In August, inflationary pressures eased in South Africa, Ghana, Nigeria, Egypt, and Kenya. Though primarily attributed to favourable base effects, the decline was also driven by lower commodity prices, especially food. Higher for longer interest rates, which positively anchored inflation and exchange rate expectations, also supported the downward trend in inflation, and we expect this direction to continue in September.
However, we do not expect consumer demand to improve substantially despite the expected disinflationary trend. This consumer dynamic will be a significant consideration for long-term investors in consumer goods companies, especially in Nigeria and Ghana, where high inflationary risks persist. Consumers across all five countries will remain cautious, prioritising spending on necessities over luxury items, mainly as consumer confidence stays bearish. In Ghana, for instance, consumers are cautious with spending because of lingering climate-induced drought concerns that could affect the major food-producing regions, thus impacting supply. The government has taken
South Africa
Currency risk
The South African rand appreciated by 2.70% in August, from R18.26/$ on August 1 to R17.77/$ on August 28. This 2.70% appreciation marks the rand’s best monthly performance in 2024 so far.
YTD, the rand gained 4.54%, building on its 1.71% YTD gain in July 2024. The currency has been relatively stronger when comparing the rand's performance so far in 2024 to its 3Y (7.69%) and 5Y (6.04%) annual depreciation averages.
The rand's performance in August 2024 was primarily influenced by movements in the US dollar, which weakened due to market expectations of US Fed rate cuts. The weakening dollar and bullish global gold prices supported the rand's positive momentum. We expect this positive trend to continue, particularly following the US Fed meeting on September 17-18, where markets anticipate the start of monetary easing in the US. The rand's favourable political climate and higher export earnings will likely bolster investor sentiment toward South Africa. This positive trend may translate into an increase in long-term investment transactions, such as private equity deals, particularly in critical sectors like energy.
In Q4 2024, we predict the rand will trade at approximately R18.40/$, unchanged from Q3 2024. This reflects our outlook for relative stability in the currency over the coming months.
Inflation & interest rate decisions
The favourable political environment, lower global interest rates, and easing commodity prices are likely to continue softening price pressures in South Africa. Reflecting these developments, we have revised our inflation projection for South Africa downward from 5-5.5% between August and September to 4.5-5.0%.
In July 2024, South Africa’s inflation rate slowed for the second consecutive month to 4.6%, marking the lowest inflation rate since July 2023 (4.7%). This decline was primarily driven by lower commodity prices, particularly in food. The disinflationary trend opens the door for a potential rate cut by the South African Reserve Bank’s (SARB) monetary policy committee at its meeting on September 19. The goal would be to lower borrowing costs and stimulate output growth, which has been lacklustre in recent quarters. South Africa’s Purchasing Managers Index (PMI), which tracks manufacturing and private sector activity, has remained in contraction territory since June. This highlights businesses' challenging operating environment, negatively impacting revenue and profits. The broader effect of slower output growth has also been reflected in rising unemployment levels, with South Africa’s unemployment rate increasing to a two-year high of 33.5% in Q2 2024, up from 32.9% in Q1 2024.
Beyond the considerations of output and slower inflation, the vote split at the July meeting, where two of the six committee members favoured rate cuts, further suggests that the SARB may lean toward monetary easing in the coming months, albeit cautiously. We anticipate a rate cut between 25-75 basis points. If this occurs, it will be the first rate adjustment since April 2023.
Overall, we expect South Africa’s macroeconomic fundamentals to improve in the short term. Inflation is likely to decline further as currency pressures ease, supporting output levels, albeit mildly. The optimistic outlook for the economy in the short to medium term may positively influence strategic investment decisions, potentially leading to an increase in transaction deals in the next three months (August-October) compared to May-July.
Egypt
Currency risk
The Egyptian pound appreciated slightly by 0.07% in August, moving from E£48.74/$ on August 1 to E£48.70/$ on August 28. This 0.07% gain marks the second-best monthly performance of the Egyptian pound in 2024 since the devaluation in March.
This mild upward trend in the currency was driven by bullish investor sentiment and anchored exchange rate expectations, reflecting confidence in Egypt’s economic turnaround following its reforms under the $8 billion IMF Extended Credit Facility (ECF) program. On August 26, the IMF completed its third review of Egypt’s economic performance under the ECF, granting access to $820 million to further support the country’s progress ahead of the following review on September 5.
