Nigeria likely out of recession; SARB, CBN & CBK to hold rates

Nigerian economy likely out of recession in Q1 2017

Growth was -1.5 percent in 2016, same as my forecast. (See https://macroafricaintel.com/2017/02/25/macroafricaintel-weekly-27-feb/.) Long before other economists came around to the view that the Nigerian economic recession might be short-lived, I tried to make the argument about the possibility in an earlier column. (See https://macroafricaintel.com/2017/01/03/macroafricaintel-will-nigeria-get-out-of-recession-in-q1-2017/.) My reckoning is that the economy would show positive growth in the first quarter of 2017, 0.6 percent perhaps. Considering that the negative turn that led to the recession was policy-induced, the lower base for the same period last year suggests a ‘normal’ outcome should push the growth headline into positive territory in the current period. Base effects aside, there are other considerations. Crude oil production suffered for the most part of 2016 due to resurgent militant attacks by resource control agitators in the oil-producing areas. Scarcity of all sorts were also the rage; at first due to foreign exchange scarcity, which then caused fuel shortages as importers could not find enough hard currency, and subsequently, food as well; which apart from paucity of FX for staples like rice and so on was also due to bans imposed by the customs and monetary authorities. And there was a stubbornly resilient insurgency in the northeastern part of the country. The Buhari administration, which though floundered initially on the economy, has been quite successful in quelling the terrorist menace. And the government has since reversed its position on stopping amnesty payments to repentant Niger Delta militants, with the budget for the programme almost tripled in early May. Additional overtures since then suggest the peace may be sustained, boosting oil production. Incidentally, crude oil prices have also rebounded, trending above $50 lately. Besides, the agriculture sector has remained largely resilient, enjoying a boom lately on the back of the government’s stimulus programme.

CBN policy rate may stay pat for remainder of 2017

Renewed efforts at collaboration between the monetary and fiscal authorities are encouraging; insofar as undue pressure is not put on the Central Bank of Nigeria (CBN) to cut rates. Finance minister Kemi Adeosun’s desire for monetary policy easing has been bolstered by the slowing of annual consumer inflation in April to 17.2 percent from 18.7 percent in January. However, considering how the monthly pace actually accelerated by 1.6 percent in April relative to that in January of 1 percent for instance (with indications the pressure might persist for a while), I do not see how the CBN would be able to justify a rate cut anytime soon. Still, I expect headline inflation to slow further in coming months, probably ending the year at about 13 percent (updated for April data).

SARB repo rate likely held at 7 percent

Annual consumer inflation in South Africa would likely remain outside of the South African Reserve Bank’s (SARB) 3-6 percent target band (except for July perhaps) for the remainder of 2017. True, the headline figure declined in March to 6.1 percent from 6.6 percent in January and would probably be about 6 percent in April. If my forecast is vindicated, it is likely to venture outside the band subsequently. Because even if food prices prove to be stable (on the back of a likely bumper maize harvest this year and hitherto ample imports to fill the gap from an earlier drought-induced decline in domestic production), power tariffs are likely to rise: Eskom secured approval in February from the electricity regulator to raise tariffs by 2 percent in the 2017/18 fiscal year. More relevant though is that the regulator also gave the power utility a carte blanche of sorts to make additional hike requests. And if crude oil prices rise as envisaged, fuel prices (and transportation costs in tandem) would probably rise as well. External factors would also weigh. The US Fed would probably raise rates twice more later in the year, after two hikes already in December 2016 and March 2017, further tightening global credit conditions. Credit ratings downgrade to junk status by S&P Global Ratings and Fitch Ratings in early April and highlighted domestic and external factors have motivated calls in some quarters for the SARB to hike rates. Governor Lesetja Kganyago has expressed scepticism about whether such a move would be differential to foreign portfolio and direct investments. More importantly, a rate cut is almost certainly out of the question this year. Thus, I expect the repo rate to remain unchanged at 7 percent for the remainder of 2017.

CBK to pause expansionary stance

Drought conditions in Kenya have caused a spike in food prices, with inflation in toe. Annual consumer inflation was 11.5 percent in April. (compare that to 7 percent in January.) My current forecasts put inflation higher subsequently; and definitely outside of the Central Bank of Kenya’s (CBK) 2.5-7.5 percent target band for the remainder of 2017. In March, the price of a 90kg bag of maize rose by 5 percent, and is set to spike even more as sellers hoard their stock. Army worms were also reported to have ravaged over 140,000 hectares of maize crops in western and southern Kenya in May, potentially adding to food price pressures down the line. With elections due in August, the government can ill-afford a food shortage crisis. So after depleting its maize reserves to less than a day’s worth (4,500 tonnes) in mid-May, following a release of about 36,000 tonnes to ease the supply shortage, the Kenyan government plans to subsidise wholesale food imports to stabilize prices. But for the drought-induced food crisis, the bank would have remained in a good position to cut rates further this year, after a 50 basis point cut to 10 percent in September 2016. Now, that is totally out of the question. And it would not make sense for it to hike rates either.

Rafiq Raji