Low commodity prices, soft global demand and domestic structural constraints have conspired to slow growth in sub-Saharan Africa’s oil exporting and importing countries alike.
Investment banking firm Renaissance Capital has lowered its 2015 growth forecast for Kenya to 5.2% (vs 6% previously), and highlights downside risks to Nigeria’s. Below is the firm’s reasoning.
Kenya: quicker growth is deferred
We expect the (investment-driven) acceleration in Kenya’s growth to be deferred, partly due to tighter monetary policy. Although growth quickened in the first quarter of 2015 to 4.9% year on year (YoY), from 4.7% a year earlier, it was softer than the previous quarter’s growth of 5.5% YoY.
Over the past two months, we have seen the central bank hike the policy rate by more than the market expected – 300bpts to 11.5% – to defend the weakening shilling. We expect further hikes in the second half of 2015 from a more proactive central bank – and as such we increase our year ending 2015 rate view to 13.0%, from 11.0% initially – to contain the vulnerable shilling. But it will slow credit growth from 19.6% YoY in March, which is negative for consumption and private sector-led construction activity.
We expect insecurity to continue to dog tourism, which means the hotel and restaurant sector’s decline may persist. We also see the underperformance of exports continuing, partly due to a lack of competitiveness that is undermining manufactured exports. Given these headwinds and softer-than-expected first quarter growth, we lower our 2015 growth forecast for Kenya to 5.2%, from 6%.
Nigeria: mounting headwinds on the supply side…
The downside risks to Nigeria’s growth outlook continue to mount. On the supply-side this includes fuel shortages. These are expected to recur in the near term, partly because fuel marketers will not supply petrol until they have been paid the US$1.5bn arrears that they believe is due to them. Fuel scarcity has the potential to bring the economy to a halt, as transportation stalls, generators fail to produce power, which hinders the operations of banks, telecommunications and industry.
… and on the demand side.
On the demand-side, Nigeria’s headwinds include unpaid salaries, a fall in government spending and the de facto import ban. Unpaid salaries to government workers (who make up about one-third of the 11 million formal workforce) were estimated to be around $2bn in the second quarter of 2015 by the transition committee. As the government is the formal sector’s biggest employer, this has material implications for consumption.
The de facto ban on 41 items, including poultry, rice and building materials, is negative for consumption and makes it harder to invest, which is negative for growth. The prices of these items are likely to rise in the short term, on the back of this policy. We see inflation at around 3% at year-end, from 9% YoY in May. The halving of the oil price implies government spending is a fraction of what it was a year ago, which is negative for growth.
We think our 3.4% growth forecast for 2015 (which we lowered from 4.5% in our April note, Nigeria GDP: How low could growth go?) accounts for some of these risks and allows for a further slowdown from 4% YoY in the first quarter during the course of the year.
Sector implications
Softening growth implies a slowdown in corporate earnings, which is negative for equities. That said, there may be some pockets of opportunities. In Nigeria, where monetary policy is constrictive, we think the likely expansion in government borrowing, to compensate for the revenue shortfall, may compel some easing of liquidity, to create room for banks to lend to the government. This would be positive for Nigerian banks.
In Kenya, the downside risks to growth suggests that the rate hikes may fall short of being aggressive. This implies some shilling weakness, which may be positive for Kenyan exports and holidays. We also think rate hikes are positive for Kenyan banks’ net interest margins, but at the margin.
This article was produced by Renaissance Capital.
