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Quantum Global Research Lab AG
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www.quantumglobal.ch
Macroeconomic and Market Outlook1
Quarter 2, 2017
Progressive recovery: Mixed patterns and prospects
Highlights
The global economy is gradually
improving, following a slowdown in
2016.
Global growth is expected to edge
up to 3.5% in 2017, on the back of
improving activity in advanced
economies, especially the US, and
strengthening momentum in
developing and emerging market
economies. The recovery pattern is
quite variegated.
The rebalancing of the Chinese
economy is proceeding as
expected, but concerns about the
housing market are stoking fears of
a hard landing of the economy in
2017.
Growth in Sub-Saharan Africa is
rebounding modestly, helped by
improving external demand,
recovery in oil and other
commodity prices, easing of
domestic constraints experienced
in 2016 and policy support.
Oil prices are expected to average
$55 per barrel in 2017 and $57 per
barrel in 2018, up from an average
of $44 per barrel in 2016, in
response to the agreement by OPEC
and several other exporters to oil
cut production. Other commodity
prices are expected to strengthen
moderately, as global demand
improves and markets find a
balance.
Accommodative monetary policies
and renewed fiscal support will
support global growth and help to
stabilize financial markets.
Growth of global trade is expected
pick up in 2017, despite the rising
risks of protectionism in the US.
The outlook is positive, but subject
to downside risks stemming from
the rise of protectionism in the US,
the pace of US interest rate hikes, a
downshift in the Chinese housing
market, uncertainties surrounding
the Brexit process, geopolitical
disturbances, political and security
risks.
1 Prepared by Seedwell Hove, with contributions from Jeremy Wakeford.
2
Global Economic Outlook
Global economic activity is gradually
picking up, as heralded by improving
leading economic indicators in advanced
and emerging market economies. This
follows a tepid 3 percent growth in 2016, as
weak commodity prices, subdued global
trade and financial market turbulence
which interacted with political and
geopolitical risks to weaken global growth.
High-income countries expanded by 1.6
percent, while developing and emerging
economies grew at 3.4 percent in 2016.
Global growth is projected by the IMF to
strengthen to 3.5 percent in 2017, edging
up to 3.6 percent in 2018, but will remain
below the pre-crisis pace2. The World Bank
is more bearish, seeing global growth at 2.7
percent in 2017, inching up to 2.9 percent
in 20183. Global growth will be stimulated
by continued recovery in the high-income
countries and easing of conditions in
developing and emerging economies.
Developed economies are anticipated to
continue to gain traction with growth of 2
percent in 2017, led by stronger recovery in
the US and Canada and moderate
expansion in Japan. Developed economies
growth will be boosted by continued
accommodative monetary policy in some
countries and renewed fiscal boosts in
others, which will provide some further
tailwinds to the upturn in manufacturing.
In emerging and developing countries,
easing of slowdowns and recessions helped
2 IMF, World Economic Outlook, April 2017
by recovering commodity prices and
improving external environment will raise
recovery momentum to see growth at 4.5
percent in 2017. For instance, China’s
economic activity is expected to grow at
6.6 percent in 2017, while the recovery in
Brazil and Russia is gradually picking steam,
with signs that these countries will return
to positive growth in 2017.
In our view, global growth will pick-up to a
range between 2.5-3% percent in 2017,
given some visible risks lingering especially
in high-income countries. The biggest risks
relate to protectionism, political and
geopolitical risks, while possible disorderly
unwinding of China’s housing and heavy
industrial sectors could also be a source of
drag. The triggering of Article 50 by the UK
will continue to elevate uncertainties in the
UK and Europe, compounded by the snap
UK elections in June. The wave of political
risks in Europe continue to raise concerns.
Although election outcomes in
Netherlands were favorable for Europe,
polls in France and Germany present
uncertainties about the future of the
European Union, amid rising tide of
populism and forced deglobalisation.
Despite promises of fiscal stimulus in the
US, Trump’s protectionist sentiments and
tight immigration policies are likely to hold
back global economic recovery
momentum.
3 World Bank Global Economic Prospects, January 2017
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Figure 1: Global economic growth and projections
Source: IMF and World Bank
Monetary conditions have remained loose,
especially in developed countries, in an
effort to stimulate economic activity. As
global economic activity is picking up,
sentiment in the financial markets is
improving, and the markets have enjoyed
relative tranquility in the first quarter. Oil
prices are anticipated stabilize at around
$55 per barrel in 2017, as the agreed cut in
oil production by OPEC and other oil
exporters takes shape. Other commodity
prices are also expected to recover
moderately, helping to boost economic
recovery in commodity exporting
countries. Global inflation is expected to
continue trending upwards in 2017 and
average 3.5 percent, reflecting a pick-up in
commodity prices, rise in import prices and
increased domestic demand pressures.
Monetary policies of major central banks
will continue to diverge, following the hike
in US policy interest rates in March. Further
monetary policy tightening in the US is
likely to put pressure on emerging market
currencies, causing their central banks to
hold interest rates cuts to prevent capital
outflows. Overall, we expect monetary
policies to remain largely accommodative
in 2017.
Global trade is expected to expand by 3.8
percent in 2017, following a sluggish 2
percent growth in 2016, stimulated by a
gradual recovery in the global economy
supporting import demand, and decent
upturn in commodity prices. However, the
recovery in global trade could face
potential headwinds from rising
protectionism, especially in the US and
Europe. Protectionism is anticipated to
increase under Trump administration
indicated by a series of executive orders in
the first weeks into office, including the
cancelation US’s membership to the Trans-
Pacific Partnership agreement. Also, the
border adjustment tax (BAT) aimed at
taxing all imports into the U.S is being hotly
debated within the Republican Party,
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which if implemented could affect trade
flows between the US and trading partners.
The implementation of protectionist
policies could also spark retaliation and
trade wars from countries such as China,
Germany and others, and disrupt global
economic linkages, further dampening
global trade.
Outlook for Advanced Economies
Growth in advanced economies is
anticipated to edge up to 2 percent in
2017-2018, from 1.7 percent in 2016.
Stronger momentum will come from
stronger activity in the US and moderate
gains in Japan. Weak productivity growth
and mounting demographic challenges will
continue to constrain medium to long-term
growth prospects of some of these
countries. However, protectionism and
political risks are likely to saddle further
growth momentum. Advanced countries
inflation is expected to increase to 1.9
percent in 2017 from about 1.5 percent in
2016, lifted by an upturn in energy prices
and import prices.
