MACROECONOMIC & MARKET OUTLOOK Q4/2017. Seedwell Hove

Transcription

1 MACROECONOMIC & MARKET OUTLOOK Q4/2017 Seedwell Hove

2 Macroeconomic and Market Outlook 1 Quarter 4, 2017 Renewed optimism, recovery gaining strength Highlights The global economy is gaining momentum and projected to expand by 3.6% in 2017 and 3.7% in 2018, driven by firming activity pick in advanced economies and developing and emerging market economies. The rebalancing of the Chinese economy is on course, but economic activity has picked up in the first half. Sub-Saharan Africa s recovery is progressing gradually, helped by improving external demand, pick in oil and other commodity prices, and policy support. Oil prices are expected to average between $53-$58 per barrel in 2017 and $54 per barrel in Other commodity prices are expected to firm up moderately, as global demand and supply find a balance. Financial conditions remained supportive, with low volatility thus far in 2017, helping to improve sentiment. Monetary policies in advanced economies are expected to remain accommodative, despite continued normalization in the US and the hawkish tones by other major central banks. Global trade is rebounding, but elevated trade policy uncertainties remain. The outlook is upbeat, but subject to downside risks stemming from the rise of protectionism in the US, the pace of US interest rate hikes, Chinese s economic rebalancing process amid cooling of the housing market, uncertainties around Brexit negotiations, political and security risks and weather related risks. 1 Prepared by Seedwell Hove, with contributions from Jeremy Wakeford. Quantum Global Research Lab AG Bahnhofstrasse Zug Switzerland Phone Fax

3 Global Economic Outlook The global economy is gaining momentum, with economic activity picking up in the first half of 2017, reflecting firmer domestic demand growth in advanced economies and improved performance in large emerging market economies. Advanced economies are largely benefiting from lenient monetary conditions and fiscal support, while emerging economies are supported by recovering commodity prices and policy support. The continued recovery in global investment is also spurring stronger manufacturing activity. The latest global purchasing manager indices and other highfrequency economic indicators point to continued growth (Figure 1). Figure 1: Composite PMI for the Global economy, Developed Markets and Emerging markets Emerging Market Composite PMI Global composite PMI Developed Markets Composite PMI Source: Bloomberg The global economy is projected by the IMF to firm up to 3.6% in 2017, and strengthen further to 3.7% in This reflects a 0.1 percentage point upgrades from the previous projections. Advanced economies will expand at 2.1% in 2017, led by the US, Canada and the Euro Area. In the Euro area, high frequency data point to solid growth in the third quarter following a robust secondquarter expansion. Canada and Norway are benefiting from recent pick up in commodity prices. Emerging market and developing economies (EMDEs) are expected to rebound to 4.6% in 2017 edging up to 4.9% in , largely supported by firming commodity prices, and robust activity in 2 IMF, World Economic Outlook, October

4 Annual %age change commodity importers. Activity in China remain stronger than expected, while Brazil and Russia have exited recession and solidifying their recoveries. India will continue to grow at a healthy pace, despite the lingering impact of the country s currency reforms and the goods and services tax. In our view, the global economy is looking more positive and is on course to achieve the 3.6% growth this year given the Figure 2: Global economic growth and projections 8.0 strong broad based performance so far this year, which strongly reflects renewed optimism. However, some downside risks stemming from trade policy uncertainties, geopolitical tensions, tightening of financial conditions and faster than expected rebalancing in China could undermine market confidence and limit the momentum somewhat World Euro area Sub-Saharan Africa Source: IMF and World Bank Financial conditions have remained supportive in the first three quarters of 2017 and market sentiment has remained strong, with low volatility since the beginning of the year. We expect monetary policies to remain largely accommodative. The US Federal Reserve has raised its short-term interest rates in June to %, as expected and is expected to continue with Advanced economies Emerging market and developing economies the normalization of monetary policy, while Japan s policy will largely remain unchanged with near zero interest rates. Following the US Federal Open Market Committee statement in September, the markets have priced in a 70% probability of one additional rate increase by the end of The Euro area monetary policy will remain largely supportive this year, despite some hawkish 3

5 sentiments. Uneven recoveries in emerging market economies has seen a number of central banks in emerging markets including Brazil, Colombia, Russia, Ukraine, South Africa, Mauritius and Zambia easing their monetary policies to further stimulate economic activity. Fiscal policy at the global level is expected to remain broadly neutral in 2017 and Global inflation has inched up in recent months, led by strong advances in developed economies. Inflation accelerated in the U.S. as hurricane-related disruptions caused gas prices to spike, while in the UK inflation came in above market expectations as the pass-through effects of the weakened pound continued to drive higher prices. Inflation also trended higher in the Euro area driven by higher prices for non-core goods. Global inflation is projected by the IMF to edge up to 3.1% in 2017, from 2.8 in 2016, reflecting a pick-up to 4.2% in emerging and developing economies and 1.7% in advanced economies. Global trade expanded briskly in the first half of The World Trade Organization has upgraded their forecasts of global trade for 2017 to 3.6%, which represents a substantial improvement from the mediocre 1.3% growth in The rebound in global trade in 2017 reflects a recovery in global demand and especially capital spending 4 and pick up in commodity prices. The recovery of oil prices have also supported investment in countries such as the US and Canada, while rising import demand from North America and significant pick up in intra-regional shipments have boosted trade flows in Asia. However, a number of risks including protectionist sentiments, rise in geopolitical tensions and natural disasters, Brexit uncertainties and easing fiscal and credit expansion in China could undermine trade recovery momentum. Global current account is expected to narrow marginally in Outlook for Advanced Economies Cyclical recovery in advanced economies is strengthening more than previously envisaged, with positive surprises in growth in the first half of 2017 occurring in countries where estimates for output were below potential in Economic growth in advanced economies is expected to pick up to 2.1% in 2017 and marginally inch down to 2% in 2018, as rising protectionism, Brexit related risks and geo-political risks hold back growth momentum. Advanced economies growth could soften as output gaps close in the medium term, while weak productivity growth and mounting demographic challenges could constrain growth in the long term. 3 World Trade Organization, Press Statement, 21 September IMF, World Economic Outlook, October

