Macroeconomic and Market Outlook 1

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2 Macroeconomic and Market Outlook 1 Quarter 1, 2018 Sustaining the upturn: More hope than fear Highlights The global economic momentum is continuing moderately. Global economic growth is projected to pick up to 3.9% in 2018, as broad based activity firm up in both advanced economies and developing and emerging market economies. The adjustment of Chinese economy is proceeding at a measured pace, as drivers of growth shift from investment to consumption and services. Sub-Saharan Africa will continue to recover gradually, helped by improving external and domestic demand, pick in oil and other commodity prices, and policy support. Oil prices are expected to average $60 per barrel in Other commodity prices are expected to firm up moderately, as global demand and supply find a balance. Financial conditions remained benign, with low volatility in 2017, helping to hold up sentiment. Monetary policies in advanced economies are expected to start to normalize in 2018, in response to firming growth and inflation. However, they will remain accommodative. Global trade is rebounding, but elevated trade policy uncertainties continue to cloud the outlook. The optimistic outlook is subject to some downside risks emanating from trade policy uncertainties and 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, geopolitical, political and security risks 1 This report was prepared by the Quantum Global Research Lab team, with contributions from Mthuli Ncube, Seedwell Hove, Jeremy Wakeford, Fernando Barbi, Lacina Balma and Milton Delo. 1

3 Table of Contents 1 Global Economic Outlook Outlook for Advanced Economies Outlook for Emerging Market and Developing Economies (EMDEs) Macroeconomic outlook for Africa Outlook for individual African countries Financial Markets Outlook Commodity Markets Outlook Risks to monitor and Implications for investments Conclusion

4 Annual %age change 1 Global Economic Outlook Global economic activity strengthened considerably in 2017, and the momentum is expected to continue in The global economy accelerated by an estimated 3.7% in 2017 and broad based across developed and emerging and developing economies, with more half of the world s economies increasing their GDP. Developed economies expanded by an estimated 2.3% in 2017, led by strong expansion in the US, Euro Area, and Canada. Emerging and developing economies rebounded strongly by 4.7% as key economies such as India and China maintained strong growth rates, while others such as Brazil and Russia recovered Figure 1: Global economic growth and projections 8.0 from recessions (Figure 1). The simultaneous recovery in developed and emerging and developing economies has been reinforced by a rebound in manufacturing and investment providing a boost to global trade, against the backdrop of benign financing conditions, accommodative monetary policies and supportive fiscal policies. Commodity prices have firmed up from the record lows, consumer and business confidence remained buoyant, volatility is declining, while some risks perceived at the beginning of 2017 have moderated somewhat World Euro area Sub-Saharan Africa Source: IMF and World Bank The global economy is projected by the IMF to expand by 3.9% in , reflecting the continuation of the momentum for both developed and emerging and developing economies 2. This reflects a 0.2 percentage point upward revision from the October, Advanced economies Emerging market and developing economies 2017 forecasts. Advanced economies are seen growing by more than 2.3% in 2018, led by the US, Canada and the Euro Area. Emerging market and developing economies (EMDEs) are expected to 4.9% in 2018, edging up to 5% in , as the cyclical 2 IMF, WEO Update, January, IMF, WEO Update, January,

5 upturn continues in commodity exporters, and robust activity ensue in commodity importers. The World Bank is more bearish, seeing the global economy expanding by 3.1% in 2018, with advanced economies advancing by 2.2%, and emerging and developing economies growing by 4.5% in In our view, the outlook for the global economy will remain upbeat in 2018, expanding at rates between %, as the strong broad based performance continues in both advanced and emerging and developing economies. We believe that economic activity will continue to solidify in advanced economies in 2018, especially in the US, Japan and the Euro Area benefiting from loose financial conditions and supportive fiscal policies. The recently approved tax cuts in the U.S are likely to provide a boost to the US economy, with favorable demand spillovers to its trading partners such as Canada and Mexico. The global financial conditions are likely to remain favorable, while strong sentiment will help to sustain the robust demand, especially investment and consumption. The economic recovery is likely to gather more steam in Brazil, Russia and other commodity exporters, as commodity prices firm and past policy support bear fruits. India should continue its positive growth trend, as the effects of currency reforms and the goods and services tax dissipate, while China s economy will continue its managed slowdown. High frequency economic and sentiment indicators point to continued strengthening of momentum (Figure 2). While downside risks are still present, especially related to trade policy uncertainties, geopolitical tensions, potential tightening of financial conditions and the rebalancing of the Chinese economy, they now appear to be less pronounced than at the beginning of Figure 2. Composite PMI for the Global economy, Developed Markets and Emerging markets Source: Bloomberg Emerging markets comosite PMI Global composite PMI Developed Markets composite PMI 4