The U.S. economy is anticipated to expand
by 2.3 percent in 2017 and solidify further
to 2.5 percent in 2018, bolstered by an
expected fiscal stimulus including personal
and corporate tax cuts, increased
infrastructure spending (about US$1
trillion) and increase in defense spending
under the Trump administration. Personal
disposable income and household
spending have remained strong
throughout 2016, largely boosted by
positive wage growth and strong consumer
confidence. We believe that economic
activity will expand at a moderate pace,
while labor market conditions will gain
further steam in the short to medium term.
The solidifying labour market will help to
sustain income gains and boost
consumption. Leading economic indicators
point to firming of activity: Manufacturing
production index expanded by 3 percent to
57.7 points in February, accompanied by
positive gains in retail sales and
employment growth. In fact, February
marked another month of strong growth in
employment, with non-farm jobs growing
by 235,000 jobs, reducing overall
unemployment to 4.7 percent. However,
PMI marginally slowed by 1 percent to 55
points, but remained above the 50 point
mark which separates expansion from
contraction (Figure 2).
5
Figure 2: US PMI, Inflation and Unemployment
Source: Bloomberg
Inflation accelerated further to 2.7% in
February from 2.5% in January, hitting the
highest level since February 2012, driven
by wage growth and rising import prices. It
is expected to average about 2 percent in
2017, in line with Fed target4. The U.S. Fed
hiked its policy interest rates for the third
time since the financial crisis by 0.25
percentage points to a 0.75–1 percent
range on 15 March 2017, as expected by
the markets. With positive inflationary
impulses and positive developments in the
employment front 2017, the Fed is likely to
have 2 more interest rate hikes in 2017, in
addition to the one in March. This is
positive for the bond market. The US dollar
is likely to remain strong in 2017,
supported by expected increases in
interest rates and expansionary fiscal
policy under Trump administration. The
key risks to the US outlook relate to
possible protectionist trade policies and
stricter immigration policies. Protectionist
trade policies may force trade partners to
retaliate and together with a stronger
dollar could weigh on US exports, while
raising import prices. Stricter immigration
policies could restrict the labor force and
dampen economic activity. The recent
failure to repeal of the Obamacare bill
could also affect the rest of Trump’s
economic agenda, as Congress may not
approve some of the plans, which may lead
to further correction of the “Trump trade”
in the equity markets. Nonetheless, the
continuation of the Obama care is a
positive catalyst for the U.S. health care
sector.
In the Euro Area, recovery continued to
gather momentum at the end of 2016, with
GDP expanding at 0.4% in Q4 (quarter on
4 US Federal Reserve Bank Statement, 15 March
2017
quarter seasonally adjusted) and much
broad based, reflecting remarkable
resilience to political, geopolitical
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US Manufacturing PMI (left) Inflation (right) Unemployment (right)
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disturbances and structural issues. Euro
Area growth is projected to remain flat at
1.8 percent in 2017 and 1.7 percent in
2018,5 helped by continued loose
monetary policy, global economic recovery
and continued improvement in the labor
market. Leading economic indicators point
to resilient activity in the first half of 2017:
The composite PMI rose to a 6 year high in
February, while economic sentiment
continues to improve. Unemployment,
which averaged 10 percent in 2016, is
projected to edge down to 9.5 percent in
2017. Inflation jumped to 2 percent in
February from 1.8 percent in January, the
highest increase since February 2013, lifted
by increase in oil prices, other import prices
and wages increases. However, further
rapid increase in inflation in the coming
months accompanied by continued
weakness of the Euro could erode
purchasing power and affect consumer
spending. We expect Euro Area inflation to
average 1.7 percent in 2017, which could
possibly prompt the ECB to taper the bond
buying programme.
The outlook for the Euro Area is
overshadowed by a number of risks: Brexit
negotiation process, elections in Germany
and France and other structural issues. The
Brexit uncertainty will also continue to
undermine investor confidence, trade and
jeopardize the recovery momentum
following the triggering of Article 50 by the
UK in March. The heavy elections calendar
in 2017 raise some concerns. The elections
in the Netherlands, were welcome by the
markets and in Europe, with the victory of
Mark Rutte’s over Geert Wilder providing
5 ECB staff macroeconomic projections for the euro area, March 2017
political stabilization against the rise of
populism in Europe. Investor attention has
now shifted to the decisive polls in France
and Germany where some centrifugal
forces are advocating for the pullout from
the European Union. In France, elections
will be held in April/May. Marine Le Pen of
the National Front (FN) party and Emanuel
Macron of the En Marche currently lead
the opinion polls, but none of them are
expected to secure an absolute majority of
the vote, suggesting that they may face
each other in the second round. A victory
by far right and anti EU candidate Le Pen
could undermine European political
cohesion, destabilize the zone, possibly
imposing a risk premium on euro-
denominated assets and ignite some short
term volatility in the financial markets. A
victory by Macron could signal diminishing
political risk in Europe, as the French and
German leadership will continue to support
the European Union project.
In Germany polls, markets might prefer a
Merkel win, but could also be comfortable
with Shultz who is also pro-EU. A negative
shift in sentiment stemming from these
upcoming elections could disrupt Europe’s
nascent recovery. In addition, the legacy of
high debt ratios and banking sector
vulnerabilities is also another drag to
recovery in some economies.
The UK’s GDP growth in 2016 moderated to
an estimated 2 percent, underpinned by
strong consumption growth, as stimulus
from the Bank of England is keeping
consumer and business confidence at
reasonable levels. The economy started
7
2017 on a positive note, defying earlier
expectations of slower growth in the
context of Brexit. The manufacturing sector
expanded strongly in January, while
unemployment rate inched down to 4.7%
in January. However, the consumer
confidence indicator inched down in
February, reflecting consumer’s
pessimism, amid rising inflation from 1.8%
in January to 2.3% in February. Growth is
projected to remain at 2 percent in 2017.
The Bank of England left interest rates
unchanged at 0.25% in March and expects
inflation to average 2.7% in 2017, well
above its 2 percent target6.
The triggering of Article 50 end of March
marks the beginning of Brexit negotiation
process- raising uncertainties as this is an
unchartered territory. The Bank of England
see UK growth 1.6 percent in 2018, but in
our perspective, UK growth could be less
than 1.5 percent, as Brexit uncertainty is
further complicated by the hasty snap
elections in June, which could dampen
consumer and investor confidence, stifle
investment, weaken trade, while
moderating household income growth
could dampen private consumption, which
will all work to drag down growth.