6 The U.S. economy posted solid performance in Q2, with GDP growth of 3.1%, as business investment continue to strengthen, partly reflecting a recovery in the energy sector. However, the effects of Hurricanes Harvey and Irma have dented economic activity in the third quarter. Economic activity could pick up later in the year and early 2018, as rebuilding efforts intensify. About USD 15.3 billion in hurricane relief has been approved so far by Senate, while Congress has reached a deal in September to increase the debt ceiling and extend government funding for three months. We now expect the Congress and administration to focus on tax reform, which could provide a boost to growth next year. High frequency economic indicators Figure 3: US PMI, Inflation and Unemployment have begun to show the extent of the impact of hurricanes: Manufacturing PMI declined by 1% to 52.8, while industrial production and retail sales also weakened in August (Figure 3). The consumer confidence index eased to in September from points in August, largely reflecting the effects of hurricane Harvey and Irma in Florida and Texas. The US economy is projected to expand at 2.2 % in 2017, edging up to 2.3 % in 2018, reflecting gains in the labor market and revival in non-residential investment and exports. Unemployment continues to trend downwards, inching down to 4.2% in September, providing a boost to consumer spending (Figure 3) Source: Bloomberg Inflation (left) Unemployment (left) Manufacturing PMI (right) Inflation picked up in August to 1.9%, after a streak of declines since February, largely driven by rising energy prices. In a hawkish tone, the Fed announced plans to start winding the Bank s massive US$ 4.5 trillion balance sheet in October. It also kept its projected path of interest rate hikes unchanged from June, which points to a rate 5

7 increase in December. The announcement sent both U.S. Treasury yields and the U.S. dollar higher. While the possibility of a fiscal stimulus plan offers a potential upside risk this year, the Trump administration is not likely to succeed in getting Congress approval this year. Trade policy uncertainties and escalation in the combative rhetoric with North Korea, issues with Russia (investigations into the U.S. President s connections to Russia), failure of Trump policies (e.g. healthcare bill) to get congress approval remain downside risks to the US outlook. Euro Area s recovery gained more steam in Q2, with GDP growing at 0.6% quarter-onquarter seasonally-adjusted from 0.5% increase in Q1, much faster than originally envisaged. The recovery appear to be broad based driven by stronger external demand and stronger private consumption, investment supported by accommodative financial conditions amid diminished political risk and policy uncertainty. Recent data also points to continued brightening of the economic picture: PMI edged up to 56.7 in September, from 55.7 in August, while sentiment is improving and labour market is strengthening. Unemployment rate is drifting to multi-year lows and industrial production rebounded in July. Recovery is expected to gather more strength in the remaining quarters, with GDP growth projected to rise to 2.1% in 2017, before moderating to 1.9 % in The forecast is 0.4 percentage point and 0.3 percentage points higher for 2017 and 2018, respectively. Optimism is high for the Eurozone despite uncertainties such as overleveraged banks, countries running debt heavy balance sheets and the ongoing migrant crisis. This is prompting the European Central Bank (ECB) to shift to a more hawkish tone on interest rates. We expect the ECB to announce a tapering of monetary policy in Q4, which may start early Inflation remains moderate at 1.5% in September after picking marginally in July, still below the ECB s target of 2%. The recent strengthening of the euro prompted the ECB to lower its inflation forecasts for 2018 and While lower unemployment will continue to support household consumption, a strong euro could weigh on export growth and keeping the inflation outlook subdued. The positive economic news flow have been reinforced this year by reduced political risks from smooth French and Germany elections. Angela Merkel s CDU/CSU won the overall in the September elections, although they lost some seats. Tough negotiations will be required in order to form a coalition government, possibly with FDP and the Green party, as fundamental differences exist between these parties. With Merkel s win, Germany s influence on deep integration in Europe is likely to continue. In France, President Emmanuel Macron has signed his flagship labor reform bill into law in spite of protests and criticism over his use of executive powers. The reforms aims to cap severance payments and make it easier for firms to lay off and hire workers to improve competitiveness, among other measures. Spain is hobbled by a push for cessation of north-east Catalonia after a referendum on October 1. The looming 5 IMF World Economic Outlook, October,