6 Global inflation has remained moderately low at 3.6% in Inflation has remained below central bank targets in advanced economies, averaging 1.7%, despite the strengthening of activity, but core inflation has trended up. In emerging and developing economies, inflation has remained modest at 4.2%. The growing impact of cyclical factors such as tightening labor markets, stable and broader global growth, and a potential strengthening of commodity prices will likely to gradually push global inflation higher to levels above 3.7% in The relationship between lower unemployment rates and higher inflation which has weakened in the previous years should begin to re-emerge in 2018, and beyond especially in developed economies. Global financial conditions have remained benign, as monetary policy remained largely accommodative and in 2017, despite prospects of further normalization of monetary policy in major advanced economies. Following 3 hikes in 2017, and start of the unwinding of its balance sheet, the US Fed is most likely to continue its twopronged policy tightening cycle in The ECB announced that it will begin to tapper its asset purchase program until September 2018, but will likely to start rate hikes in We are likely to see other major central banks (e.g. Bank of Canada, Bank of England) raising interest rates and shrinking their central bank balance sheets in 2018 and 2019, as inflation picks up and in response to better growth. The phase of policy easing is likely to continue in emerging markets, but possibly at a slower pace. While global monetary conditions will be relatively accommodative in 2018, they will likely turn less accommodative as we move to 2019, as inflation picks up and economic activity moderates. Global fiscal policy is likely to remain expansionary in Risks assets will likely continue performing well, as global prospects brighten in a more synchronized global economy, but corrections are a possibility in the near term. Global trade has strengthened significantly in 2017, expanding at 4.3%, benefiting from a cyclical recovery in global manufacturing and investment growth, robust external demand and firming commodity prices 4. Global trade growth is set to moderate to about 4%, in , as the capital spending in advanced economies and the Chinese economy continue to decelerate. In the medium to long term, structural forces, including the slower pace of global value chain integration and trade liberalization will constrain growth. Commodity prices generally recovered in 2017 especially, energy and metals prices, but agricultural prices remained stable. Oil prices increased to about $60/bbl in Q4, 2017, supported by strengthening demand, falling stocks, and an agreement in late November to extend production cuts until the end of Oil prices are projected to average $60/bbl. in 2018, while other commodity prices will remain steady or increase modestly, supported by stronger global economic growth. 2 Outlook for Advanced Economies Advanced economies have recovered more than expected in 2017, with positive surprises in growth occurring in countries where estimates for output were below 4 World Bank, Global Economic Prospects, January,

7 potential in 2016 and well above expectations in the US, Euro Area and Canada. GDP growth rebounded to 2.3% in 2017, supported by a pickup in capital spending, a turnaround in inventories, and strengthening external demand, recovery in capital spending and exports. Growth of investment reflected increased capacity utilization, favorable financing conditions, rising profits and higher business sentiment, amid declining policy uncertainty, although still elevated. We expect GDP growth of The US economy was resilient in 2017, despite the effects of hurricane-induced disruptions. The economy expanded by an estimated 2.3% in 2017, surpassing its longterm trend of 2% a year for the first time in three years, supported by improving labor market and relatively low inflation driving growth in household spending, strengthening private investment, diminished drag from capacity adjustments in the energy sector, and robust external demand. The labour market remains solid, almost reaching full employment, with unemployment rate declining to a 17 year low rate of 4.1% in December 2017 (Figure 3). Investment rates have rebounded but remain below previous cyclical highs, and could grow faster, if rising business confidence or growth-enhancing policies unlock pent-up demand for capital spending. Inflation inched up to 2.2% in November, prompting the U.S. Federal Reserve Bank to continue its monetary policy tightening cycle. The Fed raised interest rates again in December, reaching a cumulative 125 basis points since the start of its tightening cycle in December It started to gradually advanced economies to remain steady at 2.3% in 2018, and moderate to 2.2% in 2019, as monetary policy accommodation gradually unwinds and labor market slack diminishes and as output gaps close. However, risks from rising trade protectionism, Brexit negotiations and their implications and geo-political risks could trump the momentum. In the long term, weak productivity growth and mounting demographic challenges could constrain growth. reduce the size of its US$4 trillion balance sheet in October We believe the Fed will still continue with this tightening cycle and have 3 rate hikes in 2018 and possibly 2 hikes in The recently legislated corporate and personal income tax cuts are expected to lift economic activity this year, particularly to investment and keep business sentiment buoyant. We expect the U.S. growth to pick up to 2.7% in 2018, as the tax cuts and solid labour market help to sustain robust household spending. However, the benefits of tax cuts could be constrained by the economy which is nearing full capacity and the pace of monetary policy normalization possibly accelerating 6. However, risks on trade policy front continue to cloud the outlook, as the outcome of NAFTA renegotiations remains uncertain and monetary policy direction with the new Fed chair, Jerome Powell and the mid- term elections in November. Over the long term, low labor participation and weak productivity trends remain the most significant drag on U.S. growth. 5 US, Federal Open Market Committee minutes, December World Bank, Global Economic Prospects, January,

