Economic Overview
May 2024 concluded with South Africa’s closely contested elections, with initial projections indicating that Cyril Ramaphosa could become the first ANC leader without a parliamentary majority, necessitating coalition talks to keep the party in power. As Ramaphosa navigates these negotiations, pragmatic alliances will be essential for guiding South Africa towards stability, a crucial factor for future investments. Meanwhile, Ghana’s upcoming elections in December are also impacting the macroeconomic environment, with campaign spending expected to peak between June and October. The resulting inflationary effects have monetary policy authorities on the offence against rising inflation.
In June, we expect these African economies to face multiple challenges, marked by heightened inflation risks, renewed currency pressures, external sector vulnerabilities from lingering geopolitical tensions and political stability concerns due to elections. Election spending and its impact on money supply-induced inflation will only be part of the complex inflation puzzle (heavily driven by food and energy
Nigeria
Currency risk
In May, the naira was volatile at the official and parallel markets. Between May 2 and 16, leading up to the MPC meeting (May 20-21), the currency shed 8.56% of its value at the official market before gaining sharply by 30.68% on May 28, five days after the MPC meeting. The increase was primarily driven by the 2x increase in forex turnover, indicating a rise in transactions. On May 28, the spread between the official and parallel markets widened to 29.06%, a gap not seen since February 21, 2024.
From May 28, the naira reversed its quick gains, depreciating by 20.94% to close the month at ₦1,485.75/$ in the official market. Lingering dollar illiquidity, speculation and bearish investor sentiment due to policy uncertainty drive these currency swings. Following its decision to resume dollar sales to Bureau De Change (BDC) operators to improve supply, the Central Bank of Nigeria (CBN) released a directive on May 22 ordering BDCs to reapply for licences, effective June 3. This re-licensing regulation surprised the markets, triggering an adverse initial reaction that led to the naira’s steady depreciation in the parallel market. Bearish market sentiments and reduced dollar supply amid buoyant demand exerted additional pressure on the parallel market rate. Stears forecasts the naira to trade at ₦1,415.78/$ by the end of Q2 2024, down from ₦1,300.43/$ in Q1’2024, indicating ongoing currency risks for investors. We expect the naira to keep oscillating between ₦1,300- ₦N1,500 against the US dollar at the official and parallel markets in June.
Inflation and interest rate decisions
Exchange rate movements will keep commodity prices high in the near term, heightening inflationary pressures. In April 2024, the m-o-m inflation rate slowed due to the naira’s temporary appreciation between the end of March and mid-April. However, the naira’s recent loss and the dire impact of higher energy costs will likely reverse this downward trend. Compared to April 2024 (33.69%), we forecast May 2024 headline inflation numbers within our base and bear scenarios of 33.35% and 36.21%, driven primarily by food and energy prices. Notably, base effects will come into play from June onwards, leading to lower headline inflation rate numbers, barring any additional economic shocks that could alter this trend.
At its May meeting, the MPC hiked rates by 150 basis points to 26.25% to curb inflationary pressures, anchor inflation expectations, and support the currency, especially as global interest rates remain elevated. The rate hike's impact was muted on the markets as T-bill rates remain unchanged at 16.50%, 17.44% and 20.69% for three, six and twelve-month tenors. While we expect this trend to change in the coming month as the CBN strengthens the monetary policy transmission mechanism by mopping up excess money market liquidity, investor sentiments are to remain bearish. This is because of Nigeria's highly uncertain policy environment and lingering fiscal-monetary policy dissonance. Escalating food prices primarily drives inflation in Nigeria due to insecurity and high post-harvest losses, a problem that is more structural than monetary. Higher interest rates will not fix this problem, as it rests within the purview of fiscal authorities. Worryingly, we are yet to see significant improvements in fiscal policy measures to address these structural issues and effectively complement the contractionary monetary policy stance to bolster investor confidence and support output.
In June, Nigeria's macroeconomic landscape will be characterised by lingering inflationary pressures, heightened currency risk, sluggish GDP growth, and low consumption as disposable income shrinks. A few things to watch closely in the upcoming month include the possible outcome of the minimum wage review negotiations, which could mean an increase in nominal income for consumers. However, enforcing this will be tough for already cash-strapped businesses navigating the challenging operating environment. Over 50% of the population is in informal employment, dominated by micro-small and medium enterprises that have been the hardest hit since the 2023 reforms. The government is also looking to make additional strides and decisions regarding the cybersecurity levy and diaspora bond issuance in June, which speak to the scramble to improve revenue.