8 election in Italy next year is another important risk factor to monitor for Europe. UK s outlook is mixed. Manufacturing PMI rose in August, signaling an acceleration in the expansion of output, while consumer sentiment edged up in September, indicating brighter prospects for private consumption. A strong labor market is reflected by multi-decade lows in unemployment rate of 4.3% 6 in August amid signs of a mild recovery in real wage growth. On the flip side, growth in total industrial production fell in July, while the housing market cooled further, painting a blicker picture on the economy. At the same time, Brexit uncertainty continues to deter investment, and Prime Minister May s speech on 22 September failed to offer sufficient clarity on the UK s desired trading relationship with the EU. Moody s has downgraded UK s credit rating by a notch from Aa1 to Aa2 and changed the outlook from negative to stable, on policy challenges around the complexity of Brexit negotiations in September. UK s growth is projected to slow down to 1.7 % in 2017, driven by softer growth in private consumption as the pound s depreciation and rise in inflation weigh on household real income. Growth is expected to slide further to 1.5 % in 2018, as prolonged Brexit uncertainties continue. The medium-term growth prospects will largely depend on the outcome of Brexit negotiations and new economic relationship with the EU, including extent of the increase in barriers to trade, migration, and cross- border financial activity. However, the Bank of England s ultra-loose monetary policy stance and resilient global demand should soften the impact somewhat. The Bank of England adopted a more hawkish tone as officials seemed less concerned over the medium-term economic drag from Brexit. At the September meeting, the MPC voted to leave interest rates unchanged and to continue its purchases of investment-grade corporate bonds to the tune of up to GBP 10 billion and to maintain the total stock of UK government bond purchases at GBP 435 billion, financed by the issuance of Central Bank reserves. Inflation increased to 2.9% in August and is expected by the BoE to average 2.7% in 2017, way above the inflation target of 2%, suggesting that monetary tightening could be imminent. The decline in unemployment could reflect diminishing spare capacity in the economy, which could help push up wages and generate further inflationary pressures going forward. Japan s GDP growth accelerated to 2.5% in Q2, marking the fastest expansion since Q1 2015, and putting the economy back on recovery, helped by strong consumption and strengthening of global demand. Growth is expected to pick up to 1.5% in Unlike other major central banks, the Bank of Japan showed a dovish tone at its September meeting, reaffirming its loose monetary policy stance. It has kept its monetary policy unchanged, continuing with Quantitative 6 UK, Office for National Statistics 7

9 and Qualitative Monetary Easing with Yield Curve Control framework and left the policy rate at 0.1%. The 10-year bond yields remain close to 0%, while and the pace of Japanese government bond purchases remained at JPY 80 trillion (USD 714 billion) annually. Inflation has jumped up to 0.7% in August, driven by higher energy prices and a narrowing output gap, but will remain well below the Bank of Japan s target of 2% in We do not expect the Bank of Japan to change its accommodative monetary policy stance in the near future. Prime Minister Shinzo Abe has won the snap elections on 22 October, which will help him to consolidate his power and get a stronger mandate to deal with North Korea threats. The outlook is subject to downside risks including policy uncertainty from the United States; developments in emerging economies especially China and Brexit negotiations. Private consumption growth could moderate in 2019, as government hikes sales tax by 10% in Over the medium term, a shrinking Japanese Labor force will curtail GDP growth although, in per capita income terms, Japan s growth is projected to remain close to recent averages. Outlook for Emerging Market and Developing Economies Prospects for emerging market and developing economies continue to strengthen. GDP growth is projected by the IMF to rise to 4.6 % in 2017, and pick up further to 4.9 % in 2018, contributing significantly to global growth. The World Bank is more bearish, seeing growth of these countries at 4.1% and 4.5% in 2017 and 2018 respectively. Growth of these countries is largely driven by strong growth in China and India, which account for more than 40 % of GDP and more than 40 % of the population of emerging market and developing economies 7. Brazil and Russia have exited recessions and poised for moderate rebounds this year. Stabilising commodity prices and recovering industrial activity and investment and policy support are helping to boost business confidence and driving economic activity in these countries. China s posted another outperformance in Q2, with GDP growth of 6.9%, following a similar pace of expansion in Q1. However, recent data points to moderation in momentum. Retail sales growth and industrial production barely changed, while the pace of investment cooled somewhat in August. Exports slumped, while import growth picked up speed, dampening the external sector, partly driven by the recent strengthening of the yuan. The yuan appreciated by 4.1% between January and September 2017, strengthened by the positive market sentiment, strong economic dynamics, diminishing fears of an open trade war with the U.S and tight capital controls. The housing market continues to cool off with as both prices and sales declining. Growth in house prices slowed down to a seven-month low pace of 8.1% in August, 7 IMF, World Economic Outlook, October