8 Figure 3: US economic indicators Source: Bloomberg Manufacturing PMI Inflation (right) Unemployment (right) Wage growth (right) The outlook for the Euro Area continues to brighten. The region posted a stronger than expected economic growth of 2.4% in 2017, with broad-based improvements across member countries, spurred by loose monetary policy, low inflation, employment growth and stronger global growth, which are helping to push consumption and investment growth higher as well as favorable external sector. Growth rates for many member countries have been marked up, especially for Germany, Italy, and the Netherlands. The unemployment rate reached its lowest level since 2009 (8.8% in October), but, wage growth remained subdued. Economic sentiment remain upbeat, while the composite PMI which rose to 58.1 points in November, continue to signal strong activity. Political risks around major elections in 2017, have diminished. Inflation inched up to 1.5% in December, 2017 from 1.4% in October, still below the ECB s target of 2%, but core inflation remained soft at 0.9% 7. The ECB has announced a reduction its bond-buying program in October, from EUR 60 billion to EUR 30 billion until September 2018, in response to positive economic dynamics. With inflation remaining below the target, the ECB could start to raise interest rates in The aggregate fiscal stance of the Euro Area was expansionary in The cyclical upturn is expected to continue albeit at a slower pace of 2.2% growth in 2018, as domestic demand moderates somewhat after strong gains in 2017, and policy stimulus unwind gradually. Growth could further slow down to 2% in 2019, as labor market slack dissipates. The main risks to the outlook relates to lingering political 7 Eurostat data, European Commission, European Economic Forecast, Spring

9 challenges in some key economies. For instance in Germany, the CDU is failing to form a coalition government with other parties due to differences in immigration policies. Italian elections scheduled for 2018 and disputed referendum for Catalonia Independence from Spain are other important political risks for Europe. Figure 3: Euro Area economic and business indicators Source: Bloomberg Composite PMI Inflation (right) Business climate indicator (right) UK s outlook is mixed. The economy expanded by 1.7% in 2017, 0. 2 percentage point lower than in The services and industrial sectors remained resilient in The composite PMI firmed to 54.9 points, but the Services PMI dipped in November. The labour market remained solid, with unemployment rate declining to a multidecade low of 4.3% in Q3. However inflation continued to trend upwards, reaching 3.1% in November, reflecting import cost pressures from the depreciation of the pound. Consumer confidence edged down from minus 12 points in November to minus 13 points in December, with the index remaining entrenched in negative territory, since April last year, reflecting consumers broad pessimism. The economic outlook for 2018, remains challenging, with business investment suffering from significant uncertainty over Brexit Our base case scenario is for growth to range between 1.5% 1.8% in 2018, as the pervasive uncertainties generated by Brexit especially on policy frameworks that will govern trade, financial and migration arrangements between the UK and EU countries. The major effects of Brexit will however be felt only once the country actually leaves the European Union (EU), which won t happen until 2019 and possibly later depending on the agreement. Japan s prospects are optimistic. The economy expanded by 2.5% (seasonally adjusted annualized) in Q3, 2017, marking the 7 th consecutive quarter of expansion, buoyed by the stellar export performance and robust domestic demand. Growth is estimated at a higher than expected rate of 1.8% in PMI edged up to a four year high of 54 points in December, signifying robust economic activity. The government unveiled a tax reform plan in December, which includes measures to lower taxes for firms that increase wages by 3% and firms that increase investments and productivity. 8

10 This is likely to shore up salary increases and boost household spending. Inflation accelerated to 0.6% in November, from 0.2% in October and is expected by the BoJ to increase gradually toward its 2% target amid increase in mid- to long-term inflation expectations, improving output gap and upward pressure on wage levels and impact of proposed 10% sales tax hike in October We expect the BoJ to keep its monetary policy stance and reduce the pace of government bond purchases (currently at JPY 80 trillion (USD 705 billion) annually). Growth could accelerate further in 2018, and 3 Outlook for Emerging Market and Developing Economies (EMDEs) even be as high as 2%, according to some market forecast, carrying over from stronger-than-expected activity in However, it could moderate somewhat in 2019, as fiscal stimulus and export growth ease and private consumption growth moderate in response to the sales tax hike. The main downside risks to the outlook relates to U.S trade policies, adjustment of the Chinese economy and appreciation of the yen. Over the medium term, a shrinking Japanese Labor force, aging population and persistently high public debt could undermine GDP growth. The outlook for EMDEs continue to strengthen. GDP growth edged up to 4.7% in 2017, as key commodity exporting economies such as Brazil and the Russian emerged from recession, most commodity prices pick up, confidence improve, global trade recovers and investment growth turned up after a prolonged period of weakness. Growth in EMDEs was led by strong growth in emerging Asia, especially China, Indonesia, Malaysia, Philippines, Thailand and Vietnam, driven by strong world economy, private consumption and business investments 9. The region continues to account for over half of world growth. A number of recent high-frequency indicators such as industrial production and PMIs of EMDEs point to continued strong activity (Figure 2). We expect the cyclical momentum to continue to propel growth of EMDEs to above 4.9% in 2018 and 5% in 2019, as commodity prices continue to stabilize and global trade remain robust. The Chinese economy continues to rebalance, with drivers of activity shifting away from state-led investment to consumption and services. The economy expanded by 6.8% in Q4, 2017, bringing overall growth for 2017 to 6.9%, exceeding market expectations. This reflects continued fiscal support and the effects of reforms, as well as a stronger-than expected recovery of exports. 10 Private consumption remains the main driver of growth, as reflected in the continued strong increase in sales of consumer goods in However, fixed asset investment growth eased in November, as the property market continues to cool down, and industrial production moderated (Figure 4). Credit growth decelerated modestly in November, as authorities to tighten financial markets regulations including new guidelines on wealth management products, foreign ownership of foreign financial institutions and restrictions on online micro-lending. Inflation remains low at 1.8% in December. The PBoC also raised its de facto policy rate 9 IMF, World Economic Outlook, October World Bank, Global Economic Prospects, January,

