Fiscal focus: A Sub-Saharan Africa story
Following rapid monetary tightening to rein in decade-high inflation around the globe, tightening cycles have started to pause and focus is fast shifting to fiscal policy prudence. Unlike advanced economies which are somewhat insulated by safer-haven status, pressure is mounting for emerging markets to stabilise public debt. While a stronger dollar has raised external debt vulnerabilities, higher borrowing costs have lifted interest expenditure across the spectrum. That said, there are some interesting intricacies across the Sub-Saharan Africa (SSA) region. With around 13 countries voting in 2024 and an uncertain global outlook, sustainability will be a growing concern for both investors and taxpayers.
The fiscal interventions necessitated by the Covid-19 emergency pushed the ratio of gross government debt to GDP in SSA to 57.1% in 2020, from an average of 38.5% between 2000 and 2019. A relief to 56.6% materialised in 2021, likely supported by the cyclical rebound and higher commodity prices, but it was temporary. The International Monetary Fund (IMF) sees gross debt to GDP lifting to 57.7% in 2023, before slowing to 50.6% by 2028. The ratio of external debt to GDP did not lift significantly, likely highlighting slowing foreign investor participation in countries like South Africa (SA) where foreign ownership of domestic bonds has fallen below 30%. Nevertheless, total external debt lifted to $731 billion in 2020 and is expected to keep rising over the forecast period. A softer dollar should limit the rise in the quantum of this debt stock, but high-for-long interest rates mean debt service costs should remain burdensome. For 2023, external debt service costs are expected to reach north of $155 billion and 8% of GDP from $117 billion and 6.8% in 2019.
Many fiscal authorities in SSA are stressing the need for consolidation while also providing relief to the most vulnerable in society. Countries such as Zambia and Ghana have unfortunately defaulted debt obligations, requiring IMF funding and restructure deals with commercial creditors. Mozambique is also under IMF support, with risks of fiscal slippage driven by the October 2024 elections. Nevertheless, revenue mobilisation efforts and more efficient spending should support a narrower budget deficit in the medium term. It seems the calamitous debt distress in these countries has propelled the kind of structural reform that could support sovereign rating upgrades in future.
Elections will also be a headwind for countries such as SA, Botswana and Namibia, creating space for higher public sector salaries than currently projected. Nevertheless, improved revenue performance in Namibia and Botswana should support consolidation. In fact, Botswana is expected to record a fiscal surplus by 2026. Fiscal balances in Namibia, Lesotho and Eswatini have been supported by SACU receipts following the 2021/22 cyclical rebound. However, weaker commodity prices and growth in SA, further constrained by logistical issues weighing on trade, make for a dim outlook. This will be especially detrimental to Lesotho and Eswatini, where SACU revenues not only account for an inflated share of revenue, but social instability can also slow fiscal consolidation. Consolidation will also be tricky in Nigeria, where currency devaluation exaggerated local currency debt. However, a commitment to reforms should support stronger growth and revenue in future.
Ultimately, the SSA fiscal story has become more complex. Consolidation is threatened by elevated interest costs, weak external growth, as well as election cycles and social instability that could drive over-spending. Despite these near-term challenges, the reform agenda remains central to improved financial positions and sovereign ratings.
Week in review
SA's gross foreign exchange reser ves for October declined marginally to $61.0 billion, from $61.1 billion in September. The decrease largely reflected foreign exchange payments made on behalf of government, including a partial repayment of $500 million on a loan from the IMF. Partly countering these were higher gold reserves given an increase in the dollar-denominated gold price.