Japan continued with moderate growth of
1 percent in 2016, as a weak yen and strong
global demand supported export growth.
However, declining workforce, tepid wage
growth and a rising burden of aging
populations amid tight immigration
controls will continue to weigh on growth
in the medium term. The Bank of Japan
(BoJ) maintained its Quantitative and
Qualitative Monetary Easing with Yield
Curve Control program in March, and
published further details of the program to
enhance transparency. Despite fiscal
stimulus in 2016, private consumption has
remained sluggish possibly due to weak
wage growth. The Japanese economy is
expected to pick up to 1.2 percent growth
in 20177, supported by policy stimulus and
accommodative monetary policy. Inflation
is expected to increase gradually. However,
increased protectionism in the US under
Trump is casting a shadow on Japan’s
outlook, while the possible faster
tightening cycle by the Federal Reserve
Bank could heighten volatility in the
financial and foreign exchange markets.
Outlook for Emerging and Developing
Economies
The outlook for emerging market and
developing economies is generally
improving, despite some downside risks.
The IMF projects growth to accelerate
moderately to 4.5 percent in 2017, from
4.1 percent in 2016.8 The World Bank is less
optimistic, seeing 2017 growth at 4.2
6 Bank of England Inflation Report, February 2017 7 IMF World Economic Outlook, April 2017 8 IMF, World Economic Outlook, April 2017
percent growth in 2017.9 In our view,
emerging and developing economies are
on course to realize about 4.5 percent
growth or more, considering that some of
the drags seen in 2016 in some large
economies is visibly subsiding, while
expected increases in commodity prices
9 World Bank Global Economic Prospects, January 2017
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and policy interventions implemented in
various countries will further provide a fillip
to recovery. Also, the cyclical rebound in
investment, and export growth are further
providing impetus to growth in these
economies. However, risks related to the
rise in protectionism, political risks and
geopolitical tensions could weigh on the
recovery momentum in this group of
countries.
China’s rebalancing process is proceeding, with growth slowing to 6.7 percent in 2016 in line with expectations. China’s PMI inched up to 52.6 points in February, and the economy expanded by 6.9 percent in the first quarter of 2017, slightly faster than expected, reflecting past policy support. However, the momentum is expected to slow down later in the year as earlier fiscal stimulus starts to fade and monetary policy tightens. Inflation slowed down to 0.8 percent in February from 2.5 percent in January, the lowest reading since January
2015, well below the central bank target goal 3 percent. Growth is anticipated to slow down to 6.5 percent in 2017 and further down to 6.3 percent over 2018-2019,10 as monetary policy tightens and fiscal policy becomes less supportive than in 2016. The main downside risks to the outlook relate to a downturn in the housing market in 2017, as monetary policy possibly tightens, possible protectionist policies from the US and escalation of territorial disputes with the US relating to Taiwan and in the South China Sea. Housing prices in major cities have started to cool off towards the end of 2016, which could result in a pullback in real estate investment later in the year (Figure 3). We expect Chinese investment and construction to slow down in 2017, which will put downward pressure on global commodity prices and possibly generate some volatility in the financial markets. Managing imbalances and risks, while keeping growth on a reasonable path will be a policy challenge for China in 2017.
Figure 3: China’s housing market price index and economic activity.
Source: Bloomberg
10 World Bank Global Economic Prospects, January 2017
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China PMI (left) Li Keqiang Index of Economic Activity (right) House Price Index (YoY) (right)
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Brazil’s GDP is poised to return to growth
of 0.2 percent this year11, gaining more
speed in 2018 with 1.5 percent growth,
thanks to improved commodity prices,
strengthening confidence, loosening
monetary policy and gradual dissipation of
the effects of past shocks. The pace of GDP
contraction continued to ease, from -2.9
percent in Q3 to -2.5 percent in Q4 (year on
year), suggesting that recession has
bottomed out. Overall, the economy
contracted by an estimated 3.5 percent in
2016, less severe than initially
envisaged.12Leading economic indicators
point to continued steady gains: consumer
confidence, business confidence and
manufacturing PMI both improved in
February. The Manufacturing PMI rose to
the highest level of 46.9 points in February
from 44 points in January.13 Inflation
continues to trend downwards, dropping
to an over six-year low of 4.8 percent in
February, and falling within the central
bank inflation target range of 2.5-6.5
percent. This gave the Central Bank the
leverage to ease monetary policy further to
support economic recovery. In a bid to
restore business confidence and stimulate
the economy, the government launched an
infrastructure concession program for
building and operating roads, port
terminals, railways and power transmission
lines in March.14
However, recovery momentum is likely to
be hampered by high unemployment,
austerity measures which could dampen
11 IMF, World Economic Outlook, April 2017 12 Central Bank of Brazil, Economic Indicators 13 Bloomberg, March 2017 14 http://www.brazilcouncil.org/?newsalerts=brazil-
consumption. Also, there are risks on the
governance front, related to the
unearthing of number of corruption
scandals, accompanied by resignations and
suspensions of some top officials from
government will also hold back reform
momentum.
Russia continues to recover gradually with
visible indications of exiting recession in
2017. The economy leaped out of recession
with 0.3% growth in Q4, 2016, the first
expansion since 2015. Overall GDP growth
for 2016 averaged -0.2 percent,15 as the
economy managed to successfully
absorbed the dual shocks of lower oil prices
and the continuation of sanctions. The
economic turnaround seems to be
gathering momentum: industrial
production expanded in January and
services sectors continued to show
expansion. However, the PMI fell to 52.5 in
February from 54.7 in January but
remained above the 50-threshold that
separates expansion from contraction in
the sector, suggesting that the
manufacturing activity expanded, but at a
slower pace. Inflation declined to 4.6% in
February from 5.0% in January, supported
by the appreciation of the Ruble and
favorable agricultural market conditions.
This has prompted the central bank to cut
its policy interest rate by 25 basis points in
March. The broad based nature of the
inflation decline suggests that it is possible
to achieve the inflation target of 4 percent
in 2017. Economic growth is expected to
announces-another-55-projects-in-concession-program 15 Russia Federal Service for State Statistics (Rosstat)
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edge up to 1.4 percent in 2017, supported
by higher oil prices and policy
interventions16. However, some downside
risks related to geopolitical disturbances in
Syria, and internal structural factors could
saddle the outlook.