10 and below the 9.1% in July. We believe that growth will cool down in the coming quarters, to see growth for 2017 around 6.7% and slightly above policy targets. Growth is anticipated to slow down to 6.5 % in 2018 as the economy continues to rebalance. The communist Parts has started its 19th congress on October, where President Xi Jinping will laid out the party s priorities Figure 4: China s economic indicators 15 for the next five years. His speech emphasized on the continuation of rebalancing the economy, focusing on enhancing quality of growth and not speed, building a stronger and responsible global power, reform in state enterprises and the need to regulate the housing market. Chinese ideology and economic policy are not likely to change, continuing to focus on Socialism with Chinese Characterietics Source: Bloomberg House Price Index Inflation Li Keqiang Index of Economic Activity PMI (right) Brazil s outlook is stabilizing moderately. Following 18 months of painful recession, the economy has returned to positive growth- expanding by 1 % in Q1, and more softly by 0.2 % in Q2 8. The upturn was largely driven by strong growth in private consumption benefiting from falling inflation and a decision to allow workers to make early withdrawals from a government severance fund, a bumper crop and growth in exports. The PMI recovered to 51.1 in September, and industrial production edged up by 5.9% in September. Business sentiment regained some ground in 8 Instituto Brasileiro de Geografia e Estatística (IBGE),

11 September, while consumer confidence fell in August. Brazil s GDP growth is projected by the IMF to average 0.7 % in 2017 and pick up to 1.5% in 2018, (a 0.2 percentage point downward revision from the previous forecast). The revision has been prompted by ongoing weakness in investment and an increase in political and policy uncertainties. Brazil s current account balance narrowed in August, helped by increase in agricultural exports and higher commodity prices. Inflation continued to trend downwards, falling to a multiyear low of 2.5 % in September 9, which will allow the central bank to continue loosening monetary policy. However, the country continues to struggle with rising unemployment and sizable fiscal pressures and together with political and institutional uncertainty, will continue to threaten the nascent economic recovery. President Temer is reportedly likely to face another corruption charge in the coming weeks, which could slow down the pace of reforms, undermine confidence and popular support, and take a heavy toll on domestic economic activity 10. India s economy is expected to expand at 6.7% in 2017, despite suffering a setback in Q2 from the effects of the Goods & Services Tax (GST) launched in July 2017 and still lingering disruptions associated with the currency exchange initiative introduced in November Q2 growth slowed down 5.7%. Industrial production edged up in August, while PMI picked in September. The impact of the GST appears to be temporary, hence the economy could regain steam in the coming quarters, allowing GDP growth to pick up to over 7% in The main risks to India s economy emanates from the US trade protectionism stance, monetary policy tightening in the US, which could induce global risk aversion and reverse capital flows from emerging markets. The outlook for EMDEs is mixed. Robust growth above 6% will continue in South Asia in 2017 sustained by strong domestic demand, high infrastructure spending and FDI-led investments, especially in Bangladesh, Cambodia, India, China, Philippines and Vietnam. In Latin America and the Caribbean, economic activity will remain subdued, with real GDP growth projected to soften to 1.2 % in 2017, dragged down by Venezuela, Puerto Rico and Ecuardo, while activity in Argentina, Chile, Colombia and Mexico will moderate. Uncertainty about U.S. trade policy remain a concern in some countries such as Mexico. Venezuela continue to face political and humanitarian crisis amid a deepening recession. Geopolitical risks in parts of the Middle East and cuts in oil production under the extended OPEC agreement saddle growth in In Eastern Europe and central Asia, countries such as Russia, Bulgaria, Romania, and Serbia are benefiting from robust domestic demand and external demand for exports from the Euro Area. Russia s economy will continue to solidify, 9 Bloomberg, e7-a652-cde3f882dd7b 10

12 expanding by 1.8 % in 2017, after posting a 2.5% growth in Q2. 11 Activity in Turkey is recovering following a failed coup in 2016, currency depreciation and rising high inflation. Main risks to the outlook for EMDE in 2017 and 2018 relates to uncertainties from trade protectionist policies from the US, partial recovery in oil and commodity prices, tightening of global financial markets in the US and geopolitical disturbances. Macroeconomic outlook for Africa Economic recovery is progressing in Sub- Saharan Africa (SSA), following a sharp slowdown in GDP growth is projected accelerate to 2.6 % in 2017, supported by stabilizing commodity prices, strengthening external demand and helpful policy support. The rebound in the regions large economies Nigeria, Angola and South Africa, which have suffered slowdowns in 2016, and strong growth in some frontier market economies will lift the region s fortunes. Nigeria exited a five-quarter recession in the second quarter, while activity is picking up in Angola on the back of improvements in oil prices and increase in oil production. South Africa has emerged from a short technical recession, although obstacles remain. Nonresource intensive frontier market and low income countries such as Cote D Ivoire, Ghana, Senegal, Ethiopia and Tanzania will continue to grow at robust paces in 2017, supported by strong domestic demand and increased infrastructure spending. Regional per capita output growth will remain negative for the second consecutive year, while investment growth remain sluggish. 12 Increase in mining and agriculture is boosting economic activity other countries. However, slow adjustment and still existing imbalances in some large commodity exporters, heightened political uncertainty in countries such as South Africa, Kenya and DRC and drought in East Africa are limiting growth potentials. We expect Sub-Saharan Africa s economic growth to continue to accelerate to levels above 3.4% 13 in 2018, supported by stabilizing commodity prices, firming external demand and the effects of past policy interventions. The continued recovery will be driven largely by faster growth in the region s three biggest economies- Nigeria, South Africa, and Angola. Nigeria is projected to grow at 1.9%, while Angola and South Africa will expand at 1.6% and 1.1 % next year respectively. Cote d Ivoire, Ethiopia, Ghana, Senegal and Tanzania will grow at more robust paces well above 6.8% next year, sustained by increasing domestic demand, infrastructure spending and policy support. However, downside risks including weaker-than-expected improvements in commodity prices, possible tightening of global financing conditions, trade protectionism and political uncertainties in 11 Russia Federal State Statistics Service 12 World Bank, Africa s pulse, Volume 16, October This projection is in line with the IMF projection from the WEO, October,