YTD, the Egyptian pound extended its loss to -36.46% in August from -36.37% YTD loss in July 2024. This indicates heightened exchange rate pressures compared to the 3Y and 5Y annual depreciation averages of 18.81% and 13.99%, respectively.
Despite these challenges, Egypt's economic outlook remains promising. Increased capital inflows, rising gold reserves, and a reduction in foreign currency debt will likely support the currency and enhance economic growth in the near term as investors anticipate sustained economic recovery. In Q1 2024, Egypt’s total foreign debt decreased by 4.40% to $160.6 billion from $168 billion in Q4 2023, easing concerns about debt sustainability amid multilateral funding and support. Additionally, foreign currency reserves have continued to trend upward, signalling the economy’s resilience in the face of potential external shocks, such as regional political instability and tensions. Foreign reserves are up 1.02% y/y to $49.7 billion.
Additionally, the volume of transactions in Egypt nearly doubled between January-July (YTD 2023) and January-July (YTD 2024). These investments primarily targeted strategic sectors like financial services, consumer goods, technology, and healthcare. The investment trend underscores investor optimism, driven by recent economic reforms and market liberalisation efforts, which will likely enhance trade competitiveness.
Businesses now have better access to foreign exchange and face reduced capital controls, enabling more accurate pricing and supporting revenue and margins in the medium term. While investors may continue to hedge against potential exchange rate risks, portfolio companies in Egypt will likely see impressive returns in local currency terms in the coming months. We predict the Egyptian pound will trade at E£51.40/$ in Q4 2024.
Inflation & interest rate decisions
Price pressures are easing in Egypt, as evidenced by the slowdown in the headline inflation rate to 25.67% in July 2024, the lowest level since December 2022. The monthly inflation sub-index, which more accurately reflects current prices, also declined sharply from 1.58% in June to 0.40% in July. This disinflation was primarily driven by a decline in underlying inflation, which fell to -0.49% in July from 1.30% in June, indicating that structural issues contributing to supply-side price pressures are abating. Additionally, inflation in regulated items like furniture has eased substantially, with the inflation rate dropping from 3.26% in June to 0.25% in July.
However, food inflation risks remain elevated. The month-over-month fruits and vegetables sub-index surged from -0.63% in June to 12.78% in July, marking the fastest increase since the beginning of the year and the highest rate since August 2023 (19.23%). The current inflation dynamics indicate that, although structural inflation drivers are slowing, the sharp rise in food prices—driven mainly by subsidy removals—remains a significant risk. Additionally, removing fuel subsidies has further impacted food prices by increasing logistics and transportation costs.
Due to base effects, we expect August's year-over-year headline inflation rate to slow toward 23%. However, consumer wallets will remain squeezed, indicating a weak recovery in aggregate demand in the near term. This fragile consumption trend could be exacerbated by the planned 40% increase in electricity prices in the coming months as part of the country's reform efforts. This poses a significant risk to the positive inflation outlook ahead of Q4 2024, primarily as rising living costs could lead to increased social tensions.
The complex inflation landscape will be a crucial consideration for the Central Bank of Egypt (CBE) in its upcoming September 5 meeting. We anticipate another hold on interest rates to anchor inflation expectations and support output growth. At its July meeting, the CBE’s monetary policy committee left rates unchanged at 27.25% for the seventh consecutive month.
We expect the Egyptian economy to recover, though inflation risks persist. The positive momentum from investment inflows, supported by multilateral assistance, solid macroeconomic fundamentals, and significant government spending on infrastructure and environmental sustainability, will continue to underpin Egypt’s progress.
Nigeria
Currency risk
In the official market, the Nigerian naira depreciated by 2.28% in August, moving from ₦1,570/$ on August 1 to ₦1,607/$ on August 28. Like the Egyptian pound, the naira’s movement in August marked its second-best monthly performance so far in 2024.
YTD, the naira’s official rate lost approximately 44% between July and August. Compared to the average depreciation in the last 3 (22.33%) and 5 years (14.96%), the naira’s depreciation in 2024 indicates that currency pressures have intensified.
The supply-demand gap largely drove the naira’s decline at the official window in August. The average daily turnover in the official market, which reflects the level of forex transactions (supply and demand), dropped significantly by 23.38% from $190.91 million in July to $146.27 million in August.