11 (the 7-day reverse-repo rate) by 5 bps immediately after the Fed s hike in December, but the move did not have impact on the interbank market. This could suggest that further tightening is coming in On the external sector, the current account surplus continued to narrow, but with a moderation of net capital outflows, foreign exchange reserves recovered in GDP growth is expected to moderate to 6.5% in 2018, and inch down to 6.3% in We expect household spending to remain robust, supported by healthy wage growth, rising disposable income and steady job creation. The key downside risks to the outlook stem from financial sector Figure 4: China s economic indicators 15 vulnerabilities, the cooling of the housing markets amid high corporate debt levels, US trade protectionist policies, rising geopolitical tensions. A downturn in Chinese growth would be a risk to global financial markets and commodities. Potential trade tensions with US could force China to slow down purchase of US treasuries and induce volatility in global financial markets. However, we do not anticipate a Chinese hard landing in 2018, mainly because the unwinding of the oversupply and overcapacity in the property market and industrial sectors are likely to be less intense going forward. At the same time, the Chinese policymakers seem to have the levers and tools to cushion any rapid fallout Source: Bloomberg House Price Index Inflation Li Keqiang Index of Economic Activity PMI (right) 45 Brazil s outlook is improving gradually. The economy expanded by 0.1% in the 3 rd quarter, supported by strong exports growth and improvement in investment and consumption due to lower interest rates, rapid disinflation, recovering business 11 MRB Partners Report, December

12 sentiment and stronger dynamics in the labor market. Growth is estimated to have averaged 1.1% in High frequency indicators suggest continued recovery: The manufacturing PMI increased to 52.4 in December, 2017, while consumer and business confidence remain high. Unemployment declined to 12% in November, while inflation remain below the central bank target range of 3-6%, at 2.8%. The favorable inflation outturn prompted the Bank of Brazil to cut the benchmark SELIC interest rate by 50 basis points to about 7.0% in December. The outlook for 2018 looks positive, with GDP growth expected to accelerate to 1.9%, on the back of policy support, expected firming of commodity prices, improving confidence and historically-low inflation supporting private consumption. However, a number of obstacles including: sizable fiscal deficit (9%), elevated public debt (85% of GDP), and political and institutional uncertainty ahead on elections in October 2018 could saddle the recovery momentum. The outlook for India remains upbeat, as the economy expanded by 6.7% in 2017, underpinned by robust private consumption, public investments and ongoing structural reforms. Robust momentum will continue as the effects of the Goods & Services Tax (GST) launched in July 2017 and lingering disruptions associated with the currency exchange reforms introduced in November 2016 wane. Real GDP is expected to expand robustly by 7.4% in 2018, buoyed by strong private consumption moderate growth of exports, improving business investments and as previous policy reforms bear fruits. The uniform tax system will support the medium-term prospects for the economy by creating a single national market, and enhancing the efficiency of domestic trade, while improving fiscal revenues. Manufacturing PMI jumped to 54.7 in December of 2017 from 52.6 in November, on high growth potential, while industrial production and business confidence also firmed up, suggesting that the impetus could continue. Moody's upgraded India's sovereign rating by one notch to Baa2 in November, while the World Bank gave India a 30 place jump on its Ease of Doing Business ranking. Despite a recent uptick, inflation remained within the Reserve Bank of India s (RBI) target band of 2-6 %, following a steady decline over the past year to 1.3 % in July. Risks to the outlook for the Indian economy emanate from the potential adverse effects of the US monetary policy normalization on the financial markets, the slowdown in China and trade policy uncertainties from the US and Europe. The outlook in other emerging and developing countries remains variegated. Emerging and developing Eastern Europe experienced an upturn, with growth of 3.1% in 2017, especially with the recovery in Russia, strong growth in Romania, Turkey and Poland, supported by Strong domestic demand and external demand from the EU and looser fiscal policy. Recovery in Russia is underpinned by improvement in oil prices, strong consumption growth, appreciation of the ruble which is driving exports, easing inflation and policy support. Private consumption is playing an increasing role, in particular, in Albania, where employment 12 IMF, World Economic Outlook, October,

13 and wages have increased. The outlook for Latin America will continue to strengthen in 2018, as major economies such as Brazil and Argentina have exited recession, helped by pick up in commodity prices, easing monetary policies and improving labour market conditions. Political uncertainties will however remain a concern in 2018, amid looming elections in Brazil, Colombia, Mexico and Paraguay. Mexico s outlook is also affected by the negotiations on NAFTA. The political, economic and humanitarian crisis in Venezuela is deepening further, with the country now in technical default. The MENA region experienced temporary 4 Macroeconomic outlook for Africa The outlook for Sub- Saharan Africa continues to hold up. Economic recovery will strengthen, to see GDP growth recovering to 2.7% in 2017, from the sluggish 1.4% in The recovery is supported by improving commodity prices, strengthening external demand and policy support. The large economies-nigeria, Angola and South Africa, which suffered slowdowns or recessions in 2016 rebounded moderately. Nigeria exited a five-quarter recession in Q2, 2017 to see growth averaging about 0.8% in 2017, while South Africa emerged from a short technical recession in the second quarter, with growth estimated at 0.9% in An uptick in metals prices, along with a recovery in the agricultural sector, supported a modest slowdown in 2017, but growth could pick up moderately in 2018 and While stronger oil prices are helping a recovery in domestic demand in oil exporters, such as Saudi Arabia, the needed fiscal adjustments will weigh on growth momentum, while geopolitical and oil market developments will also shape outlook. The main risks for emerging and developing economies largely stem from the economic rebalancing process in China and implications for commodity prices, potential faster pace of monetary policy normalization in the United States and trade policy uncertainties in developed economies. rebound in metals exporters. Some nonresource intensive frontier market and low income countries such as Cote d Ivoire, Ghana, Senegal, Ethiopia and Tanzania continued to grow at robust paces in 2017,well above 6%, sustained by strong domestic demand, increased infrastructure spending and policy support. Political instabilities stymied economic activity in South Africa, Kenya and DRC, while drought blighted agricultural production and exacerbated food shortages in the Horn of Africa. GDP per capita growth returned to positive growth of 0.3% in 2017, following a 1% contraction in 2016, while investment growth remained sluggish World Bank, Africa s pulse, Volume 16, October

