Q3’22 SSA Update – Policy and the polls

What shaped the past week?

Global:   With Q3’22 earnings season underway, investors were buy-side driven this week, as they sought to snap up counters that had fallen sharply in recent sessions. Nonetheless, they remain wary of the rising geopolitical tensions between Russia and Western powers as well as expected output cuts from OPEC+. Starting in the Asia-Pacific region, the Japanese Nikkei-225 was the best performer, gaining 4.55% w/w; whereas in China, the Shanghai Composite closed flat on the week, as a worsening global outlook weighed on investor confidence. The worldwide economic downturn is set to deepen, with the International Monetary Fund (IMF) warned it will revise the global GDP growth forecast for 2023 down from the current 2.9%. Moving to the Eurozone, where the energy crisis remains in focus, key markets across the region closed higher, with the German Dax and London FTSE-100 rising 1.54% and 2.49% w/w respectively. However, we expect the latest economic numbers out of the region, to drag investor confidence in coming sessions; Germany’s Federal Statistical Office (Destatis) published that industrial production in the country went down more than expected by 0.8%. In comparison, retail sales also recorded a decline of 4.3% in August. Additionally, Germany’s import prices surged by 32.7% m/m. Finally, in North America, where investor focus was on President Biden’s meeting with OPEC+ officials in Riyadh Saudi Arabia, U.S. markets traded higher in what was a volatile week for stocks. Tech stocks recorded positive gains this week, with the NASDAQ up 1.87% at time of publication; the S&P 500 and Dow Jones were up 1.22% and 1.11% respectively, as investors await the latest earnings results of listed companies in the U.S.

Domestic Economy:  Recently, the Senate approved the 2023-2025 Medium Term Expenditure Framework (MTEF), which outlines two fiscal scenarios—the business-as-usual and reform scenarios. The business-as-usual scenario is premised on continued retention of subsidy in 2023 while the reform scenario assumes a subsidy reform by mid-2023. Under the business-as-usual scenario, Nigeria is set to spend  N18.75 trillion and earn N6.34 trillion, denoting a fiscal deficit of  N12.41 trillion. Under the reform scenario, Nigeria is expected to spend  N19.76 trillion and earn N8.46 trillion resulting in a fiscal deficit of  N11.3 trillion.

Equities:   It was volatile week for the local equities market, as the NGX All Share index sank 3.41% w/w. Losses across the market were broad-based with all key indices closing in the red. Starting with the banking sector, losses in the tier one space dampened its performance, as the sector sank 3.47% w/w; ZENITHBANK fell 2.25% w/w to 19.55/share, with ACCESSCORP and UBA also falling by 5.59% and 3.57% respectively to settle at  N7.06/share and N6.75/share. Moving to the Oil and Gas space, losses across the oil marketing space, notably in OANDO (-6.25% w/w), saw the sector sink 1.02%. Additionally, moderated losses across the Consumer and Industrial Goods sector, as the fell 0.56% and 0.33%. Finally, AIRTEAFRICA, which is the most capitalized stock on the NGX index, sank 10.00% to  N1,800/share, further weighing on the performance on the market this week.

Fixed Income: Fixed income markets traded on a relatively quiet note this week as investors continued to trade cautiously and system liquidity remained tight. In the bond market, however, we saw some selloffs across benchmark bonds, which raised average yields 33bps w/w. Meanwhile, minimal activity in the NTB segment resulted in average yields falling 1bp w/w.

Currency: The Naira depreciated 214bps w/w at the I&E FX Window to N439.17.

What will shape markets in the coming week?

Equity market:  The month started off weak, with price dip in heavyweights dragging the market. We expect another series of mixed trading activities next week as investors look to the attractive counters across board.

Fixed Income:  The NTB market is expected to open the week on a tepid note ahead of the NTB auction on Wednesday. Given the paucity of buy interest across benchmark bonds, investors are likely to maintain their bearish sentiment in the coming week.