In the parallel market, the naira’s performance closely mirrored the official rate, depreciating by 1.23% to close the month at ₦1,625/$. The spread between the official and parallel rates widened to 1.95% from 0.08% in July, highlighting the increased demand for forex in the parallel market due to persistent supply shortages in the official market.
The spike in forex demand was partly driven by the 150-day import duty waiver and summer travel. As of August 2024, the FX backlog with commercial banks stood at $1.19 billion across 26 banks. To alleviate the demand pressures, the CBN intervened through a Retail Dutch Auction (RDA) on August 6, successfully clearing 69% ($815.36 million) of the total backlog, substantially easing currency pressures. Following this intervention, the naira rebounded from ₦1,601/$ on August 6 to ₦1,570/$ on August 27. Additionally, the CBN sold forex to Bureau De Change operators at ₦1,450/$, mandating a ceiling of 1.5% above the purchase rate from the CBN to reduce arbitrage opportunities. The CBN’s intervention efforts were supported by a drawdown from foreign exchange reserves, evidenced by the decline from $36.80 billion in July to $36.36 million in August.
Further market interventions by the CBN, coupled with rising oil export earnings, are anticipated to support the naira in the coming months. Oil production has increased for three consecutive months since May to 1.31mmbpd in July. This improvement in production, alongside broader growth in the oil sector, contributed to the uptick in Nigeria’s GDP growth from 2.98% (y/y) in Q1 2024 to 3.19% (y/y) in Q2 2024. Additionally, rising capital inflows, primarily from portfolio investments, will likely bolster the naira’s performance. Between 2024 YTD (January-July) and 2023 YTD (January-July), FPI inflows more than doubled from ₦266.64 billion to ₦81.47 billion. We predict the naira will close Q4 2024 at ₦1,500/$, slightly up from ₦1,569/$ in Q3 2024.
However, long-term investors will likely remain cautious until Nigeria’s economic recovery is more firmly established, particularly given ongoing currency risks. This trend underscores bearish investor sentiment toward Nigeria, especially in the long term, as uncertainties around the country’s currency outlook persist.
Nigeria urgently needs stable investments that contribute positively to economic productivity. Therefore, creating a harmonious and business-friendly environment has become imperative for fiscal authorities. There have been strides in this direction, particularly with infrastructure projects. More recently, the government announced plans to issue a $2 billion domestic dollar bond to address urgent socio-economic needs in the education and health sectors and support infrastructure projects. Additionally, the government is seeking a $500 million loan from the World Bank. While these moves will increase the debt burden, repayment challenges are likely only possible if the funds are not effectively utilised to achieve the intended positive economic outcomes.
Inflation & interest rate decisions
In July, the CBN raised its monetary policy rate to 26.75% to anchor inflation and exchange rate expectations. The increase in interest rates, followed by lower food prices and base effects, contributed to the slowdown in the headline inflation rate to 33.4% in July (Stears forecast: 33.27%). The month-on-month sub-index also moderated from 2.31% in June to 2.28%.
We expect the disinflationary trend to persist in the coming months, driven by the positive impact of the harvest season and the 150-day import duty waiver, which began on August 14 and will end on December 31. These measures, alongside favourable base effects, are anticipated to improve food supply, contributing significantly to softer prices.
However, inflation risks remain elevated due to ongoing currency pressures and structural rigidities constraining output. This is reflected in the slight uptick in the underlying (core) inflation rate, annually and monthly. Additionally, the 12-month average of all sub-indices, including the headline inflation rate, increased in July, indicating that inflationary pressures remain a concern.
The CBN’s monetary policy committee will meet on September 23-24, and we expect the committee to leave rates unchanged, barring any significant changes to the current disinflationary trend. The MPC will likely maintain the status quo to monitor inflation, growth, exchange rate trends and the impact of previous rate hikes on the economy.
Overall, we expect the Nigerian economy to improve in the medium term. However, in the short term (3 months), inflation, business and consumer expectations remain bearish, necessitating immediate policy actions to boost confidence and sustain positive growth. The CBN’s July inflation, business and consumer expectations survey supports this near-term outlook. To alleviate currency and inflation pressures in Nigeria, closer policy coordination between fiscal and monetary authorities is essential. While the CBN maintains high interest rates and provides forward guidance through effective communication and timely data releases, fiscal authorities must also prioritise addressing structural challenges like insecurity and transparency on government spending to stabilise exchange rate expectations.