The outlook for other emerging market and
developing economies is mixed, but
generally positive. In East and South Asia,
growth is fairly strong, led by robust
economic activity in Bangladesh,
Cambodia, Indonesia, India and Nepal,
benefiting from productivity gains. India’s
growth is set to pick up this year to above 7
percent in 2017, from a slide to 6.6 percent
in 2016, supported by buoyant household
consumption on the back of improved
wage incomes, economic reforms and good
monsoonal season and fading of
headwinds from demonetization
programme. In Latin America (e.g. Mexico,
Venezuela, Haiti, and Ecuador), economic
activity could remain difficult due to partial
recovery of commodity prices and threats
of protectionism. In Eastern Europe,
activity will be modest in Poland, Albania
and Uzbekistan, while Turkey is
destabilized by domestic political
disturbances and geopolitical instabilities.
In Sub-Saharan Africa, the outlook for 2017
is brightening, with an expected rebound of
growth, while optimism is rising in the
Middle East and North Africa (e.g. Iran,
Qatar and Algeria) in 2017 due to
expectations of higher oil prices. However,
deepening geopolitical tensions and civil
conflicts in some countries could scupper
further growth potential.
Macroeconomic outlook for Africa
Economic activity in Sub-Saharan Africa
(SSA) is regaining momentum, with growth
anticipated to rebound to about 2.9
percent in 2017, following a sluggish 1.5
percent in 2016. The headwinds
experienced last year including low
commodity prices, the slowdown in China,
and less supportive external environment
are easing. Growth in 2017 will be
supported by an improving global
economy, modest recovery in commodity
prices, and policy interventions. Oil prices
are expected to average $55 per barrel in
2017, while other commodity prices will
firm modestly. The region’s large
economies (Nigeria, South Africa and
Angola) which have dragged down SSA
growth in 2016 seem to have bottomed out
16 IMF, World Economic Outlook, April 2017
and are on a recovery path. Excluding
Nigeria and South Africa, SSA growth will
even be stronger at around 5% in 2017.
Growth rates will be variegated among
countries in the region. Oil-importing
countries will lead the recovery with 4.2
percent growth, while oil-exporting
countries will grow at 0.9 percent in 2017.
Some frontier market economies such as
Cote d’Ivoire, Senegal, Kenya and Ghana
and low income countries (Ethiopia,
Tanzania and Rwanda) will continue to
grow at robust paces, well above 5% in
2017, sustained by strong infrastructure
investments, improved business
environment, and dynamic private sectors.
The Sub-Saharan African outlook for 2018 is expected to strengthen further: growth is
11
projected to accelerate to 3.6 percent. Growth will be supported by the improving momentum of the world economy and
gradual stabilization of commodity prices as markets rebalances and terms of trade improve.
Figure 4: Growth estimates and forecasts for selected African countries, 2016 and 2017
Sources: World Bank, IMF
Table 1: Selected Macroeconomic Indicators for Sub-Saharan Africa 2010 2011 2012 2013 2014 2015 2016 2017
Real GDP Growth (percent)
6.9 5.1 4.1 4.1 4.6 3.4 1.5 2.9
Real Per Capita GDP growth (percent)
4.5 2.6 1.8 2.8 2.6 0.9 -0.9 0.5
Inflation (percent, yoy ave.)
8.2 9.5 9.4 6.6 6.3 7.0 11.4 10.7
Net FDI (percent of GDP)
2.7 2.1 2.0 1.3 1.6 1.9 1.5 2.1
Fiscal Balance -3.4 -1.1 -1.8 -3.1 -3.5 -4.3 -5.4. -4.5 Total Public Debt (percent of GDP) 27.7 28.3 28 29 31.6 37.4 42.5 44
CA Balance -0.9 -0.7 -1.9 -2.4 -3.9 -6.1 -4.0 -3.8 Reserves (Months of imports)
4.2 4.6 5.3 5.0 5.6 5.4 4.6 4.3
Broad Money Supply growth (%)
13.4 12.6 16.8 7.8 15.5 10.9 12.8 13.9
Private sector credit (% of GDP)
29.2 27.9 28.0 27.7 28.0 28.9 - -
Sources: IMF, World Bank
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Inflation in Sub-Saharan Africa is slowly
moderating, largely reflecting the
stabilization in exchange rates and easing
of some past inflation drivers. Although still
in double digit ranges, inflation in Angola,
Ghana and Nigeria is turning down (Figure
5). The gradual recovery of commodity
prices improving foreign exchange is
helping to stabilise exchange rates which in
turn act to diminish inflationary pressures
in these countries. Inflationary pressures
have remained muted in the CFA franc
zone countries in West and Central Africa,
benefiting from the stable peg to the Euro.
We expect inflation in the region to recede
to levels below 10% in 2017, helping to
boost consumption, and allowing central
banks to loosen monetary policies.
Figure 5: Inflation rates of selected African countries (%)
Sources: Central Banks and Trading Economics. Inflation rates are the latest available readings.
Stabilising commodity prices and an
improving external environment will help
to narrow the fiscal deficits for the region
to about 4% of GDP from 5.4% in 2016.
Fiscal adjustments and consolidations will
also help a number of commodity
exporters to reduce fiscal deficits.
However, public debt ratios are likely to
remain elevated, with more than 70% of
Sub-Saharan countries expected to retain
debt levels above 40% of GDP in 2017,
raising concerns about debt sustainability.
The current account deficit for the SSA
region is projected to narrow to 3.8% in
2017 from above 4 % of GDP in 2016,
supported by stabilizing commodity prices.
Current account deficits will remain high,
above 10% of GDP in oil importing
countries (e.g. Mozambique, Sierra Leone
Rwanda and Guinea) compared with oil
exporting countries ((Figure 6).
Mozambique is still adjusting from debt
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distress, following the revelation of
undisclosed borrowing exceeding US$1.4
billion (10% of GDP).