13 Annual %age change some countries could limit the recovery momentum. Figure 5: Growth forecasts for selected African countries, 2017 and Sources: World Bank, IMF Table 1: Selected Macroeconomic Indicators for Sub-Saharan Africa Real GDP Growth (%) Real Per Capita GDP growth (%) Inflation (%, yoy ave.) Net FDI (% of GDP) Fiscal Balance Total Public Debt (% of GDP) CA Balance Reserves (Months of imports) Broad Money Supply growth (%) Private sector credit (% of GDP) Sources: IMF, World Bank The region s inflation continued on a downward trend on the back of stabilizing exchange rates, and declining food prices in countries which received good rainfalls (e.g., 12

14 South Africa, Zambia, Ghana, and Malawi). Easing inflationary pressures are creating space for some central banks to ease monetary policies in countries such as South Africa, Ghana, Malawi, Namibia, Rwanda, Mauritius and Zambia, providing some boost to growth, as lower inflation and a more accommodative monetary policy provides impetus for domestic demand. However, inflation remains elevated in other countries Figure 6: Inflation rates of selected African countries (%) (e.g. DRC, Angola and Sierra Leone). In Angola, Ghana and Nigeria, inflation is declining, but still remains in the double digit ranges. Inflation remain muted in the CFA region, thanks to the stable peg to the Euro. We expect the region s inflationary pressures to recede further next year, as past price impulses continue to dissipate and currencies firm up. Source: Bloomberg and Trading Economics January 2017 August 2017/ Latest SSA Average Fiscal deficit for the region is projected to narrow slightly to 4.2% of GDP in 2017 from 4.7% in Oil and metals exporters continue to run sizable fiscal deficits, reflecting slow and partial fiscal adjustments and limited progress in increasing fiscal space. For instance South Africa is facing challenges with fiscal consolidation of the 2017/18 budget, as government revenue is increasing at a slower pace than expenditure, and real economic activity remains weak. 14 Fiscal deficits have widened somewhat in some non-resource-intensive countries, due to continued expansion in public infrastructure. However, in many CEMAC countries, large spending cuts have sharply narrowed the fiscal deficits. Concerns about debt sustainability are 14 World Bank, Africa s Pulse, October

15 rising, as debt levels remain elevated. More than 70% of Sub-Saharan African countries are expected to retain debt levels above 40% of GDP in Debt levels are high especially in Congo Republic, Mozambique and Zimbabwe (Figure 7). This largely reflects limited progress made in reducing the fiscal deficit. External conditions for the regions appear to be improving somewhat, helped by the uptrend in global growth, robust growth in global goods trade, pick up in commodity prices, and supportive global financing conditions. The region s current account deficit is expected to narrow to 3.4% of GDP in 2017 from above 4.1 % of GDP in However, current account deficits will remain high (above 10% of GDP) in some oil importing countries (e.g. Mozambique, Sierra Leone, Rwanda and Guinea). Figure 7: Government Debt for selected African countries (% of GDP), 2017 and 2018 Bostwana DRC Nigeria Cameroon Tanzania Rwanda Guinea Sub Saharan Africa Chad Côte d Ivoire South Africa Equatorial Guinea Zambia Kenya Ethiopia Mauritius Sierra Leone Senegal Angola Gabon Ghana Zimbabwe Mozambique Congo Republic Source: IMF African currencies have continued to stabilize in 2017 compared with 2016, contributing to easing inflationary pressures. A number of currencies have overall appreciated between January and September The Mozambican metical appreciated by 15%, while the Congo Republic Franc and Mauritius Rupee appreciated by 9.3 % and 5.7% respectively (Figure 8). The Angolan Kwanza has stabilized, with the gap between the official exchange rate and the parallel market 14

16 exchange rate has narrowing somewhat, while the pace of depreciation of the Nigerian naira has slowed as the exchange rate balances. Interventions by the Central Bank of Nigeria will keep the naira relatively stable on the parallel market in We expect the Angolan kwanza to remain overvalued compared to the parallel market for the next 2 quarters. However, the Congolese (DRC) franc and the Sierra Leone leone have remained under pressure, depreciating by 45.4 % and 34.3% respectively. The Congolese Franc is weakened by the continued political instability, decline in FDI and dwindling foreign exchange reserves despite a rise in copper prices, while the leone is weakened by the declining in exports and diminishing foreign exchange reserves. Despite the overall appreciation between January and September, the South African Rand remained volatile, succumbing to political wrangling during the year, growth slowdown, credit rating downgrades and capital outflows. Figure 8: Changes of selected African currencies against the US$ (January September 2017) Mozambiquan Metical Congo Republic CA Franc Cameroon CA Franc Senegal CFA Franc Côte d Ivoire Franc Mauritius Rupee Guinea Franc Botswana Pula Zambian Kwacha Egypt Pound South African Rand Ugandan Shilling Malawian Kwacha Kenyan Shilling Angolan Kwanza Tanzanian Shilling Ghanaian Cedi Rwandan Franc Ethiopian Birr Nigerian Naira Sierra Leone Leone DRC Congolese Franc Source: Bloomberg Outlook for individual African countries Nigeria s economy returned to positive growth, with 0.6% GDP growth in the second in Q2, 2017 after 5 quarters of contraction, helped by improving oil prices, ramped up oil production and positive dynamics in the agricultural sector. Oil production averaged 1.84 million barrels per day in Q2, up substantially from 1.81mb/d in Q1, which 15

