Entries for 'South Africa'

Major SSA-4 countries remain vulnerable to the war and global recession. Ghana faces the highest risk of distress amid rising government debt, a depreciating currency, elevated inflation, and declining FX reserves. Softer commodity prices and tight financing conditions will help ease inflation.

Load shedding reached new record highs in recent months, with more to come. High-frequency data already reflect the impact on major sectors of the economy. With electricity problems persisting in July and expected to extend into the fall, overall economic activity likely fell markedly in Q2 and will decline further in Q3. Inflation probably peaked in June, but is expected to remain above 6% over H2, which will keep pressure on the SARB to continue tightening monetary policy.

Global liquidity conditions look set to tighten further, which will force CEEMEA central banks to continue to hike interest rates. Wider macro imbalances also call for tighter policies in some cases. Energy shortfalls could lead to falling output and employment, which would ease demand pressures.

Upside inflation surprises have prompted rate hikes by CEEMEA central banks. We project demand pressures to remain benign despite the ongoing recovery. Even so, markets are pricing further aggressive rate hikes in the coming months. Rising inflation has pushed up long-term bond yields across the region in ‘21H2. Wider term premiums reflect higher credit risk spreads in Turkey and Romania. South African bonds offer the most attractive real returns among CEEMEA bonds.

The recovery has been uneven, with activity below pre-Covid levels for some sectors. Uncertain economic prospects will likely keep authorities from tightening policies. Losses in recent local elections may lead to delays of critical fiscal adjustment steps. Global factors, including tighter global liquidity conditions, could weigh on the Rand. Abrupt depreciation would force the SARB to tighten earlier than otherwise expected.

The result of higher oil prices is a shift in purchasing power from oil consumers to producers. Oil exporters are getting a boost to their terms of trade, leading to wider CA and fiscal surpluses. Higher energy prices will hurt several EMDEs that remain heavily dependent on petroleum imports.

We project non-resident flows of $128 bn to CEEMEA countries in 2021. Higher FDI and the IMF’s SDR allocation are the most important drivers. Excluding one-offs, however, flows will remain below pre-pandemic levels. G3 tightening will likely reduce investors’ appetite for EM assets in 21Q4. But further rate hikes in CEEMEA should improve portfolio flows in 2022. Non-resident flows to the region are estimated to reach $98 bn next year.

Upside inflation surprises prompted rate hike in most CEEMEA countries. We expect inflation to ease across the region, but high uncertainty remains. In Russia, we now see a higher terminal rate and easing to start later in ’22. The SARB can likely afford to stay on hold longer with only one hike in ‘22. We expect gradual cuts in Turkey through 2022 in line with market pricing. Despite above-target inflation, the Ukrainian NBU will likely stay on hold.

Mobile money use in Sub-Saharan Africa has grown substantially in recent years. Limited reach of traditional banking services likely contributed to this dynamic. We estimate that mobile money transactions reached around $275 bn in 2020. However, their importance differs considerably among countries in the region. The industry will likely undergo a fundamental transformation in coming years. Changes will include market entrance of existing app-based payment platforms.

We use VAR models to decompose the effect of commodities and FX on EM inflation. Turkey and Russia, for different reasons, appear most exposed to exchange rate shocks. Headline inflation in South Africa and Brazil appear to be driven by energy prices, while price dynamics in Indonesia are more responsive to non-energy commodities. We expect tight stances in Brazil, Mexico, Russia, Turkey to keep expectations anchored.

We continue our series on EM inflation by turning towards country specifics. In this note, we examine inflation dynamics in Russia, South Africa, and Turkey. As demand is a key driver of inflation in Russia, we expect further tightening. In South Africa, we see the pickup as transitory and largely driven by base effects. Turkey stands out with the highest inflationary pressures and little room to ease.

Sub-Saharan African countries will receive an estimated SDR16.2 bn in 2021Q3. While this will increase holdings markedly, it represents a small share of the total. We assess the impact of the allocation in four areas and find it relatively limited. For most of SSA’s largest economies, reserve adequacy will improve marginally. Respective allocations are also too small to fundamentally affect financing needs.

IMF support to Sub-Saharan African countries reached unprecedented levels in 2020. Short-term instruments with limited conditionality accounted for most of the funding. Additional financing will likely be needed to support a robust recovery from COVID-19. In particular, multi-year arrangements could help anchor needed fiscal consolidation. The allocation and possible reallocation of SDRs could be very beneficial for the region.

Pent-up demand should support robust output growth in 2022. The SARB is expected to keep its accommodative policy stance. South Africa’s current account will gradually revert to a deficit. The government is expected to stand firm against labor unions. Fiscal consolidation could narrow risk premia in coming years.

Depreciation pressure on the Rand has been weaker and yields risen less than in 2013. However, South Africa’s fiscal position is much weaker than during the taper tantrum. Substantial financing needs leave the country vulnerable to shifts in market sentiment. Furthermore, structural issues will continue to constrain growth in the coming years. This will add to already-heightened foreign investor concerns over debt sustainability.

In its 2021 budget, the government cut deficit targets relative to last October’s MTBPS. As a result, it expects public debt to peak at a lower level of 88.9% of GDP in FY25/26. We see risks to underlying revenue and spending projections, in particular the wage bill. In our estimate, larger deficits will cause debt to peak at a higher level of 92.9% of GDP.

Improved market sentiment will allow African sovereigns to return to the market in ‘21. We expect Egypt, Nigeria, Ghana, and South Africa, among others, to issue Eurobonds. However, debt sustainability and liquidity concerns are rising in the context of COVID-19. African countries face Eurobond repayments of close to $100 bn in the coming years. An end to the current low-interest rate environment could make rolling over of debt costly.

CEEMEA countries recovered faster from the initial COVID-19 shock than expected. This is mainly due to virus containment allowing for a faster reopening of businesses. As a result, we are revising our estimate of the contraction in 2020 from 5.2% to 3.2%. However, a second wave of infections weighed on economic activity in recent months. We expect modest growth of 3.8% in 2021, but much depends on vaccinations efforts.

In the October MTBPS, the government increased deficit targets again. This will result in a steeper rise and higher peak of government debt. We see substantial risks to both revenue and expenditure projections. Additional budgetary support to troubled SOEs also looks likely in ‘21.

We expect a slow and uneven recovery in non-resident capital flows globally. CEEMEA should fare somewhat better with a broad pickup in ‘20H2 and ‘21. The recovery will likely be driven by stronger FDI and portfolio capital flows. A possible COVID-19 resurgence and geopolitical risks weigh on the outlook. If sentiment worsens, Turkey, South Africa, and Ukraine will be most exposed.