14 Annual %age change Figure 5: Growth estimates and forecasts for selected African countries, 2017 and Sources: World Bank, IMF We expect Sub-Saharan Africa s economic momentum to continue, with GDP growth rising to levels above % 14 in Growth will be led by oil importers, which are expected to grow at 4.4%, while oil exporters will expand at 1.8%. Excluding Nigeria and South Africa, SSA growth will even be more upbeat with growth rate of 5.1% in The moderate increase in commodity prices, gradual strengthening of domestic and external demand, improved access to international financial markets and surging FDI will drive growth. Non resourceintensive economies will expand at solid rates, while most resource-intensive economies will consolidate recoveries from the 2014 terms of trade shock. However, growth will be weak in some metal and oil exporters which adjusted slowly to lower commodity prices, as fiscal consolidations and adjustments further constrain public investments. For instance Equatorial Guinea (which joined the OPEC in May 2017) is expected to remain in recession in About 8 SSA countries are anticipated to grow at rates above 6% in 2018, while over 20 economies will expand at rate overs 5%, reigniting the Africa rising narrative. Ghana will be the fastest growing economy in SSA, with 8.9% growth, followed by Ethiopia and Cote d Ivoire which will expand at 8.5% and 7.3% respectively. Growth in these countries will be propelled by vigorous infrastructure investments, dynamic expansion of services sectors and a recovery in agricultural production. Among the low income countries, Benin, Burkina Faso, Senegal, Sierra Leone and Tanzania will also grow at robust paces, well above 6%, propelled by increasing domestic demand, infrastructure spending and policy support. The region s three biggest economies- Nigeria, South Africa, and Angola will further 14 This projection is in line with the IMF projection from the WEO Update, January,

15 gain their momentum in 2018, with growth rates of 2.1%, 0.9% and 1.6 %, respectively. Although still below average, their growth rates will be helpful in keeping the region s growth above the levels. Growth will remain barely above population growth, to see GDP per capita at 1% in 2018, which is not big enough to reduce poverty. Numerous risks are clouding the outlook for SSA, including political and security risks from upcoming elections, inadequate fiscal adjustments, rising public debt and faster tightening of global financing conditions. Table 1: Selected Macroeconomic Indicators for Sub-Saharan Africa Real GDP Growth (%) Real Per Capita GDP growth (%) Inflation (%, yoy ave.) Fiscal Balance Total Public Debt (% of GDP) CA Balance Net FDI (% of GDP) Total Investment (% of GDP) Reserves (Months of imports) Broad Money Supply growth (%) Private sector credit (% of GDP) Sources: IMF, World Bank Stabilizing exchange rates and declining food prices in some countries will help to reduce the region s inflation from the estimated 10% in Price pressures eased in Ghana, South Africa, Malawi, Mozambique and Zambia and remained muted in the CFA region, due to the stable peg to the Euro. Easing inflationary pressures will provide space for central banks to continue with monetary policy easing to support economic activity. However, inflation remains elevated in DRC, Angola and Sierra Leone. In DRC, inflation topped 71% in August, 2017, before declining to 62% in December, fueled by steep depreciation of the domestic currency, amid low commodity prices and high government deficits (Figure 6). We expect the region s inflationary pressures to recede further in 2018, as past price impulses dissipate and currencies stabilize further. 14

16 Figure 6: Inflation rates of selected African countries (%) Source: IMF January 2017 December 2017/ Latest SSA Average Fiscal pressures for the region are easing moderately. The region s fiscal deficit is projected to narrow slightly to 4.3% of GDP in 2018 from 4.7% in 2017, on the back of improving commodity prices and fiscal adjustments. Oil and metals exporters are likely continue to run sizable fiscal deficits, reflecting slow fiscal adjustments to lower commodity prices and limited progress in increasing fiscal space. 15 In some countries, such as Côte d Ivoire, Cameroon and Equatorial Guinea, fiscal stabilization has come at the expense of decreased expenditure as opposed to structural fiscal reforms. The decline in fiscal revenues forced Benin, Cameroon, Chad, Gabon, Niger, Sierra Leone and Togo to seek financial assistance from the IMF in Burundi, Equatorial Guinea, Kenya, Mozambique, Niger and Zambia are expected to have fiscal deficits above 6% of GDP in The region s debt to GDP ratio has increased to 45.1% of GDP in 2017 from 30% of GDP in The debt ratio is project to increase and average 45.7% in 2018, reflecting elevated fiscal deficits, growing interest payments and valuation changes from exchange rate depreciation and more borrowing. About 62% of countries will retain debt levels above 45.7% of GDP in Debt levels will be higher among oil importers (52.8% of GDP) than in oil exporters (35.1% of GDP), especially in Burundi, Cape Verde, Mozambique, Togo and Zimbabwe (Figure 7). Countries which have borrowed in international markets will face higher borrowing costs and US interest rates increase coupled with an appreciating US dollar. Several countries across the continent had their sovereign credit ratings downgraded in 2017, on debt sustainability concerns, putting upward pressure on external financing costs. 15 World Bank, Africa s Pulse, October