17 helped the oil sector to grow by 1.6%. The non-oil sector marked its second consecutive positive growth of 0.5% in Q2, led by expansions in the agriculture, finance and insurance and electricity and gas. The foreign exchange window introduced in April by the central bank is succeeding in attracting portfolio investment, bolstering international reserves and helping to rebalance the foreign exchange market. In September, the Central Bank further unified some parallel exchange rates in a bid to simplify the foreign exchange system. High frequency indicators point to further improvement: PMI increased to a multiyear high of 55 in August, thanks to a robust domestic market and strong growth in output and new orders. Inflation continues to decelerate, inching down to 15.9% in September, although it remains above the central bank target of 6-9%. We expect the inflation rate to drop further and stabilize around 15% in Growth in 2017 is projected to average 0.8 %. The implementation of policy measures under the government s Economic Recovery and Growth Plan would support efforts to industrialize and diversify the economy. However, improvements in power supply and other infrastructure remain key to unlock economic diversification. We expect growth to strengthen further to 1.9 % in 2018, as a result of higher oil production and oil prices, and the gradual loosening of currency controls. Oil production could increase slightly in However, this positive impetus could be limited by the tensions continuing to rumble in the oil producing Niger Delta region, as militants recently threatened to renew attacks on the oil infrastructure. There are also concerns about policy implementation, market segmentation in the foreign exchange market and banking sector fragilities, which could weigh on economic activity in the medium term. On the political front, tensions could escalate next year as the 2019 presidential elections approach. The South African economy has emerged out of a 2 consecutive quarters technical recession, with 2.5% growth (seasonallyadjusted annualized rate) in the second quarter, swinging up from 0.6% contraction in Q1, driven by strong growth in agriculture (33.6% quarter-on-quarter SAAR expansion in Q2) and expansions in electricity, mining and finance sectors. GDP growth is projected to average 0.7 % in The economy slipped into recession as political uncertainty has eroded business confidence and led to credit rating downgrades and decline in private investment. President Jacob Zuma narrowly survived a no-confidence vote in August amid a string of corruption scandals. The political bickering is likely to continue until at least the electoral conference of the African National Congress in December, hurting consumer and business confidence and increase volatility of the rand. Divisions within the ruling party are likely to remain pronounced over the coming years. Private consumption remain subdued due to lackluster labour market marked by high unemployment (27.7% in July). The PMI 16

18 dropped to 48.5 in September from 51.6 in December 2016, while manufacturing production declined 0.3 % in August, reflecting subdued business conditions. Subsiding food prices are helping to keep inflation under control (5.1% in September and within the target of 3-6%), giving room for the Reserve Bank to further loosen policy and stimulate demand. GDP growth is expected to pick-up to 1.1 % in Higher prices for the country s key export commodities, especially gold and platinum and other precious metals, together with robust agricultural output offsetting the weak private consumption and investment will be crucial in generating a steady recovery. The outlook for Angola is strengthening, after difficult conditions in GDP is anticipated to expand by 1.5% in 2017, which is a 0.3 percentage point upgrade. 15 Improving economic activity will be helped by stabilizing oil prices and increase in oil production. Oil production increased by 3.2% to 1.68 mb/d in August since January. The National Institute of Statistics (INE) s economic climate indicator rose from -24 points in Q1 to -21 in Q2, reflecting improvements in tourism, mining, and construction and communications sectors. However, business sentiment remain subdued. The outlook for 2018 looks brighter: GDP growth is projected at 1.6%, driven by moderate pick up in oil prices, ramped up public investment, greater oil production. Stronger oil revenues will probably narrow the current account deficit next year. However, high debt levels will increase debt servicing costs and limit growth momentum. Angola s credit rating was downgraded from B to B- by S&P, on concerns of rising debt costs, but its outlook was raised to stable, because of sustainable current account balance. Although the exchange rate gap between the official and the parallel exchange rate are narrowing, the foreign exchange market will remain in disequilibrium, constraining the non-oil sector. Inflation has continued to decelerate, reaching 25.2% in September and marking the 9 th consecutive monthly decline. The fading effect of the currency depreciation in 2015/2016 will further slow inflation over the coming quarter, possibly halfing it in 2018, allowing BNA to loosen monetary policy. João Lourenço has replaced José Eduardo dos Santos as Angola s president following peaceful elections in August. The new president is unlikely to substantially change economic policy-making in Angola. Zambia s outlook is stabilizing. GDP growth is expected by the IMF to accelerate to 4% in 2017, following a modest 3% growth in Zambia s outlook was upgraded by S&P to stable from negative in August. Growth will be boosted by a strong rebound in agriculture, increased electricity generation coupled with higher copper prices and greater output from the mining and manufacturing sectors which will drive strong export performance. This will also contribute to the narrowing of the trade 15 IMF, World Economic Outlook, October,