Figure 6: Current Account Balances for selected Sub-Saharan African Countries, 2017
Source: IMF
Improvements in external positions is
helping to stabilise a number of currencies
in the region. The pace of depreciation of
Nigerian naira and Angolan kwanza have
decelerated, with the exchange rate gap
between the official and parallel markets
narrowing (Figure 7). This has helped
reduce inflationary pressures. The Naira
depreciated by 5 percent between January
and March and is expected to stabilise
further in 2017, as the foreign exchange
market gradually rebalances. The
Mozambican metical appreciated by some
4.5 between January and March 2017. The
Leone in Sierra Leone remains under
pressure, depreciating by 37 percent in the
first quarter, due to a decline in exports to
China and lasting economic impact from
the 2014-2015 Ebola crisis. Despite the
appreciation of the South African rand in
the first quarter, the gains were erased
following the firing of the respected
Finance Minister on 30 March and credit
rating downgrade by S&P and Fitch in April.
The Rand has lost 4 percent between 30
March and 12 April. The Congolese Franc
(DRC) has also succumbed to political
instability and loss of foreign exchange
reserves, deprecated by 25.7 percent in the
first quarter. The balancing of the foreign
exchange markets in some countries
(Nigeria and Angola) will help to reduce the
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Mozambique
Sierra Leone
Guinea
Rwanda
Equatorial Gunea
Ethiopia
Gabon
Senegal
Tanzania
Ghana
Kenya
Congo Republic
Chad
Cote D Ivoire
Angola
DRC
Sub-Saharan Africa
South Africa
Zambia
Cameron
Zimbabwe
Nigeria
Bostwana
14
pace of drawdown of foreign exchange
reserves.
Figure 7: Changes of selected African currencies against the US$ (January 2017- March 2017)
Source: Bloomberg
Prospects for individual African countries
The outlook for individual countries is quite
variegated. Nigeria is anticipated to exit
recession in 2017, as headwinds
experienced in 2016 subside somewhat.
The economy contracted by 1.3% in Q4,
2016 which is an improvement from
previous quarters, suggesting that the
recession has bottomed out. The oil sector
contacted by 12.4 percent, while the non-
oil sector contracted by 0.3% in Q4 to see
overall GDP growth at -1.5% in 2016.
Growth is projected at about 1 percent in
2017, edging up to 2 percent in 2018,
supported by improving oil prices,
implementation of large infrastructure
programme (about $30 billion) and
improving external demand. The pace of
recovery will depend on the extent of
recovery in oil prices, successful
implementation of proposed large
infrastructure projects amid financing
challenges, reforms in the public sector,
the pace of rebalancing of the foreign
exchange markets and resolutions to stop
disruption of oil infrastructure in the Delta
region. Some green shoots of recovery are
emerging: The PMI rose from 51.9 in
January to 52.2 in February, reflecting
improving demand and growth conditions.
Oil production in Q4 rose increased by 8.1
percent to 1.90 (mb/d) from Q3’s 1.63
mb/d, marking the first increase in output
after successive declines in 2016, as the
government strike a deal with militant
-40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0
Sierra Leone Leone
DRC Congolese Franc
Nigerian Naira
Tanzanian Shilling
Ethiopian Birr
Rwandan Franc
Kenyan Shilling
Ghanaian Cedi
Egypt Pound
Ugandan Shilling
Angolan Kwanza
Zambian Kwacha
Malawian Kwacha
Cote D Ivoire Franc
Senegal CFA Franc
Cameroon CA Franc
Congo Republic CA Franc
Botswana Pula
Guinea Franc
South African Rand
Mozambiquan Metical
15
groups to stop attacks on oil infrastructure.
The foreign exchange market is gradually
rebalancing, with the official and parallel
market exchange rates showing signs of
convergence following the increase in sales
of foreign exchange into the interbank
market by the central bank. This is helping
to stabilize foreign currency reserves
currently at USD 30.3 billion. Inflation
which peaked at 18.7 percent in January
has turned down to 17.8 percent in
February, likely supported by the higher oil
prices bringing in more foreign exchange
inflows and helping to reduce pressure on
the exchange rate. We expect the inflation
rate to drop further and stabilize around 15
percent in 2017. Nigeria issued a $1 billion
Eurobond in February 2017, which was 8
times oversubscribed, with a favorable
yield of 8 percent, reflecting improved
market sentiment on the economy. The
banking sector remains weak, with non-
performing loans at 12.8 percent as at Q4,
2016.
The South African economy contracted by
0.3 percent in Q417 (quarter on quarter,
seasonally adjusted), with overall 2016
growth is estimated at 0.3 percent,
reflecting poor performance of the mining
and manufacturing sectors, subdued
investment due to political and
institutional uncertainties and still weak
external demand. Political tensions have
continued to rise, with President Zuma
sacking the respected finance minister,
Pravin Gordan, further dividing the ruling
ANC party. The opposition have increased
calls for Zuma’s resignation and are
planning to call for a vote of no confidence
in parliament. The political infighting has
17 Statistics South Africa.
weakened the rand, which has lost 4% of its
value between March 30 and April 12. SA’s
credit rating was downgraded by S & P and
Fitch BB+ (junk investment status), citing
political instability and threat to growth.
The downgrade is likely to increase the cost
of borrowing, induce capital outflows and
exert downward pressure on the rand.
Inflation edged down to 6.3 percent in
February from 6.6 percent in January,
remaining above the Central Bank’s target
range of 3-6 percent. We expect inflation to
moderate further in the coming months
helped by continuing tight monetary policy
and dissipation of food inflationary
pressures. The 2017 budget presented in
February targets growth of 1.3 percent and
2 percent in 2017 and 2018 respectively,
helped by improvement in agriculture and
recovery of commodity prices. In our view,
South Africa growth will be less than 1
percent this year, and may not exceed 1.5
percent in 2018, as ongoing policy turmoil
will further weaken consumer and business
confidence and together with lackluster
labour market drag down growth
momentum. Leading economic indicators
signals sluggish economic activity: the
Standard bank PMI inched down by 1 point
to 50.5 in February from January.
The outlook for Angola is brightening, after
a sluggish 0.4 percent growth in 2016.
