By Hilary Mare
THE Sub-Saharan Africa (SSA) economy is set to grow at a slower pace this year as subdued commodity prices, uncertainty regarding the Brexit and its effects on financial markets, and numerous domestic headwinds will weigh on growth.
Essentially for Namibia as indicated in the recently published total Sub-Saharan Africa report which was released under the theme ‘weathering the storm’, shows that real GDP growth continues to decelerate in 2016 as the blighting drought across southern Africa intensifies. Although the weakness was spread across most sectors, it remained most severe in the agricultural, mining and construction sectors. Water shortages will constrain output in the water intensive agriculture, mining and construction sectors, while the completion of several key infrastructure projects will add downward pressure on construction activity.
In an analysis of the key finding of this report, Namene Kalili, research manager, strategic marketing and communications at FNB highlighted some key changes on a variety of topics, such as growth, inflation, monetary and fiscal policies.
“Real GDP growth continues to decelerate in 2016 as the blighting drought across southern Africa intensifies. Although the weakness was spread across most sectors, it remained most severe in the agricultural, mining and construction sectors. Water shortages will constrain output in the water intensive agriculture, mining and construction sectors, while the completion of several key infrastructure projects will add downward pressure on construction activity.
“Diamond recoveries should improve in 2H16 once the world’s most advanced marine diamond sampling and exploration vessel, the MV SS Nujoma is commissioned. As water pressures and other headwinds mount, growth is expected to decelerate to 3.1 percent in 2016 and recover moderately to 4.5 percent in 2017 and 6.7 percent in 2018. Broad money supply slowed after private sector credit extension decelerated and currency demand weakened. The slow demand is reflective of the prevailing economic slowdown, widening output gap and rising unemployment. Rising inflation, lacklustre employment growth and higher interest rates constrained real disposable income growth.
“Accordingly, the economy is unlikely to experience a meaningful increase in household consumption growth. The current account widened following the deterioration of the trade account coupled with a decline in SACU transfer receipts. However, the near term data reflects a vast improvement in FDI inflows, bolstering the capital and financial account. We have therefore revised our current account deficit in line with the near term improvement and the lower import demand,” he said.
Looking at the report, it asserts that the immediate impact of Brexit will be delayed and minimal, while providing long-term opportunities for the beef and grape industries. The resultant trade negotiations will provide an opportunity to improve market access for these products.
“However, for a sector like tourism we expect numbers from the EU and the UK to contract in next year’s season as income effects reduce demand from the European source markets. This will be exacerbated the high package holiday inflation prevalent in the domestic market,” the report states.
Rising foreign demand for diamonds, copper and fish has sharply lifted export earnings. Along with weakening import demand Namibia’s external position has improved, stabilising the import cover to around 3.2 months.
“Despite the anticipated slowdown in economic activity, we remain cautiously optimistic about the medium-term outlook for Namibia. The economy should eventually benefit from infrastructure upgrades and greater commodity production capacity. An improvement in transport networks, coupled with increased electricity, port and water storage capacity should position the country as an efficient and reliable regional logistics hub in the long haul,” extends the report.
With regards to inflation, the drought has pushed inflation beyond the upper limit of the target band. Consequently, food, energy and housing inflation have accelerated well into double-digit territory and are combining to push inflation higher.
“The recent escalation of electricity and water tariffs will push inflation upwards to our 7.4 percent year-end estimate. Domestic inflation continues to decouple from South African inflation due to the divergent price forming mechanism in the agronomic, energy and poultry sectors. Domestic prices will therefore remain higher for longer,” the report adds.
Looking at the monetary policy, the report acknowledges that the Bank of Namibia last hiked interest rates by 25bp at its April 2016 MPC meeting, citing interest rate alignment within the Common Monetary Area (CMA). Consequently, reserves remain more than sufficient to maintain the one-to-one currency peg.
“Compulsory deposits, along with the reduction of the maximum repayment terms to 54 months on vehicle and asset finance, should curtail import demand even further, while stabilising FX reserves at the globally acceptable levels. With stable reserves, there remains very little pressure on the central bank to raise interest rates further as we approached what we regard as the end of the interest rate hiking cycle. The central bank is expected to take an accommodative stance in 2017, cutting interest rates in the 2H17 once inflation starts to moderate,” explains the report.
Acknowledgeable further is that the local bond market was subdued leading up to Brexit. Bidders were keen at the short- and long end of the curve, while bids in between were hard to come by.
The report therefore states that the bid-to-cover ratio was favourable at 1.54 leading up to the Brexit vote. However, post-Brexit, the ratio dropped substantially to 0.65. The market displayed muted appetite for the local inflation linker as N$97.5million was allocated from N$120million on offer. With the vote out of the way, investors remain in two minds on where to put their money.
Lastly, the report addresses factors to do with the Namibian dollar being pegged at a 1:1 ratio with the South African rand. Its notes that the USD/ZAR has traded in a wide range of 14.00 to 16.00, with the recent bias towards the downside while elevated event risk makes the rand vulnerable in the short term, and expects a modest weakening bias into the end of the year, with a target of 15.20 on USD/ZAR.
“This is also partly due to the dollar underpinned from safe-haven demand. While local factors continue to be a drag, a more notable narrowing in the current account deficit alongside rising SA/world real rate differentials should support the rand during 2017 and we see a rate of 14.00 by the end of next year. An important consideration in our forecast is that the dollar has already peaked, and that modest depreciation will also be supportive of commodity prices. Should China’s growth wobble again and commodity prices falter, the rand may weaken by more than expected,” concludes the report.
Confidente. Lifting the Lid. Copyright © 2015