19 deficit and a strengthening of the kwacha. Further impetus could come from improved liquidity and fiscal support. Inflationary pressures have subsided substantially, falling to a multi-year low of 6.4% in August, promising room for the central bank to loosen monetary policy and support economic activity. The fiscal deficit is expected to narrow to 8% in 2017 from 8.9% in The expected issuance of Eurobonds in 2017 will help to close the financing gap for capital projects. However, rising debt levels (expected at 56% in 2017) and recent rise of political tensions pose downside risks to the outlook. The outlook for some frontier economies (Cote d Ivoire, Ghana, Senegal and Kenya,) remain upbeat in Cote d Ivoire s economy is expected to grow at 7.6% in 2017 and 7.3% in 2018, sustained by the increase in infrastructure spending, resilient services sector and extensive international financial support. However, the decline in cocoa prices will significantly dampen the momentum and fiscal revenues. Cocoa contributes 15% to GDP and 50% of exports in Cote d Ivoire. Government finances came under pressure in 2017 following the sharp slump in cocoa prices and the payment of bonuses to members of the army and civil service following a protest in May. The budget deficit is expected to widen to about 4.5% of GDP this year, and possibly narrow to 3.7% of GDP in The government issued two Eurobonds, with a combined value of USD 1.8 billion early in the year to close the funding gap. Kenya s outlook is positive, but stymied by a number of obstacles. GDP growth has been revised down to 5% in 2017, on the back of a devastating drought dampening agriculture and causing food shortages to more than 5.6 million people, decline in credit following the capping of interest rates in September 2016 and political tensions after the nullification of the presidential election results by the Supreme Court in September. This is compounded by surging inflation (8% in August) and rising unemployment, dampening private consumption. Economic activity in the private sector was hit by a slump in demand amid escalating concerns over prolonged political instability, reflected by a plunge in the PMI, which dropped to a record low of 40.9 in September, and below critical 50 point threshold that separates expansion from contraction. Kenya is under close scrutiny for possible downgrade of its credit rating by Moody s later this year. In our view, Kenya s economy could grow at a pace below 5.5% predicted by the IMF in 2018, due to possible escalation of political violence, which is increasing uncertainty and slowing investment, combined with adverse effects of the ongoing drought. While the decision by the court reflects Kenya s strengthening of institutions, prolonged political tensions will likely divert attention from economic policy and dampen investment and economic activity next year. Prospects for Ghana are improving. The economy is anticipated to expand at 5.9 % in 2017, and strengthen robustly to 8.9% in 18

20 2018, propelled by increase in oil production from the new Tweneboa-Enyenra-Ntomme (TEN) oil fields and Sankofa oil fields, as well as from the Jubelee oil fields as repairs are completed, higher oil prices, and expected increase in private sector lending benefiting from monetary policy support. The extension of the Extended Credit Facility (ECF) with the IMF will significantly ease fiscal pressures and help safeguard financial stability. A stronger oil sector should also have positive spillover effects on other sectors of the economy, while the implementation of measures announced in the 2017 budget should help reduce the budget deficit and put the public finances on a more sustainable path, and encourage investment. Indeed, Q2, GDP growth was stellar, at 9% largely driven by the mining sector (which includes the oil sector), which expanded by 75%. The PMI points to continued strong momentum, picking up to 56.5 in September. Ghana will also benefit from a favorable ruling by the International Tribunal for the Law of Seas (ITLOS) s following a three-year long maritime dispute with the Côte d Ivoire in terms of higher FDI inflows for oil exploration. Inflation slowed to 12.2% in September, moving towards the central bank target of 6-10% and helping the central bank to continue with its current monetary easing cycle. Ghana is planning to issue a 4 billion (US$1 billion) local currency bond by end of this year. Ghana s outlook was upgraded to positive by the S&P, reflecting bullish growth prospects. Senegal will continue to grow at a healthy pace of 6.8% in 2017, edging up to 7% in 2018, sustained by strong growth in agriculture, a dynamic private sector and structural reforms (e.g. the Plan for an Emerging Senegal) helping to solve critical bottlenecks in the country's productivity and competitiveness and grow the economy), positive terms of trade coupled with stable political environment. The agriculture sector is benefiting from a good rainfall season and government support programmes. Rapidly growing exports will help to reduce the current account deficit from nearly 9% in 2014 to 5.1% in Higher revenues and fiscal consolidation will help fiscal authorities to progressively reduce fiscal deficit to -1.5% of GDP in 2017 and stabilize the debt to 61% of GDP in Senegal issued a US$1.1 billion Eurobond in May, which was oversubscribed by a factor of 8, with a yield of 6.25, reflecting strong investor confidence in one of Africa s fastestgrowing frontier market economies. Some low-income countries (Rwanda, Tanzania and Ethiopia) will maintain their robust growth rates in 2017 and Ethiopia s outlook remains upbeat, with economic growth projected to remain robust at 8.5% over It will outperform its peers, demonstrating its resilience amidst a drought shock. Strong economic expansion is bolstered by a huge public infrastructure programme (focusing on energy and transport facilities, healthcare, education and dams (e.g Grand Ethiopian Renaissance Dam on the Nile River, expected to house the largest hydroelectric power plant in Africa)), and robust foreign direct investment. The economy s underlying fundamentals remain strong, and concerted government efforts to turn Ethiopia into the continent s leading manufacturing hub are paying off. Ethiopia was also granted a US$1.3 billion loan by the 19