South Africa
Currency risk
The May 29 elections shaped the economic performance of the South African economy. Ahead of the polls, the South African rand witnessed moments of volatility. After appreciating 2.39% between May 2 and 20, the currency steadily depreciated by 3.02% to close the month at R18.70/$ from R18.13/$ on May 20. Compared to April 2024, the rand was relatively flat. Stears predicts the South African rand to close the second quarter of 2024 at R19.50/$, below the R18.99/$ recorded in the first quarter.
The strength of the US dollar and bearish market sentiments influenced the rand’s movements in May. The uncertainty around the outcome of the elections shaped investors’ view of the potential political risks, making them cautious. The voting was unpredictable, and the results of the parliamentary elections, after vote counting ends, will be out between June 2 and 3. So far, the ANC is set to record the lowest majority win in over a decade, spotlighting reduced support for the party and the public’s need for change. The election is hotly contested, with the Electoral Commission (IEC) stating the voter participation rate will surpass the 66% recorded in 2019. In the coming month, South Africa’s macroeconomic climate is expected to be driven by the outcome of the May 29 elections. With the ANC losing its seat majority in parliament for the first time since 1994, a coalition is underway for the party to retain the presidential ticket. This domestic political clime and the US dollar’s rebounding strength on higher interest rates will pervade the markets, possibly intensifying currency volatility in the coming month. The parliament is to choose a president 14 days after the general elections.
Inflation and interest rate decisions
Whatever the election results, the urgent priority for South Africa's political leadership is to supercharge the economy amid the current sluggish growth trend and challenging macroeconomic conditions. The new leadership must prioritise the power crisis to defibrillate the economy and support output growth. However, this will be challenging, as rising inflation risks coinciding with the spillover effects of election campaign spending will force the South African Reserve Bank (SARB) to remain hawkish. This is because higher borrowing costs will constrain output. At its May 30 meeting, the bank’s monetary policy committee voted to keep the repo rate unchanged at 8.25%, an outcome we accurately predicted.
Producer prices rose to a six-month high of 5.10% in April 2024 due to high input cost materials. This indicates that inflationary pressures will likely remain elevated in the short term as businesses pass the burden of higher prices to consumers. Apart from rising producer prices, food inflation risks are also high, primarily due to adverse El Nino effects that cause droughts in central food-producing regions. The m-o-m food inflation increased to 0.20% from 0.10% in March.
In June 2024, the SARB will likely keep the interest rate environment tight until the headline inflation number reaches its mid-point target of 4.50%. The decision to leave rates high is also to support the rand as the US dollar stays strong in the face of a hawkish Fed as inflation woes persist. After the MPC’s meeting on May 30, effective rates, including T-bills, remained high, though with an inverted yield curve. This underscores cautious investor behaviour as preferences lie in short-term returns to avert long-term risks associated with political instability in an election year. The 3-month tenor rate (8.61%) is 0.2 percentage points above the 12-month tenor of 8.41%. Still, we expect the positive real rates of returns in South Africa to support foreign reserves, which decreased by 0.83% percentage points in April 2024. This potential appreciation will happen gradually when the dust of the election outcomes settles, typically within 3-12 months.
South Africa will be marked by the public's response to the outcome of the parliamentary elections, lingering inflation risks and currency pressures. However, we expect the policy environment to be favourable, aiming to boost investor confidence and support dollar inflows. Fiscal authorities will aim to checkmate spending and keep the budget performance surplus. The ultimate goal will be to support the monetary stance of the SARB, which is an imperative move to positively anchor inflation and exchange rate expectations amid political and macroeconomic fragility.
Egypt
Currency risk
In May 2024, the Egyptian pound's performance was mixed. The currency appreciated 2.35% mid-month before depreciating by 0.90% to close at E£47.37/$. This trend is consistent with the Nigerian naira and South African rand, spotlighting lingering currency volatility in African economies. However, on average, the currency appreciated by 1.58% compared to April 2024. The slight improvement in the Egyptian pound is premised on the country's upward foreign exchange trend and a supportive policy environment.