Growth is projected by the IMF to edge up
to 1.3 percent in 2017, boosted by
improving oil prices supporting recovery in
oil sectors, increased public investment
spending, improving terms of trade and
relenting drags on non-oil sectors. Oil
production has increased by 6 percent to
1.7 mb/d between January and March
16
2017, which saw Angola overtaking Nigeria
(with 1.3mb/d) as the largest oil producer
in Sub Saharan Africa. The Kwanza official
exchange rate remained relatively stable in
the first quarter, with the gap with the
parallel market exchange rate narrowing
somewhat. Foreign exchange reserves,
which have declined by 17% to US$20
billion between January- December 2016,
have remained relatively stable in the first
quarter. Inflation has turned down, slowing
for the second straight time to 39.4% in
February, after peaking at 42% in
December 2016, reflecting improved
foreign exchange inflows due to higher oil
prices at the end of 2016. We expect
inflation to moderate further in 2017 to
around 30%, but monetary policy is likely to
remain tight. The main risks to the outlook
relates to elections in August, still
disequilibrium in the foreign exchange
market and still elevated inflation. The
rebalacing of the foreign exchange market
will depend on the durability of current oil
price uptrend.
Zambia’s economic outlook is
strengthening. GDP growth is expected to
accelerate to 4 percent in 2017, following a
modest 3 percent growth in 2015-2016.
Economic reforms, recent rise in copper
prices and improving electricity supplies
will provide some fillip to growth. The
fiscal deficit is expected to narrow to 8
percent in 2017 from 8.9 percent in 2016.
The USD1.2 billion loan expected from the
IMF in 2017, will be a game changer to the
Zambian economy, helping to stabilize the
budget and shift the economy to a higher
gear. The government has also signed a
18 Bank of Zambia, Monetary Policy Committee statement, 22 February 2017
US$ 2.3 billion contract to build a railway
line linking the country to Malawi. The
expected issuance of Eurobonds in 2017
will help to close the financing gap for
capital projects. However, credit
constraints and high lending rates will
remain key drags to the economy. Inflation
has fallen considerably from 20 percent in
July 2016 to 6.7 percent in February 2017,
well below the target range of 9 percent,
on the back of appreciating kwacha and
dissipating drought effects. This has
allowed the Bank of Zambia to lower its
policy interest rates by 150 basis points to
14% and reduced the statutory reserve
ratio by 250 basis points to 15.5 percent18.
The outlook for some frontier economies
(Cote d’Ivoire, Ghana, Senegal and Kenya,)
remain bullish in 2017. Cote d’Ivoire’s
economy is projected to expand by 8%,
buoyed by a strong infrastructure
programme, robust domestic demand,
extensive international financial support
and stable inflation (1.7 percent in 2017).
Ghana’s economy is poised to grow at a
healthy pace of about 6 percent in 2017,
following a modest 3.3% growth in 2016.19
Growth will be supported by a gradual
increase in commodity prices, increased oil
production from the new Tweneboa-
Enyenra-Ntomme (TEN) oil fields, which
will boost oil production by 50%, and
reforms from the new government,
improving terms of trade and expected
increase in private sector lending. Ghana’s
new finance minister announced his
maiden budget in March, which focused on
reducing the fiscal deficit (-4% in 2016)
19 IMF, World Economic Outlook, April 2017.
17
through drastic expenditure cuts, coupled
with fiscal policy rules and increasing fiscal
revenues. The new government is expected
to continue with the fiscal consolidation
programme agreed by the IMF under the
Extended Credit Facility arrangement,
which attempts to reduce the fiscal deficit
and public debt (66 percent of GDP in
2016). Inflation continues to trend
downwards, reaching 13.2 percent in
February, but remains above the central
bank target of 8 percent. Easing
inflationary risks prompted the central
bank cut its policy rate by 200 basis points
to 23.5 percent in March, which will
provide further tailwinds to the economy.
The Cedi remains relatively stable in the
first quarter.
The Kenya’s GDP growth is expected to
moderate to 5.3 percent in 2017 from 6
percent in 2016, weighed down by a drop
in lending to private sector (4%), following
the capping of interest rates last
September. This will dampen investment
and consumption which have driven
growth in the previous years. The
government has even postponed several
bond issuances as investors drove interest
rates above the cap. The government is
considering to reassess the policy in light of
the negative repercussions. The PMI fell
from 52 in January to 50 in February,
reflecting that business that business
activity has stagnated. Political uncertainty
around August’s general elections and
elevated twin deficits of fiscal and current
account deficit of 6.4% and 6.1%,
respectively and high debt levels (52% of
GDP) could also saddle economic activity in
2017. Meanwhile, Kenya’s inflation has
jumped to 10.3 percent in March from 9
percent in February, the highest recording
since May 2012 largely driven by food
prices.
Senegal will maintain solid GDP growth
rate of 6.8% in 2017, sustained by robust
growth in agriculture, a dynamic private
sector and policy reforms (e.g. the Plan for
an Emerging Senegal). The agriculture
sector is benefiting from a good rainfall
season and government support
programmes. Rapidly growing exports will
help to reduce the current account deficit
from nearly 9% in 2014 to 8% in 2017. Also,
higher revenues will help fiscal authorities
to progressively close the fiscal gap, from a
deficit of 5% of GDP in 2014 to 3.7% in
2017. Debt ratio is trending downwards,
and expected at 56% of GDP, while inflation
is stable at 2%
Some low-income countries (Rwanda,
Tanzania and Ethiopia) will maintain their
robust growth paces in 2017, buoyed by
infrastructure development, mining
expansion and dynamic consumer
spending. Rwanda is expected to maintain
its healthy growth pace above 6 percent
over 2016-2017, boosted by strong policy
reforms, improving business regulatory
environment and infrastructure
investment. Tanzania’s economy will
expand at 6.8 percent in 2017, largely
supported by government-backed
infrastructure projects and robust
household consumption. The large
infrastructure programme include coal and
iron ore mines, a liquefied natural gas
terminal, an oil pipeline connecting with
Uganda, a railway line connecting
neighboring landlocked countries, a new
port in Bagamoyo and rural household
18
electrification. Further boost is provided by
the Central bank which has cut interest
rates to 12% from 16% in March. However,
the financing of a large infrastructure
programme is likely to be challenging and
could result in a sizeable fiscal deficit about
5 percent of GDP.
Ethiopia’s GDP growth will remain resilient
in 2017, with growth above 7 percent,
sustained by government’s investment
programme under the ambitious Growth
and Transformation Plan II (GTP II) focusing
on energy, transport facilities, healthcare
and education, despite drought affecting
agriculture production. The country
secured over US$ 200 million of loans from
China earlier this year and has started
constructing the first of 17 industrial parks
expected to bolster the manufacturing
sector. However, ongoing social unrests
are likely to deter investment.