Ghana
Currency risk
The Ghanaian cedi steadily depreciated in August, declining by 1.46% from ₵14.96/$ on August 1 to ₵15.17/$ on August 28. This marks the cedi's worst monthly performance so far in 2024.
YTD, the cedi has depreciated by 21.70%, extending its 20.27% loss from July 2024. According to the Stears FX monitor, of the nine currencies tracked, the cedi is the fourth worst-performing currency in August 2024, trailing only the Ethiopian birr, Nigerian naira, and Egyptian pound. However, comparing the cedi’s performance to its 3Y (20.6%) and 5Y(15.7%) averages, the currency’s loss so far in 2024 is not too drastic.
The currency's decline was driven mainly by bearish investor sentiments from concerns over productivity, particularly in cocoa production and exports. Cocoa accounts for over 10% of Ghana’s export earnings. The decision by Ghana’s Cocoa Board (COCOBOD) to discontinue its syndicated loan financing approach for the 2023/2024 cocoa season has raised doubts about large-scale cocoa purchases from farmers and, consequently, exports. For context, COCOBOD had planned a two-phased financing strategy for the 2023/2024 season: a $400 million pre-financing agreement with international buyers, followed by $800 million from a syndicate of lenders, the latter of which was discontinued.
These issues surrounding export earnings have exacerbated forex liquidity challenges, putting downward pressure on the cedi. Additionally, rising forex demand amid tight supply conditions further impacted the currency.
Ghana also initiated its 10-day debt swap exercise with Eurobond holders ($13 billion) starting on August 27 as part of its broader debt restructuring efforts. A successful exchange is crucial to unlock additional IMF funding by the September review. Bondholders have two options for exchanging their existing bonds: the DISCO and PAR. The DISCO option offers a 37% haircut and two new bonds maturing in July 2029 and 2035 with a 5% coupon rate. Meanwhile, the PAR option provides a 1.5% coupon rate in new bonds maturing in January 2037 without any haircut.
We anticipate the swap agreement to be successful, granting Ghana access to an additional $360 million from the IMF, which will support the government’s reform efforts and fiscal sustainability. Once concluded, this debt restructuring phase is likely to bolster investor sentiment towards Ghana further. YTD (January-July 2024), the volume of private investment transactions in Ghana almost doubled compared to the same period in 2023. We expect this upward trend to continue in the near term as Ghana’s macroeconomic fundamentals improve and currency pressures ease, partly due to a weaker US dollar. By our forecasts, the Ghanaian cedi will trade at ₵15.8/$ in Q4 2024, down marginally from ₵15.2/$ in Q3 2024.
Inflation & interest rate decisions
As with Nigeria, South Africa, and Egypt, base effects have favourably supported the slowdown in Ghana’s inflation to 20.90%, marking the lowest since March 2022. This disinflationary trend is primarily driven by the decline in food and non-food prices, reflecting improved supply conditions and stabilising essential input costs.
The easing inflation provides some relief for consumers in terms of purchasing power. With food and non-food prices softening, household budgets may experience less strain, potentially leading to a modest increase in consumer spending. However, given the historical volatility of inflation in Ghana, consumers will likely remain cautious.
We anticipate Ghana’s disinflationary trend continuing in the near term, driven by favourable base effects and the ongoing stabilisation of food and non-food prices. In the coming months, we predict a further decline in inflation towards 15-18%.
The sustained disinflationary trend will likely influence the Bank of Ghana to cut interest rates at its September meeting. A rate cut would aim to support output growth by reducing borrowing costs for businesses and consumers. This could be particularly beneficial for capital-intensive sectors, such as manufacturing, consumer goods and construction, where lower financing costs can translate into increased investment and expansion activities. Additionally, with inflation pressures easing, companies will likely find it easier to plan and manage costs, supporting better profit margins.
While Ghana’s disinflationary trend is a positive development, the broader economic recovery will depend on the effective management of interest rates, fiscal policy, and external pressures. Investors and portfolio companies should prepare for a transition period, where strategic adjustments in response to evolving economic conditions will be crucial to capturing growth opportunities and mitigating risks.
Kenya
Currency risk
Despite social tensions and a relatively uncertain macroeconomic environment, further exacerbated by multiple credit rating downgrades, the Kenyan shilling outperformed its peers. Although the currency experienced volatility in August, it still managed to gain 0.09%, closing the month at Ksh129.04/$ compared to Ksh129.15/$ on August 1. When compared to July, the currency gained 0.68%.
