‘Frontier’ Africa feels pinch of waning confidence

WHILE South Africans are bracing themselves for higher interest rates to continue dampening growth prospects, the picture is not much better on the rest of the continent.

“[The] challenges that face the three largest economies in Africa are growing,” said John Ashbourne, Africa economist at London-based Capital Economics.

Due to a commodity collapse during the past year, and in particular the price of oil, Africa’s three largest economies — Nigeria, South Africa and Angola — have seen their prospects falter, weakening the “Africa rising” narrative.

The central bank of Nigeria, the continent’s biggest oil producer, decided not to devalue the naira, something that would have acted as a shock absorber to the fall in the price of the fuel.

But Razia Khan, Standard Chartered’s research head for Africa, said the bank’s inaction wasn’t protecting the real economy from the burden of lower oil prices.

“It’s not allowing a nominal variable like the exchange rate to bear some of that burden of adjustment.”

This did not make Nigeria a compelling case for investment. Portfolio and foreign direct investors are concerned about the risk of a sudden devaluation or erosion of returns they expect.

“For an entire new class of investors who had only recently got involved in frontier African markets — markets outside of South Africa — Nigeria was really the only economy that offered them real scale,” Khan said.

Nigeria has had a fixed exchange rate system in place since February last year. It operates on an orders-based system. Nigeria has engaged in radical easing since November and cut interest rates aggressively, also using other rates to encourage banks to lend into the economy more.

Khan said that if there was declining interest in Nigeria, it “does have real cost for the rest of sub-Saharan Africa. It’s all about investor confidence rather than actual trade linkages with the rest of the region, which are still fairly minimal.”

In contrast, Angola has engaged in tightening of monetary policy to adjust to the oil shock and has devalued its kwanza currency consistently.

Gareth Brickman, Africa analyst at ETM Analytics, said it was important for Angola to maintain access to external cap- ital markets. The country raised $1.5-billion in euro bonds recently and had to pay just under 10% for borrowing costs.

Ghana, which has been directed by the IMF to reduce its budget deficit, kept its interest rate unchanged at 26%.

It said inflationary pressures had moderated in recent months.

Headline inflation increased by only 10 basis points to 17.7% in December.

Khan said fiscal tightening would be more effective than small increases in policy rates.

“So for Ghana, we’re not surprised that the Bank of Ghana kept interest rates on hold.”