17 Moderately increasing commodity prices and recovering external demand have contributed to narrowing of current account deficits, especially among the commoditydependent economies. The region s current account deficits narrowed to 3.4% of GDP in 2017, from 4.2% of GDP in An improvement in external financing conditions has also led to a decline in borrowing costs and improved access to finance. This has enabled some countries such as Nigeria, Cote d Ivoire and Senegal to re-enter the Eurobond market in 2017, as improved global sentiment toward emerging and frontier markets helped to narrow sovereign bond spreads. We are likely to see more sovereign bond issues in 2018, as countries try to close their financing gaps amid declining bond spreads. The region s current account position is projected to widen slightly to 3.6% of GDP in 2018, especially in oil importers. Tanzania, Ethiopia and Kenya, Mozambique, Sierra Leone and Guinea will have current account deficit above 10% of GDP, reflecting high imports of capital goods for infrastructure and a higher cost of fuel imports as oil prices pick up (Figure 7). Figure 7: Current Account Balances of Selected African Countries (2017 and 2018) Bostwana Nigeria Chad South Africa Côte d Ivoire Sub-Saharan Africa Zimbabwe Cameroon Zambia DRC Angola Senegal Tanzania Mauritius Ghana Kenya Equatorial Guinea Ethiopia Gabon Rwanda Congo Republic Sierra Leone Guinea Mozambique 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 December The Mozambican metical made a huge upturn, appreciating by 18.3%, while the Congo Republic Franc and the South African Rand appreciated by appreciated by 10.5% and 9.8% respectively (Figure 8). The 16

18 Angolan Kwanza was stable during the year 2017, but depreciated by 25% between 5-20 January 2018, after the central bank floated the exchange rate. The Nigerian Naira depreciated by 18.4%, reflecting the slowdown of the pace of depreciation as the exchange rate balances, and the official and the parallel exchange rates narrow. Interventions by the Central Bank of Nigeria are likely to keep the naira relatively stable on the parallel market in However, the Congolese (DRC) franc and the Sierra Leone leone remained under pressure, depreciating by 48.2% and 39.1% respectively. The Congolese Franc is weakened by the continued political instability, and diminishing foreign exchange reserves despite a rise in copper prices, while the leone is destabilized by the slump in exports and dwindling foreign exchange reserves. The Ethiopian Birr lost 21.5% of its value in the year, following a significant devaluation of the currency by the central bank in October 2017 to boost lagging exports. We expect most currencies to continue to stabilize in Figure 8: Changes of selected African currencies against the US$ (January - December 2017) Mozambiquan Metical Congo Republic CA Franc Cameroon CA Franc South African Rand Senegal CFA Franc Côte d Ivoire CFA Franc Botswana Pula Mauritius Rupee Guinea Franc Egypt Pound Malawian Kwacha Zambian Kwacha Kenyan Shilling Ugandan Shilling Angolan Kwanza Tanzanian Shilling Rwandan Franc Ghanaian Cedi Nigerian Naira Ethiopian Birr Sierra Leone Leone DRC Congolese Franc Source: Bloomberg 5 Outlook for individual African countries Nigeria: Facing the twin challenges of recovering the economy and boosting national security, Nigeria s economic outlook has been improving following the carryover of sub-zero rates from 2016, thanks to strong dynamics in the oil sector and agriculture sector. The Nigerian economy gained further steam in Q3, 2017 registering a growth of 1.4% after exiting recession, with 0.6% growth in Q2, Higher oil production and oil prices drove the buoyant acceleration of the oil sector GDP of 25.9% in Q3, Oil output averaged 2.03 mb/d per day Q3, and well above the

