likely to exacerbate the port disruptions seen in South Africa since the fourth quarter of 2023, if container ships docking severely limit port capacity, this can pose downside risks to exports not only in South Africa but other major deep sea ports, such as Mombasa, Kenya, and Dar es Salaam, Tanzania.

“This will impact not only on exports in these countries, but can also impact exports of landlocked countries that rely on these major regional ports,” she said.

The BMI team expects South Africa’s growth to accelerate to 1.7%, although it is expecting significant headwinds to persist that will keep the growth rate well below the regional average.

“We anticipate that growth will largely be driven by private consumption this year, bolstered by moderating prices and a dovish pivot by the South African Reserve Bank (SARB). Declining unemployment and lower levels of load shedding are likely to support consumer confidence this year,” said Wolfe.

However, the team also expected business activity to remain sluggish, reflecting the structural constraints, such as persistent power outages, poor transport linkages and port disruptions, she added.

Further, rising uncertainty around the 2024 general election outcome is also likely to weigh on business confidence, as uncertainty about the result is likely to encourage investors to adopt a wait-and-see attitude to larger investment decisions.

Additionally, BMI expects the SARB Monetary Policy Committee to cut interest rates by 100 basis points across the year to reach 7.25% by December 2024.

“We anticipate that inflation will have slowed sufficiently by May to allow the SARB to start monetary easing. Despite improvement, weak growth may incentivise the SARB to shift its focus from containing price pressure to focusing on supporting economic activity.

“We also expect the SARB to start to cut rates earlier than the US Federal Reserve, which we expect to start cutting rates in July. A general dovish pivot in developed market central banks across the year will provide room for the SARB to continue to cut rates without triggering significant capital outflows,” she said.

Further, the BMI team forecast the deficit will narrow from 5.4% to 4.8% by the following fiscal year, and that stronger economic activity will support revenue.

“With the budget only months before the elections, the government is unlikely to pursue sharp expenditure cuts that can be unpopular with the electorate. This trend has been seen in the run-up to many general elections,” Wolfe noted.

Therefore, the company expected social transfers to remain substantial, with the government already committing to extending the Covid-19 grant by another year, she said.

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