Africa: Politics and Reform
Politics and Reform remain major issues in key african economies including S Africa; Nigeria; Ethiopia and Kenya. Meanwhile, the Zambia debt deal provides a template for other African countries with excessive debt.
South Africa remains in the spotlight, both due to problems relating to the Ukraine war and also the approaching 2024 general election (scheduled between May and August). The government is investigating U.S. claims that arms were shipped to Russia from a naval base, though the U.S. has downplayed the importance of this as it wants to avoid S Africa being more influenced by China and Russia. Additionally, S Africa needs to negotiate the August BRICS summit still scheduled to be in Cape Town amid international criminal court requests to arrest Russian president Vladimir Putin (though report suggest he will not now attend). This is undermining S Africa leadership in the region. Meanwhile, opinion polls suggest that the ANC will likely have less than 50% of the vote in the 2024 election and will likely need to form a coalition with the Democratic Alliance. However, previous elections have seen the ANC do better than opinion polls, as dissatisfaction with the ANC has translated to not voting rather than voting for opposition parties and voter turnout has fallen quickly since 1994. As President Ramaphosa has been able to weather last year probe over his finances, and his government eased the power crisis partly, (helped by lower demand), these could feedthrough with a lag to help the ANC. This means that the election will be close and it is still possible for the ANC to have a small majority. Meanwhile, growth continues to be suppressed in 2023 by the power and transport/logistics crisis and growth will be marginally positive. (Note: The South African Reserve Bank (SARB) predicts South Africa’s GDP growth for 2023 will be 0.3%).At least inflation appears to have peaked as food price pressure ease and this should mean that the SARB will likely have finished its tightening cycle in July. The main long-term economic issue is putting the government debt/GDP ratio (Note: South Africa Government debt accounted for 70.9 % of the country's GDP in Mar 2023.) onto a downward path, but this will have to wait until after the 2024 election.
Nigeria has seen a significant policy shift under the new president, with a scrapping of the hugely expensive fuel subsidy; the sacking of the central bank chief; removal of Nigerian Nairu restrictions and 40% devaluation in 2023. The combination of these moves is seen to be a swing away from statist policy under the previous president, and has been warmly welcomed by the equity and international debt markets. Additionally, though the measures have caused disruptions and pushback, they have not resulted in protests, unlike 2012. The difficult part is that the retail fuel price increase and devaluation will boost already high inflation in the coming months, which are likely to overshoot previous estimates of 18% inflation for 2023. Whether the central bank slows monetary financing of the budget deficit, and credibly brings down inflation into 2024 should be the key focal points. We believe that through bringing inflation to single digits, Nigeria can enjoy a more stable macroeconomic backdrop to the population dividend in the next five years, and ease some of the structural problems. Alternatively, failing to get inflation down from current levels could risk unrest into 2024, and ignite high unemployment concerns. Opposition legal objections against the March election result are less important at this juncture, as they do not appear to be gaining traction.
Kenya has moved up to be the 4th largest Africa economy behind Ethiopia, as the growth momentum continues to be fuelled by the stage of the economic development cycle that Kenya is in. However, it has not been plain sailing for the new president Ruto, as the government has been challenged by rising prices for basic commodities that were a cause of the March protests. Additionally, the external situation remains difficult with a current account deficit set to be 5.5% of GDP and government debt/GDP ratio at 66% in 2023. Though the IMF package helps to eases these problems from a timing standpoint, the government has to improve competitiveness and business environment. At least on the domestic front, the government is seeking to undertake more control of the debt trajectory, through pressure to boost tax collections by reducing corruption and also planning to selectively increase taxes.
For Ethiopia, the good news is that debt agreements are progressing for Zambia and Ghana, which includes China and other official lenders being willing to accept no repayments for 3 years and an extension of debt repayments to 20 years (Zambia has also agreed a low interest rate payments until 2037 on bilateral loans). Negotiations with Eurobond holders are underway, with a push for similar terms but uncertainty over whether this will be achieved.Even so, this is helpful as a template for Ethiopia given the large amount of debt with Chinese borrowers. Whether China is willing to do this for Ethiopia is not yet clear as the high inflation and current account deficit could be pose problems (Zambia has a current account surplus and the prospect of higher copper prices in the 2020’s). Further complexity for Ethiopia is that the U.S. has previously pushed for transitional justice for victims of the recent war in Tigray to come first, before support for IMF and U.S. bilateral aid are forthcoming. However, it is interesting that the view in Washington has become more fluid after the surprise China brokered deal to re-establish diplomatic ties between Iran and Saudi Arabia. The U.S. could be concerned that China and/or Russia could have greater influence in Ethiopia, if the U.S. does not help Ethiopia progress towards economic recovery and rebuilding. One issue to monitor is unrest in other regions, as intermittent outbreaks have occurred in Amhara. Tigray for now is largely calm after the November 2022 agreement between the government and the Tigray people liberation army (TPLA), though should still be monitored as the Eritrean government still has troops in Tigray and the Eritrean president is strongly opposed to the TPLA.