19 mb/d average in Q2, helped by the completion of the repairs and maintenance work in the oil fields and improvement of security situation in the Niger Delta. The non-oil sector however performed poorly, contracting by 0.8% in Q3, The economy grew by an estimated 0.8% in Manufacturing and nonmanufacturing PMI have recorded steady improvements, closing at new highs of 59.3 and 62.1 points respectively in December. The PMI has sustained 8 months of successive expansion, fostering quick recovery. Inflation declined to 15.4% in December, from 18.7% in January 2017, but remains in the double digit ranges and above the Central Bank s target range of 6% 9%. The Nigerian Stock Exchange (NSE) recorded substantial progress, performing behind best performers such as the Argentina s Merval and Mongolian Stock Exchange in The Naira exchange rate has remained stable with minimum distortions, supporting a pickup in equity and portfolio flows. The IMF projects growth to rise to 2.1% in 2018, on the back of a gradual improvement in oil prices and strong public investment spending. Oil prices currently averages US$70/bbl against the oil price assumption of $47/bbl. The positive outlook is subject to some risks. Growth remains fragile as most non-oil sectors are still sluggish. An eminent political derailing over reforms outlined in the Economic Recovery and Growth Plan remains a concern. Both the state and the federal governments are facing diminishing fiscal capacity, raising the need to implement significant fiscal adjustment policies to sustain macroeconomic stability and economic recovery. At the same time, the situation in the Niger Delta remains fragile, with possible further violence especially in the run-up to the 2019 elections. The outlook for Nigeria appears good in 2018 only to the extent that oil price does not fall short a wide gap from the $47/bbl benchmark assumed in the budget. South Africa: For the first time since 2014, the South African economy has expanded at a rate of 2.0% or more for two consecutive quarters after a short recession. Real GDP growth rate moderated to 2.0% in Q3, 2017 after a rebound to 2.8% in Q2, The agriculture sector was the largest contributor to growth in real GDP in the third quarter, while the services sector slowdown somewhat. Growth in 2017 is estimated at 0.9% from the 0.3% growth rate registered in the preceding year. Political uncertainty continues to weigh on confidence and investment. According to the World Bank, South Africa's economy is expected to grow by 1.1% in 2018 (one of the lowest rates in sub-saharan Africa) as stronger activity in trading partners boosts exports 16. Inflationary pressures have subsided in 2017, and inflation has declined to 4.6% in November, allowing for a moderately expansionary monetary policy to support economic activity. Although the rise of Cyrill Ramaphosa in the higher rank of ANC may have renewed business prospects in the long-term, the ABSA PMI for the South African economy has been stuck below the neutral 50-point-mark for the past seven consecutive months, recording 44.9 points in December 2017, signaling difficult business conditions. S&P downgraded South Africa s local currency 16 World Bank, Global Economic Prospects, January,

20 credit rating to sub-investment grade in November, on concerns of high debt levels and poor health of public finances. There is a rising risk of further credit downgrades by other rating agencies, if conditions worsen further. South Africa s economic outlook is still looking bleak as policy uncertainty persist. Growth will remain positive, and steady at 0.9% in 2019, amid still weak investor confidence and subdued domestic demand due to lackluster labour market with high unemployment of 27.7% in Q3, The outturn of commodity prices will be key to South Africa s prospects in The high dependence on external financing is the main source of financial vulnerability as lowering investor confidence and further credit rating downgrades may contribute to a massive net outflow of foreign investment in the coming years. Angola s economic outlook is moderate. The economy is set to expand modestly, on the back of rising oil prices amid still existing structural imbalances. The World Bank has revised the country s economic growth forecast to 1.6%, in 2018 up 0.7 percentage points from its previous forecast. The Economic Climate Indicator fell by 49 points between the fourth quarter of 2014 and the fourth quarter of Since then it has begun a recovery cycle, having increased by 12 points by the end of the second quarter of 2017, yet still in the negative territory, suggesting that business conditions are still difficult. Oil production marginally increased to 1.61 mb/d in November, after a slide to 1.6 mb/d in October from the high level of 1.68 mb/d in August. Moderate pickup in oil prices expected at US$60/bbl, against Angola s oil price assumption of US$50/bbl will support economic recovery in The floating of the exchange rate in January following a lengthy period of overvaluation, will help to preserve the foreign exchange reserves which declined by 30% to US$14.25 billion between January and November, The exchange rate depreciated by over 25% between 5-20 January Inflation which moderated to 23.7% in December, is rise again in 2018, following the floating of the Kwanza. The Central Bank has hiked its policy rate by 200 basis points in November, for the first time since 2016 under the new governor, setting the tone for a new tightening cycle in Despite the rising oil prices that could support economic recovery, the economy is still restrained by existing structural imbalances imposed by excessive reliance on oil. These include high inflation, shortage of foreign currency, soaring public debt estimated at more than 60% of GDP, current account and fiscal deficits. While oil production fell by 5.5% in the first half of 2017, it is expected to drop further. With the aim of addressing such imbalances, the government has initially established a Macroeconomic Stabilization Program (PEM) focused on fiscal consolidation and the stabilization of foreign exchange markets, to jumpstart the economy and subsequently implement the National Development Plan (PND ). Zambia s outlook is promising. GDP expanded by an estimated 4% in 2017, driven by increase in copper exports. Overseas sales of copper grew 25.2% in October compared with September boosting overall exports and contributing to a reduction in the trade deficit. Increased agriculture production and improved electricity generation also contributed to the positive dynamics. Inflation has been gradually declining from a peak of above 20% in February 2016 to 6.1% in December 19