Aside from the $35 billion Ras El Hekma fund from the UAE, Egypt has also seen a 6.4x sharp increase in Special Drawing Rights from the IMF as part of the immediate $820 million funding. In April 2024, SDRs increased to 300 million (~$397.11 million) from 47 million (~$62.21 million). Egypt’s gold reserves and foreign exchange also increased by 4.23% and 0.20% in April, with the impact felt in May. We expect this upward trend to continue in June, supporting the Central Bank of Egypt (CBE) in defending the currency should large swings occur. In June 2024, we expect currency pressures to be manageable, especially as the escalation of the Isreal-Gaza war continues to disrupt government revenue from key revenue sources like the Suez Canal.
Inflation and interest rate decisions
The tight monetary policy environment is expected to remain in the near term to rein inflation and support the Egyptian pound. The CBE held rates at its May 23 MPC meeting, which aligned with our prediction. We expect this “hold” decision again at the July 18 MPC meeting, barring any significant economic shocks that will alter the current inflation and interest rates dynamics. Although average yields slowed after the MPC meeting on May 23, the issuance was still oversubscribed 2x across all tenors, and we expect this trend to continue in the upcoming month. Yields will remain high to keep narrowing the inflation-interest rate gap, supporting dollar inflows as investors stay relatively optimistic.
Inflation trends in Egypt will be mixed in the coming month. While we predict an increase in the m-o-m inflation rate from 1.06% in April due to rising food inflation concerns, the headline inflation rate is expected to decelerate gradually based on favourable base effects. The Egyptian government recently lifted the multi-year-long subsidies on bread, a major staple in Egypt, to free up cash so that the government could potentially embark on capital expenditures to support output growth in the near term. This move aligns with the Egyptian government’s reform path under its IMF program. Towing this route will allow the release of more funding for the government. However, it means a further increase in food prices. The removal of subsidies on bread alongside the increase in energy prices is expected to be reflected in the m-o-m inflation numbers for May and June, emphasising the need for the CBE to stay hawkish.
Over the next four weeks, Egypt’s economy will be marked by moderating currency pressures on increasing dollar inflows. However, it will take time for this to translate into reduced prices as businesses struggle with high operating costs and expensive credit. This means businesses will continue to transfer the high-cost burden to consumers through prices. In addition, heightening food inflation risks amid the escalating Middle East tensions will keep interest rates high, narrowing the negative rate of returns for investors.
Ghana
Currency risk
The Ghanaian cedi depreciated all through May due to the strengthening of the US dollar and lower dollar inflows from key sources of income. In the month, cocoa exports, which account for roughly 10% of Ghana’s total export earnings and government revenue, decreased by 49.0 percentage points to $599.3 million in the first four months of the year compared to last year's corresponding period. The decline in cocoa export earnings offset the marginal increase in revenue from gold and crude oil exports. Bearish market sentiments driven by Ghana’s inability to ramp up cocoa production and improve foreign exchange earnings dampened exchange rate expectations. This was further worsened by the delays surrounding the debt restructuring negotiations with international creditors. Additionally, the strength of the US dollar amid the high-interest rate environment negatively impacted the currency's performance. Between April and May, the cedi lost 5.30% to trade at ₵13.77/$ from ₵13.04/$.
Amid the dollar shortages, foreign exchange demand for imports remained strong, exerting additional pressure on the currency. However, we expect the Cedi's depreciation to slow in June as dollar inflows from external sources, including multilateral support funds and foreign exchange investments, pick up. This will be supported by the expectations of a substantial headway in the debt restructuring conversations with international creditors, which could see Ghana glacially move out of debt overhang. Additionally, gross foreign exchange reserves increased in April, hinting at available dollars to defend the cedi in the coming month. Aside from dollar availability, the Bank of Ghana (BoG) is also looking to crack down on illicit transactions, increasing parallel market activities amongst the forex bureaus. This poses risks despite the short term benefit for currency. The markets will likely interpret these moves as “desperate” for the apex bank, further pricing in negative market sentiments on the currency. Instead, monetary and fiscal authorities should focus on ensuring ample dollar supply at the official markets, which will, over time, reduce demand at the parallel market to ensure exchange rate stability.