Mining output continued its decline in September, shrinking by 1.9% y/y after falling by an upwardly revised 2.0% in August (revised from -2.5%) and by 4.4% y/y in July. The outcome was marginally better than Reuters consensus of a 2.0% y/y decline. Seasonally adjusted output, critical for the calculation of quarterly GDP growth, slid by 0.3% m/m, following an expansion of 1.2% in the previous month (revised from 0.8% m/m). This suggests that output shrank by 1.5% q/q, a detraction from 3Q23 GDP growth. This is consistent with our view that the economy may have failed to sustain the 0.6% quarterly GDP growth recorded in 2Q23. Y TD (January to September) mining output is down by 1.8% y/y, reflecting poor growth within the coal, iron ore and platinum group metals (PGMs) divisions, while the gold division has outperformed. Overall, the mining sector remains challenged by unreliable energy supply and logistics constraints, as well as moderating external demand, with growth challenges in China and Europe boding ill for the export of critical commodities.
Total manufacturing output contacted by 4.3% y/y in September, following a 1.5% expansion in August. The outturn was materially worse than the consensus prediction of a 2.6% decline. Seasonally adjusted output also fell by 0.5% m/m, effectively reversing the 0.4% m/m gain in August. This means that factory output fell by 1.2% q/q, suggesting that the sector detracted from 3Q23 GDP growth. The latest PMI reading points to even weaker activity at the start of the fourth quarter, with near-term expectations also turning sour, likely due to adverse global events. Overall, while the productive sectors of the economy are becoming more resilient to electricity shortages through private generation, activity remains hamstrung by infrastructure bottlenecks as well as slower external demand and rising trade barriers.
Week ahead
On Tuesday, the Quarterly Labour Force Sur vey (QLFS) results for 3Q23 will be published. In 2Q23, the official unemployment rate fell slightly to 32.6% from 32.9% in 1Q23. Nevertheless, the unemployment rate remains stubbornly high and above the pre-pandemic average of 25.5%. Overall, employment levels have recovered to pre-pandemic levels, though at uneven speed across sectors and by skill level. Faster job creation is hampered by the prevailing economic weakness, characterised by energy shortages and other infrastructure constraints.
On Wednesday, retail sales data for September will be released. In August, sales volumes declined by 0.5% y/y, a slower pace compared to the 1.0% decline in the previous month. This means that volume sales registered annual declines in each month this year. Indeed, Y TD (January to August), volumes are 1.8% lower compared to the same period last year, underscoring the challenging consumer backdrop, including high inflation and interest rates, weak real wage gains and depressed sentiment.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 7 Nov | SA | Gross Foreign Reserves $ bn | Oct | 61.0 | 61.1 |
| 9 Nov | SA | Mining Production % y/y | Sep | -1.9 | -2.0 |
| SA | Mining Production % m/m | Sep | -0.3 | 1.2 | |
| SA | Manufacturing Production % y/y | Sep | -4.3 | 1.5 | |
| SA | Manufacturing Production % m/m | Sep | -0.5 | 0.4 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 14 Nov | SA | Unemployment Rate | 3Q | -- | 32.6 |
| 15 Nov | SA | Retail Sales % y/y | Sep | -- | -0.5 |
| SA | Retail Sales % m/m | Sep | -- | 0.2 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 72,226.67 | 1.2% | -2.2% | 3.7% |
| USD/ZAR | 18.65 | 1.2% | -1.9% | 5.0% |
| EUR/ZAR | 19.89 | 1.7% | -1.3% | 11.7% |
| GBP/ZAR | 22.80 | 1.6%% | -2.3% | 12.9% |
| Platinum US$/oz. | 859.67 | -6.6% | -2.4% | -12.8% |
| Gold US$/oz. | 1,958.19 | -1.4% | 5.3% | 14.8% |
| Brent US$/oz | 80.01 | -7.9% | -8.7% | -13.6% |
| SA 10 year bond yield | 10.34 | -0.3% | -4.2% | -1.6% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.7 | 1.1 | 1.7 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.2 | 1.4 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.3 | 4.3 | 3.7 |
| CPI (average) %y/y | 4.5 | 6.9 | 5.9 | 5.0 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 4.9 | 4.7 | 4.9 | 4.7 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.10 | 17.50 | 18.40 |
