July 28, 2023/Cordros Report
Economic activities remain on a positive growth path across our coverage countries amid lingering inflation and local currency pressures. Besides that, fiscal pressures have persisted in most of our coverage countries, more so that global interest rates remain high. Accordingly, the preceding implies that bond yields will likely remain elevated across our coverage countries over the rest of the year. Nonetheless, we may be approaching the end of the monetary policy tightening cycle. That said, FX pressures remain prominent, especially in Egypt and Kenya, requiring more FX adjustments. Thus, this report examines the critical macroeconomic themes across our coverage countries and assesses the general outlook across these economies over the rest of the year.
Consumer price pressures to trend downwards but remain elevated
Domestic price pressures across our coverage countries remain significantly above 2022FY levels, partly due to high food costs, lingering currency pressures, and increased transport costs. Nonetheless, price pressures have started to moderate in Ghana (-1,165bps), Rwanda (-794bps), and Kenya (-118bps) in 6M-23, primarily supported by the favourable statistical bases from the prior year and tighter monetary policy (particularly in Ghana). However, price pressures have maintained a steady uptrend in Egypt (+1435bps) and Nigeria (+145bps).
We expect consumer prices to decelerate in our coverage countries, except Nigeria, where reforms are expected to aggravate price pressures over the rest of the year. In particular, high base effects and lower fuel prices amid relatively stable currency will likely continue to exert downward pressure on consumer prices in Ghana. Accordingly, we forecast Ghana’s headline inflation to end the year at 27.87% y/y. Likewise, in Kenya, we forecast a 7.90% average inflation in 2023E, with a year-end expectation of 7.18% y/y (December 2022: 9.06% y/y). Nonetheless, while consumer price pressures are tilted to the upside in the near term in Egypt, we anticipate the impact of a favourable statistical base effect to set in by October, helping to slow down price pressures in Q4-23E. Accordingly, we revise our estimates and expect Egypt’s headline inflation to average 31.92% y/y in 2023E and end the year at 28.72% y/y. Finally, Rwanda’s urban inflation moderated for the fourth consecutive month in June (13.69% y/y vs May: 14.10% y/y), and we expect the disinflation to persist over the rest of the year. We hinge our expectations on the effects of (1) declining energy prices, (2) an anticipated increase in domestic food production, and (3) the lingering cooling impact of monetary policy tightening amidst the favourable base effects from the prior year. Consequently, our baseline scenario suggests urban consumer prices will likely average 13.90% y/y in 2023E (2022FY: 13.86% y/y) and settle at 8.03% y/y by year-end (December 2022: 21.63% y/y).
Currency pressures seem not to be going away soon
Across the coverage countries, local currencies remain pressured, partly due to (1) low export earnings induced by the global slowdown, (2) high import costs exacerbated by the Russia-Ukraine conflict, (3) tighter global monetary policies, (4) higher inflationary pressures, and (5) large fiscal deficits which. Notably, Kenya (-5.8%), Egypt (-6.1%), Ghana (-5.9%), and Nigeria (-5.0%) have budget deficits higher than 5.0% of GDP, as indicated in their respective 2023FY budget.
We expect the depreciation trend to continue slowly over the rest of the year as the existing factors stoking local currency pressures remain intact amid longer-than-expected interest rate increases in advanced economies. Notably, as projected in our coverage initiation report for Egypt (see report: Economic Stability Remains Shaky on Debt and Cost Concerns), we maintain our expectation that the EGP is likely to depreciate by 35.2% to EGP38.20/USD by year-end. Nonetheless, we think the key factors for providing near-term respite to Egypt’s FX reserves include the (1) adoption of a flexible exchange rate regime, (2) a successful privatisation programme, and (3) materialisation of funding support from Gulf countries. On (2), we understand that the Egyptian government recently signed contracts to sell USD1.90 billion worth of assets, of which USD1.65 billion will be settled in foreign currency while the remaining USD250.00 million will be settled in the country’s local currency. Elsewhere, we expect persistent current account pressures to add further downside risks to the KSH, which is likely to depreciate towards KSH156.52/USD by year-end.
The monetary policy tightening cycle appears to be in its mature phase
The monetary authorities have maintained tight monetary policy stances, although at divergent levels. Interestingly, while the deceleration of Ghana’s inflationary pressures (-1,164bps in 6M-23) is the fastest among our coverage countries, the Bank of Ghana (BOG) raised the key policy rate by 300bps in 7M-23 – the highest among the countries we cover. Elsewhere, Nigeria (+225bps) and Egypt (+200bps) have also increased respective key policy rates as of 7M-23 as consumer price pressures remain unrelenting. At the same time, the Central Bank of Kenya (CBK) has only embarked on one interest rate increase in 2023, hiking the policy rate by 75bps at the March meeting, while the 50bps increase by the National Bank of Rwanda (NBR) came in February, after which the benchmark interest rate has been left unchanged.
We expect most of our coverage countries’ Monetary Policy Committees to thread softly over the rest of the year as inflationary pressures continue to soften amid the risk of overtightening and negatively impacting growth, more so that price pressures are expected to trend downwards. Notably, we expect Ghana, Kenya, and Rwanda to keep their respective key policy rates unchanged at current levels. However, we see a fair possibility for the NBR to cut its key policy rate by 50bps towards the end of the year, given our forecast that headline inflation will decelerate and fall below the 8.0% upper band of the MPC’s medium-term inflation target by year-end. That said, as explained earlier, near-term consumer price pressures in Egypt and Nigeria are tilted to the upside. Consequently, we expect a further 100bps – 150bps increase in Egypt’s overnight deposit rate.
Debt concerns provide fiscal consolidation opportunities
Indeed, Sub-Saharan African (SSA) economies are facing a funding squeeze, exacerbated by elevated global inflation and tight monetary policy stances globally, leading to higher borrowing costs for the region. In our view, the preceding creates an opportunity for countries to embark on a conscious fiscal consolidation effort, as funding from alternative external sources (bilateral and multilateral) may not be enough to cover the outsized fiscal deficits, holding domestic debt issuances constant. However, despite this opportunity, we highlight that budgetary deficits in our coverage countries remain above 5.0% of GDP, albeit lower than the previous year.
Given the elevated global interest rates and currency pressures, our coverage countries have found it challenging to access the external market amid still-high fiscal deficits. Consequently, some economies have been in the spotlight regarding debt default. Notably, there are still refinancing concerns in Egypt. Ghana is still negotiating debt restructuring with external creditors, with its local market activity concentrated on short-term securities excluded from the recently concluded domestic debt exchange. However, we understand that Kenya plans to re-finance the USD2.00 billion due in 2024 by year-end through a syndicated loan and funds from multilateral institutions. Nigeria has no Eurobond maturity due next year after successfully redeeming the 10-year USD500.00 million Eurobond that matured on 12 July 2023.
All told, we expect our coverage countries to shrug off existing challenges and maintain a positive domestic growth path in 2023E, partly driven by resilient service sectors. At the same time, while inflation in the countries (safe for Nigeria) is expected to be on a deceleration trend over the course of the year, Russia’s termination of the Black Sea grain deal serves as a downside risk to imported food prices in the near term. Finally, exchange rate pressures will likely remain dominant for the year, and we think general monetary policy tightening is at its mature phase.