21 2017, supported by the continued stability of the exchange rate, lower food prices in view of a good harvest and improved market confidence in the country s policy direction. This has led the central bank to ease monetary policy, reversing the pressure on credit growth. The monetary policy rate was cut from 11% to 10.25% in November Growth in Zambia remains dependent on the price of copper, and will be held back by deficiencies in the electricity supply, 97% of which is generated by hydropower. The World Bank, however, forecasts growth to strengthen by 4.5% in 2018 and 4.7% in 2019, driven by strong mining and agricultural output, and higher investment in construction and manufacturing sectors 17. However, the high debt burden (56% of GDP in 2017) and wide fiscal deficit (-8% of GDP in 2017) poses downside risks to the outlook and calls for reforms and deepening of fiscal consolidation efforts. The government has recently announced its intentions to refinance USD 2.8 billion worth of Eurobonds in 2019 to reduce debt servicing costs. Some frontier market economies including Cote d Ivoire, Ghana, and Senegal are anticipated to continue with their robust paces in Cote d Ivoire continues to record strong and resilient economic performance in 2018, despite the fall in cocoa prices in 2017 which weighed down household spending and weakened fiscal and export revenues. The economy expanded by 7.6% in 2017 and is projected by the IMF to grow by 7.3% in The service sector, mainly transport, trade and telecommunication, a robust domestic consumption and public and private investments will constitute the drivers the strong economic growth. The economy will also continue to benefit from the extensive international support, policy reforms and improving business and macroeconomic environment, which is boosting confidence. IMF disbursed nearly US$137 million as part of the second review of its ECF/EFF arrangement in Inflation is expected to remain low at about 2% in 2018, below the 3% regional threshold of the WAEMU, partly due to the peg of the CFAF to the Euro. The fiscal deficit widened to 4.5% of GDP in 2017, well above the Western Africa Economic and Monetary Union (WAEMU) regional deficit norm of 3% of GDP and is expected to be 3.75 % of GDP in It will eventually converge to the WAEMU regional norm by 2019 if fiscal consolidation measures under the IMF program remain on track. Ghana s outlook remain on the upside, with growth projected to edge up strongly to 8.9% in 2018, from about 6% in It will be the fastest growing economy in SSA in The economy expanded robustly, by 9.3% in Q3 2017, buoyed by a jump in the oil and gas sector expansion, timely resolution of disruptions in the Jubilee oil and gas field and a restoration of energy supply, supporting a rise in exports. Exports of gold, cocoa and oil surged at the end of the year, pushing the trade balance into a surplus. The PMI which has been above the 50-point threshold for 22 consecutive months notching 54.8 points in November, signaling robust economic expansion. Non-oil growth is estimated at 4% in 2017 and expected to rebound to 5% in 2018 and 6% in 2019, gradually converge to its potential level of 5% in the long run. Inflation has been declining since Q2 2016, reaching 11.7% in 17 World Bank, Global Economic Prospects, January,

22 November 2017, helped by monetary policy tightening and exchange rate stability. This, combined with fiscal discipline and IMF support helped to loosen monetary policy. The central Bank of Ghana has cut the policy rate by 100 basis points 20% in November. Going forward, inflation is expected to fall within the BoG s band (8 ± 2 %) by early 2018 and remain firmly inside it over the medium term. Ghana has issued a $1.4 billion nonsovereign bonds in local currency in November 2017 to help clear energy sector debts owed to banks. The bond was undersubscribed, at 19% yield, as it was not guaranteed by the government. Ghana s credit rating outlook was upgraded to positive in October 2017 by S&P. 18 However, the favorable outlook could be saddled by the country s elevated public debt burden (71% of GDP) in 2017 and a high level of nonperforming loans in the banking sector (21.6% in October, 2017) 19. The Kenyan economy transcended through a rough patch in 2017, which has seen the economic growth moderating to 5% in 2017, from 5.8% in The economy faced a number of headwinds, including prolonged tumultuous political tensions around elections, drought and decline in credit to the private sector. Kenya s outlook remains positive with projected growth of 5.5% in 2018, on the back of a recovery in the agricultural sector; a stable macroeconomic environment; continued low international oil prices; continued stability of the Kenya shilling (KES); and political stability. The political dust is settling after Uhuru Kenyatta was finally sworn in as the President of Kenya for a second term on 28 November, following a prolonged tumultuous and disputed elections, marked with protests and sporadic bouts of violence since August High frequency data suggest continued a durable upturn: The PMI jumped to 53 points in December 2017, from 42.8 in November, exceeding the critical 50 point threshold for the first time since May Thanks to prudent monetary policy, inflation has remained in the single-digit ranges and fell to 4.5% in December, despite adverse conditions and disruptions caused by tumultuous election period. However, the drop in private sector credit growth, and high debt levels remains key constraints to growth going forward. Senegal s GDP growth will remain robust in 2018, sustained by the implementation of the government new development plan, the Plan Sénégal Emergent and public investments in energy and transport. The economy expanded by 7.1% year-on-year in Q3, 2017, after a 6.4% growth in Q2, driven by strong expansions in industrial sector (10.7% especially constructions and energy), and services sectors (6.5%, especially transport and financial services) Growth is estimated at 6.8% in 2017, edging up to 7% in However, rising public debt, increasing financing needs for the public investments and low domestic resource mobilization suggest the need for reforms to sustain growth momentum. Reforms are also needed in order to open up the economic space for the private sector, as growth in the last three decades were largely driven by public sector. The government has adopted a triannual plan of reforms of the business environment and competiveness for , aimed at reducing structural bottlenecks to private sector development 18 IMF staff report, Bank of Ghana, Banking Sector Report, Vol 2.4, November