21 World Bank in September. In August, the government announced a plan to develop a port facility in Sudan to reduce reliance on Djibouti and diversify and boost international trade. Recent IMF data suggests that it could overtake Kenya as East Africa s largest economy in Rwanda s economy is poised to expand at 6.1% in 2017, strengthening further to 6.8% in 2018, buoyed by improving business regulatory environment and increased infrastructure spending. Stronger food production and stabilisation of the currency will help to bring down inflation, but the current account deficit could widen a bit in 2018 as a result of huge imports associated with the new Bugesera international airport. Prospects for Tanzania are moderately strong, with GDP growth of 6.5% and 6.8% anticipated in 2017 and 2018 respectively, driven by robust expansions in the manufacturing, construction and financial sectors and a surge in mining and increased infrastructure spending and robust domestic demand. The current account deficit is shrinking, while the external debt is rising. However, the increasing tightening of the mining sector by the government could discourage foreign direct investment and dampen growth. Activity is improving in some Southern and East African countries, such as Malawi, Financial Markets Outlook Global financial conditions have remained supportive in the first three quarters of Market sentiment has remained Zimbabwe, Botswana, Mauritius and Mozambique in 2017, supported by a good rainfall season combined with government support programmes, which is boosting agriculture and power generation. The outlook for Mauritius remains upbeat over the coming years as the tourism sector which has maintained solid growth since mid-2014 continues to support the economic momentum. Growth is projected at 3.9% in 2017, inching up to 4% in However, recently, exports competitiveness has been affected by a strong rupee and modestly rising inflation. The Central Bank of Mauritius has cut its policy rate by 50 basis points to 3.5% in September in a bid to support domestic consumption and cool the exchange rate. The Mozambiquan economy is turning the corner after its recent debt crisis. The economy grew at 3.1% in Q2, 2017 and we expect GDP growth to settle at around 4.5 % in Greater coal exports have helped to narrow the current account deficit, boost international reserves and strengthened the exchange rate. The government missed several bond repayments this year, and international financial assistance has yet to resume. Uncertainty stemming from the debt crisis will continue to dampen the prospects. Botswana s economy will remain stable over the coming years. strong, while market volatility is low, despite elevated policy uncertainties (Figure 9). Low market volatility together with improved 20

22 global economic outlook easing and financial conditions helped to renew investor optimism. The US Federal Reserve raised short-term interest rates by 25 basis points in June to %, as expected. Following the Federal Open Market Committee announcement of September 20, markets have priced in a 70 % probability of one additional rate increase by the end of The Bank of England, the ECB and Bank of Japan have kept their monetary policy stances, but recent hawkish tones suggest possible turning points to monetary policy cycles. The ECB is likely to raise its interest rates and start to taper its bond buying programme late in 2017, given the rise in Euro Area inflation and recent robust momentum. Figure 9: Volatility and Global Economic Policy Uncertainty Source: Bloomberg Global Economic Policy Uncertainty Index VIX Index (right axis) In emerging market economies, financial conditions have been generally supportive of a pickup in economic activity. A number of central banks have loosened their monetary policies. For example Brazil, Belarus, Chile, Colombia, Russia and Saudi Arabia, Ukraine, Paraguay, Peru and Vietnam have cut their policy interest rates by between basis points in the last 3 quarters of However, Argentina, Czech Republic, Kuwait, Jordan, Mexico, Jordan, Georgia, United Arab Emirates have all hiked their interest rates by basis points so far in 2017 to support their currencies and tame inflationary pressures. In Africa, Ghana, Mozambique, Rwanda, Uganda and Zambia, Malawi, Mauritius, Namibia and South Africa have cut their interest rates to support economic activity, while Egypt has hiked its policy interest rate by 200 basis points. 21

23 As expectations about US fiscal easing are diminishing yields on 10-year US Treasury bonds have declined by about 40 basis points mid-september from their March 2017 average. Long-term sovereign bond yields have remained broadly stable and closer to zero in Japan and have risen by some 16 basis points in the United Kingdom. The yields declined by over 35 basis points in France, but moved sideways in Germany (Figure 10). They have started to pick up in the US, UK and France at the beginning of October, possibly driven by continued hawkish tones of major central banks and announcement by the Fed that it will start to unwind its balance sheet in October, rising inflation expectations which is raising the prospects of further monetary policy normalization especially in the US. Figure 10: Bond yields (10 Year Bonds) of selected high income countries Source: Bloomberg US France Germany UK Japan Global equities have remained buoyant, with significant gains in both developed markets (especially the US) and emerging market stocks largely driven by the rise in global earnings, continued positive macroeconomic data, favorable macroeconomic data, diminishing political risks in some large economies and improvements in consumer and business confidence. However, global equity markets corrected somewhat in August amid fears of open hostilities over North Korea s missile program, with investors becoming cautious and reducing the level of risk-taking in their portfolios by turning to safe havens such as gold, government bonds, high-quality corporate fixed income. From January to September, the MSCI global index rose by 22