Growth in some Southern and East African
countries, such as Zambia, Malawi,
Zimbabwe, Lesotho which were affected by
El Nino driven drought in 2016 is expected
to improve somewhat in 2017. Agriculture
output and hydroelectric generation in
these countries is set to increase in 2017,
following above normal rainfall received.
Some of the countries will need additional
financing to rehabilitate infrastructure
destroyed by La Nina driven floods.
However, Mozambique’s growth outlook
remains bearish, with low international
financial support, amid the debt distress
situation. Growth could slowdown to less
than 4.5 percent in 2017, as high inflation
above 20% is keeping monetary and fiscal
policy in tightening mode. The government
defaulted on a US$60 million coupon
payment due to creditors earlier this year
and the government is working on plans to
restructure its debt. A public debt audit
requested by the IMF is expected to be
released in the coming weeks. However, in
the Horn of Africa, including Somalia,
Ethiopia, South Sudan, Kenya and northern
Uganda, drought in 2017 will dampen
agricultural production and causing food
shortages to some 16 to 20 million people.
Financial Markets
As the global economic expansion gathers
momentum, financial market sentiment
continues to strengthen. Global equities
have continued register gains in the first
quarter of 2017, reflecting improving
consumer confidence and positive
macroeconomic data. The S&P-500
increased by 5 percent, while the
Eurostoxx50 gained 5 percent between
January and March, large reflecting the
Trump induced rally and improved
confidence. The MSCI global index edged
up by 5.4 percent in the first quarter, with
MSCI emerging market index delivering a
solid positive reading of 12.6 percent. The
Shanghai Stock Exchange picked up by 2.4
percent. The Nigerian stock market
however slided by 4.1 percent, reflecting
domestic challenges, while the
Johannesburg Stock Exchange was
recorded little change. However, the
‘Trump trade’ rally in the equities market
could fade soon, as investors seems to be
concerned about higher levels of the
19
indices, amid rising market volatility. The
global stock/bond (S/B) ratio is still
overbought compared to stocks (Figure 8),
which suggests that a
correction/consolidation phase may
prevail in the near term.
Figure 8: Global Stocks to Bond Ratios
Source: MRB Partners
Investor appetite for emerging markets
assets has been rising, with capital inflows
to emerging and developing countries,
especially bond and equity mutual funds
and international debt issuances firming in
the first quarter. Recent bond issuances by
the Arab Republic of Egypt, Nigeria, Oman,
and Kuwait attracted strong demand,
reflecting improved market sentiment20.
However, the appetite could wane in the
near term, as the Fed continues to tighten
its monetary policy, in the context of a
stronger dollar. The impact of such outflows
could be magnified if FDI inflows into
emerging markets are also reduced by
fears of rising trade protectionism. The
20 World Bank, Africa’s Pulse, April 2017
upleg of the U.S. dollar seen in the last
months is likely to moderate in the short
term, despite favorable interest rate
differentials, as Trump has expressed
concerns that the dollar is overvalued.
Several emerging market currencies
depreciated substantially in recent months,
most notably the Turkish lira, the Mexican
peso and Malaysian ringgit, while for other
commodity exporters, notably the Russian
rubble and Brazil real have appreciated.
Monetary policies of major central banks
continue to diverge. The US Fed has hiked
its interest rate in March, reflecting
positive economic performance and
20
favorable inflation outlook. Two more
interest rates hikes are likely in 2017, given
the strength of recent inflation impulses.
The Bank of England has kept its
benchmark interest rates at 0.25 percent
and its quantitative easing program since
August, while the ECB has kept its
monetary policy stance. Going forward, the
BoE will probably wait to see whether the
recent softness in consumer spending
persists and how investment responds to
Brexit negotiations before any monetary
policy change. In light of rising inflation (2%
in February) above the ‘danger zone’ level
of 1% the ECB is likely to raise its interest
rates in 2017 and start to taper its bond
buying programme. The Bank of Japan is
likely to maintain negative interest rates in
2017.
Elsewhere in emerging markets, a number
of central banks have cut their policy
interest rates in order to stimulate
economic activity. Brazil, Russia, Chile,
Colombia have cut their policy interest
rates by between 25-75 basis points in the
first quarter, which could provide some
tailwinds for equities. However, Mexico,
Kuwait and United Arab Emirates have all
hiked their interest rates by 25 basis points
in March to support their currencies and
tame inflationary pressures. In Africa,
Ghana, Rwanda and Uganda have cut their
interest rates, while other central banks
have kept their interest rates unchanged,
despite easing constraints in a number of
these countries.
Developed economies 10-year government
bonds have been moving sideways on
average, since the shift upside in July 2016.
This reflects long term inflation
expectations and prospects for faster
normalization of monetary policy. Bond
yields starting to turn down especially in
the UK, US and Germany (Figure 9). 10-year
US Treasuries declined by 27 basis points
between 14 March and 4 April 2017, while
10 year German Bunds shed 19 basis points
and UK 10 year bonds lost 13 basis points.
Japanese bonds were largely flat, while in
France bond yields have edged up at the
beginning of April, reflecting rising political
uncertainty ahead of elections end of
April/May (Figure 9).21 German and French
bond yields are decoupling, reflecting
varied risks perceptions in the two
countries.
21Bloomberg, March 2017
21
Figure 9: Bond yields (10 Year Bonds) of selected high income countries
Source: Bloomberg
Bond spreads have narrowed across the
world since the beginning of 2016,
reflecting improving market sentiment.
From January to March 2017, African and
emerging market bond spreads have fallen
by approximately 200 and 320 basis points
respectively. However, African bond
spreads notably in Angola, Ghana and
Zambia have remained elevated above the
emerging markets spreads, ending the first
quarter at 320, 318 and 258 basis points
above emerging market averages
respectively. The good news is that they
continue to be on a declining trend,
reflecting falling risk perceptions.
Figure 10: African Sovereign Bond Spreads
Source: Bloomberg
US France Germany UK Japan
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-31
EME Africa Ghana Namibia Nigeria South Africa Zambia Angola Kenya
22
Credit ratings have been relatively stable,
with few credit risk downgrades in African
countries so far in the year. Following some
months of scrutiny by rating agencies,
South Africa’s credit rating was
downgraded by S&P and Fitch to BB+ (junk
investment status) in March and April, on
concerns about rising political risks and
threat to growth. Mozambique’s credit
rating remains in selective default (SD) and
restrictive default (RD) by S&P and Fitch
amid continued debt distress situation and
unfavorable external condition. Table 2
shows credit ratings of selected African
countries as at 15 April 2017.