Policy and the polls

Geopolitics has sent several economies to a dead-end, with high food and energy prices stoking import bills, production costs, and raising inflation expectations. As a result, the International Monetary Fund has downgraded its growth projections for the world at large and Sub-Saharan Africa.  Beyond geopolitics, we see national politics contributing to economic uncertainty over the next five months. In Q3’22, three of our coverage economies were in an electoral season. While Angola and Kenya concluded their Presidential elections in August 2022, Nigeria’s electoral campaign season officially kicked off in September 2022.

Growth slows as base effects wane

In Ghana, expansion in the manufacturing, Information & Communications, and agricultural sectors strengthened the 4.8% y/y expansion in Q2’22 (Q2’21: 4.2% y/y). The Ghanaian economy has particularly been held back by currency depreciation and fiscal vulnerabilities. Despite these challenges, the Ghanaian economy grew at a faster pace in the first half of 2022 (H1’22: 4.2% y/y) than it did a year earlier (H1’21: 3.9% y/y). In H2, we expect the Ghanaian economy to grow at a slower pace (H2’22f: 5.1% y/y) compared to the prior year (H2’21: 6.7% y/y), given the previous year’s high base and impact of the fiscal sustainability crisis on investment flows and economic activities. Thus, we estimate a 4.8% y/y growth estimate for Ghana in FY’22 (2021: 5.4% y/y).

In South Africa, we observed a massive slowdown in growth levels from 19.45% y/y in Q2’21 to 0.19% y/y in Q2’22. While this slowdown can be attributed to fading base effects, we note that growth in South Africa was subdued by heavy flooding in KwaZulu Natal, the province with the second largest contribution to economic growth in South Africa. As a result, we witnessed y/y contractions in key sectors including the manufacturing, agriculture, mining, power and construction sectors.

Politics dominates the sphere

In Kenya, a-first timer and the outgoing Deputy President, William Ruto, defeated a 5-time contender, Raila Odinga, after garnering 50.5% of the total votes cast. Although the election result was contested by the opposition, the Supreme Court upheld Ruto’s victory. This subdued the elevated political risk following the violence that greeted the outcome of previous elections (2007, 2012, and 2017). In Angola, the elections swayed in favor of the incumbent President, Joao Lourenco, who garnered 51.2% of the total votes cast to secure his second five-year tenure in office. While the election result was disputed by the opposition, the results of the tight contest was upheld by the courts. This extends the 47-year tenure of the ruling party – the Popular Movement for the Liberation of Angola (MPLA).

Fiscal vulnerabilities lay bare

In Nigeria, the can of fiscal reforms has been consistently kicked down the hill as the responsibility to remove subsidies has been transferred to the next administration. While the Senate has kicked against both tax waivers and subsidy bill, it is unlikely that any substantial reform can be implemented before the February 2023 general elections. With oil production falling to an all-time low in Nigeria, Angola displaced Nigeria as Africa’s top oil producer. Angola has particularly been in good shape, as the country improved its fiscal balance in 2021 via a record budget surplus and substantial reduction in debt levels. This has led to a better ratings outlook from Fitch, as the latter revised Angola’s credit rating to positive (from stable). Ghana has been on the wrong side of fortune with the twin wigs – the war in Ukraine and monetary policy normalization – shutting out the economy from the international debt market. The downgrade of Ghanaian sovereign credit rating by two leading rating agencies compounded Ghana’s fiscal woes.

Inflation shows cooling signs

In our maiden SSA inflation report, we reviewed the inflation trajectory in July. We opined that elevated energy prices and currency weaknesses were key drivers of inflation across these economies. From August, however, we have observed a broad-based slowdown in month-on-month inflation. Although unfavorable base effects kept year-on-year inflation on the uptrend in Ghana, Kenya, and Nigeria, inflation decelerated in South Africa for the first time since the invasion of Ukraine. Angola continues to witness lower inflationary pressures, because of the currency gains from the oil windfalls. In the near term, we see the trajectory of oil prices as a key driver of inflation. Nevertheless, we still see medium risks from the escalation of the Ukraine-Russia war, which could lead to higher oil prices, particularly in the winter season.