Inflation and interest rate decisions
The exchange pass-through effect on commodity prices was more pronounced in the m-o-m inflation numbers for April inflation. Both food and non-food inflation rose, highlighting lingering inflation risks. We expect this upward trend to continue in the coming month, especially as the El Nino effects lead to unfavourable weather conditions and stunt food output growth. Although we expect currency pressures to moderate slightly in June, due to lag effects, prices will remain elevated, especially as business input costs stay expensive. Energy and transportation costs are also rising, keeping inflation risks elevated. This means that consumer disposable income in Ghana will remain squeezed, dampening demand and consumption levels.
To curtail rising prices and anchor inflation expectations positively, the apex bank will retain the high-interest rate environment at its July 23 meeting. In May, the BoG’s monetary policy committee held rates steady at 29%, aligning with our expectations. The bank aims to bring inflation, currently 25%, to its 6-10% target range, pointing to a sustained tight monetary policy stance. The high interest rates will continue to squeeze credit demand and potentially slow output growth. However, at the current level of 27.95%, interest rates outperform inflation, suggesting that the rates of return for investors will remain positive in the near term.
The Ghanaian economy will be marked by sustained inflationary pressures, a hawkish central bank, and slow currency pressures due to improved dollar inflows. This highlights a long road to macroeconomic stability, especially as debt restructuring talks have yet to be concluded. The upcoming elections in December are also set to start impacting the economy as campaigns peak from June to October. Thus, cash in circulation is bound to start creeping up, inducing the impact of money supply on inflation. The central bank will closely monitor these issues to steer the economy towards reduced prices and economic growth.
Kenya
Currency risk
The Kenyan shilling witnessed large swings in May. After appreciating 2.09% between May 2 and 16, the currency resumed a consistent depreciation to close the month at Ksh133.37/$. Although the currency remained relatively unchanged compared to April, on average, the movements of the shilling in the month will be a major concern for the apex bank at its upcoming June meeting.
Like the South African rand, Egyptian pound and Ghahanian cedi, the performance of the currency was largely driven by the movements in the US dollar, the lingering global interest rate environment and escalating geopolitical tensions that make the Kenyan economy susceptible to external shocks. By the end of Q2 2024, we predict the currency will trade at Ksh137.95/$, 8.73 percentage points above the Ksh 149.99/$ average in Q1’2024. This indicates moderate currency risks in Kenya ahead of when the final interest payments on the $2 billion Euronond issuance will be paid in June. Additionally, the minor decline in the foreign exchange reserves between April and May signals interventions in the forex market by the CBK. We expect this trend to continue in the upcoming month should sharp currency volatility occur.
Inflation and interest rate decisions
The movements of the currency hint at an upward revision of energy prices (petrol, diesel, kerosene and electricity costs) that declined in May. This, combined with rising food inflation risks due to El Nino effects triggering floods in coastal areas responsible for food production, exacerbates inflation pressures. However, favourable base effects are still expected to slow the headline inflation rate in the coming months. Stears predicts Kenya’s inflation rate to be between 3.59% and 5.44%. In May, the annual and m-o-m headline inflation rates rose to 5.10% and 1.00%, respectively.
As we approach June, the impact of implementing the 2023 Finance Act, which doubled the value-added tax (VAT) on petroleum products by 16%, will wear off. Meanwhile, the 2024 finance bill is currently in parliament for debate. This new bill proposes a wide array of tax changes likely to support economic growth in the near term. A major change is the cancellation of fines for companies in Export Processing Zones (EPZs) that should further encourage FDIs and the production of key export commodities, supporting the government’s coffers. The IMF predicts Kenya’s economy to grow by 4.97% in 2024, outperforming the regional growth of 3.80%. In addition to future growth prospects, the Kenyan government is curtailing spending and increasing revenue to narrow its budget deficit. The country recorded a budget surplus in the April 2024 budget performance review, with tax revenue climbing by 17.13 percentage points compared to a year ago. The improvement in revenue is a green light for the international community to invest further in Kenya.
The CBK is expected to leave rates unchanged at 13.00% at its June meeting to support these dollar inflows and provide positive yields to investors. Leaving rates unchanged will aid the central bank’s forward guidance approach to hedging against inflation risks while monitoring output growth. It will also support the Kenyan shilling that witnessed volatility in May.
Overall, Kenya remains a bright spot amongst the top African countries. In June, the economy will be characterised by slowing currency pressures, lingering inflation risks, cautious consumer spending and a tight monetary policy environment.