According to the Stears FX monitor, the Kenyan shilling was the best-performing currency out of the nine tracked in August 2024. YTD, the currency appreciated so far by 21.60%, extending its 20.77% gain from July 2024. This contrasts with the Kenyan shillings' 3Y and 5Y annual depreciation averages of 11.01% and 8.14%, respectively.
The Kenyan shilling benefitted from rising export earnings, primarily from tea, contributing 18.9% to the country’s total export income. The increase in export inflows supported the accretion in foreign exchange reserves, which rose by 1.23% between July and August. This reserve increase enhances the Central bank’s ability to defend the currency. Additionally, the 11.48% rise in diaspora remittances between June ($371.59 million) and July ($414.26 million) bolstered the currency's mild appreciation, as dollar supply was sufficient to cushion demand, particularly from manufacturers needing to import raw materials.
We anticipate improving output in the coming months despite a considerable contraction in private company activities in July, mainly due to disruptions from protests.
The federal government's plan to introduce the tax amendment bill and support from the IMF—likely to disburse $800 million in September—will improve Kenya’s debt and fiscal sustainability outlook. This will boost investor sentiment toward the Kenyan economy, increasing investment transactions, particularly in forward-looking sectors like renewable energy, agricultural technology, and payment solutions.
YTD (January -July 2024), the volume of private investment transactions in Kenya increased by 14.8% compared to the corresponding period in 2023. One noteworthy deal is a $27.5 million equity investment in Sunculture, a solar-powered irrigation solutions and agricultural technology provider supporting small-holder farmers in Kenya. This improvement in investment is underpinned by Kenya’s relatively stable macroeconomic environment, an outlook that has remained resilient despite recent social disruptions.
Though fiscal sustainability risks persist, we expect the Kenyan economy to stabilise in the coming months. We forecast the Kenyan shilling to trade at Ksh131.8/$ in Q4 2024, a significant appreciation from Q2 2024 (Ksh138/$).
Inflation & interest rate decisions
Kenya’s inflation rate rose slightly in August 2024 from 4.32% to 4.37% (Stears forecast: 4.36%), reversing the six-month downward trend since January 2024. Higher electricity prices, which increased the energy sub-index inflation rate from -0.40% in July 2024 to 0.30% in August, drove the increase. Inflation has remained close to the lower band of the Central Bank of Kenya’s (CBK) 3-7% target range.
In this light, we expect the CBK to hold rates at their current levels at its upcoming meeting in October unless significant economic shifts like another protest or adverse weather conditions necessitate a policy change. At its meeting on August 6, the bank cut interest rates by 25 basis points to 12.75%, down from 13%. This marked the first rate cut since March 2020 and the first adjustment since February 2024.
The bank will likely adopt a cautious approach to interest rate adjustments, aiming to maintain stability in inflation and exchange rate expectations. Furthermore, even though global interest rates may decrease—particularly if the US Fed cuts rates in September—the CBK will likely maintain its current rates to keep Kenya’s yields attractive to emerging market investors. This strategic approach is essential for the Kenyan government to continue raising finance to meet its fiscal obligations.
The reduction in interest rates offers potential relief for Kenyan businesses and individuals with high loans over the past months. Additionally, reduced inflationary pressures on fuel and food could lead to lower operational costs and household expenses, improving profit margins for logistics, retail, and consumer goods companies and increasing consumer disposable income.
The rate cut will likely be a positive signal for investors, indicating a more accommodative monetary environment supporting economic growth. However, the CBK's cautious stance, particularly its focus on maintaining attractive interest rates for short-term foreign investors, highlights the ongoing need for caution regarding exchange rate risks. The interplay between interest and exchange rates will be crucial in shaping investment strategies for investors with high exposure to export-oriented sectors or businesses heavily reliant on imported goods.
The Kenyan economy will continue stabilising, with inflation rates remaining within the CBK’s target range. This stability should foster a more predictable investment environment, encouraging local businesses and foreign investors to increase their economic activities in Kenya. However, businesses and investors must remain mindful of potential external shocks, such as geopolitical tensions affecting key export destinations like Egypt for Kenya or fluctuations in commodity prices, which could alter the economic landscape.
In summary, while the recent rate cut provides a more favourable environment for growth, businesses and investors should continue to monitor the CBK’s monetary policy closely, especially in the context of global economic trends and Kenya’s ongoing fiscal needs.