Table 2: Credit Ratings of Selected African Countries
S & P Moody’s Fitch
Country Credit Rating Outlook Credit Rating Outlook Credit Rating Outlook
Angola B Negative B1 Negative B Negative
CoteD’ Ivoire B Not Rated Ba3 Stable B+ Stable
Congo Republic B- Stable B3 Negative CCC Not Rated
DRC B- Negative B3 Stable B+ Not Rated
Ethiopia B Stable B1 Stable B Stable
Gabon Not Rated Not Rated B1 Negative B Negative
Ghana B- Stable B3 Stable B Negative
Kenya B+ Stable B1 Stable B+ Negative
Mozambique SD Negative CAA3 Negative Restrictive Default Not Rated
Namibia Not Rated Not Rated Baa3 Negative BBB- Negative
Nigeria B Stable B1 Stable B+ Negative
Rwanda B Stable B2 Stable B+ Stable
Senegal B+ Stable Ba3 Positive Not Rated Not Rated
South Africa BB+ Negative Baa2 Negative BB+ Stable
Zambia B Negative B3 Negative B Negative
Source: Bloomberg.
Going forward, financial markets will continue to grapple with a number of issues, including U.S. trade and immigration policy uncertainties, political risk in Europe and the impact of a looming slowdown in Chinese housing market or heavy industries and global economic prospects and monetary and fiscal policy conditions. While financial markets appear
to be betting on a fiscal stimulus in the US economy, Trump’s protectionist trade sentiments and tight immigration policies poses a potential threat to global growth and financial markets stability. The Brexit process and elections in France and Germany will also continue raise anxiety in the markets.
Commodity Markets
Commodity prices have been relatively
stable in the first quarter of 2017. Energy
prices eased slightly while non-energy
indices have marginally firmed up, on the
back of stronger market sentiment. The
IMF’s All Commodities Price Index barely
moved in the first quarter, despite the 37%
gain since the low tipping point in January
2016. Energy prices (oil, natural gas and
coal) fell by 2.6% in the first quarter,
following a 12% rally between November
and December 2016, largely driven by oil
23
prices, while the non-energy price index
rose by 2.9 % in Q1.
Figure 11: Commodity Price Indices
Source: IMF Primary Commodity System
Oil prices have remained range-bound
around $55/barrel in January and February
as OPEC and some non-OPEC oil producers
implemented their agreed production cuts.
However, growing shale oil production and
swelling oil stocks in the US slowed down
oil prices to average $52/bbl in March. The
EIA forecast Brent crude oil price to
average about $55/b in 2017, up from an
average of $44/b in 2016 and possibly edge
up to $57/b in 2018. Global oil demand is
projected by the US Energy Information
Administration (EIA) to grow by 1.5 mb/d in
2017, supported by stronger global
economic growth. On the other hand,
global oil supplies rose by 260 kb/d in
February to reach 96.52 mb/d, which is 170
kb/d less than a year ago. OPEC’s output
declined compared to a year earlier for the
second month in a row, but increased in
February by 170kb/d to 32 mb/d. It appears
as though OPEC members are sticking to
their agreed output cuts, with compliance
rate estimated by IEA at 98%, and some
countries such as Saudi Arabia over
complying, while non-OPEC countries have
reached 37% compliance so far. However,
the US has increased oil production in
response to higher prices with
expectations of 9.2 mb/d and 9.7 million
b/d increase in 2017 and 2018 respectively.
A relatively balanced oil market is
anticipated in 2017 and 2018, especially if
OPEC maintains its production at current
rates which could support prices at or
above their current levels. The outlook for
the oil market also depends on whether
OPEC and other oil producers agrees to
extend their output cuts for another six
months from July.
0
50
100
150
200
250
300
Pri
ce In
dic
es (
20
05
=10
0)
All Commodity Price Index Food and Beverage Price Index Agricultural Raw Materials IndexMetals Price Index Energy Price Index
24
Figure 12: World Oil Demand/Supply Balance and Oil Prices.
Sources: EIA and QGRL Staff Estimates
Precious metal prices were relatively stable
in the first quarter. Gold and silver inched
up slightly (0.2 percent and 1.7 percent)
since January, ending at $1,231 and $17.6
per ounce, respectively, while platinum
reversed its February gains to average $963
per ounce in March. Looking ahead to the
coming quarters, fundamentals for
precious metals seems to be more solid,
but prospects of further interest rate hikes
by the US Fed is a potential downside risk.
Figure 13: Precious metal prices
Source: Bloomberg
0
20
40
60
80
100
120
140
2013 2014 2015 2016 2017
US$
per
bar
rel
Crude Oil Prices
WTI Brent
WTI Forecast (EIA) Brent Forecast (QGRL)
0
5
10
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25
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Gold Platinum Silver
25
Most non-precious metal prices rose quite
strongly in the first quarter, led by iron ore
and uranium (Figure 11). Iron ore increased
by 21% and uranium rebounded 22% in the
first quarter, while zinc and copper also
posted double-digit growth rates.
However, tin and nickel prices declined by
4% and 5%, respectively. The medium-term
outlook is for moderate change in most
base metal prices over the coming year or
two, with the exception of iron ore, which
could turn down by 2017Q3. Trump’s
proposed $1 trillion infrastructure
spending plan could boost demand for
certain base metals. Supply of metals will
likely remain robust over the next few
years as a result of large capacity
expansions that were made during the
recent boom years.
The prices of grains firmed in the first
quarter, led by wheat which rose by 17%.
Prices of maize (5.5%) and barley (4.6%)
also picked up moderately, while the rice
price rose marginally by 1.2%, after falling
nearly 13% in the previous quarter. Wheat
price is forecast to strengthen by around 3-
6% for the next three quarters, while maize
price is expected to grow more slowly,
around 1-3%. Rice prices are also likely to
pick up moderately this year, while barley
will be flat. The agricultural raw materials
index (timber, cotton, wool, hides and
rubber) was down in 2016 by 6.8%, while
beverages dropped by 8.7%, reflecting
continued weakness in global demand,
rising supplies. On the outlook, rubber, is
likely to pare some of its recent gains, while
timber will be stable over the next few
quarters, as moderate gains in demand are
expected to be matched by expanded
supply. In Q1, 2017, some beverage prices
(e.g tea) have increased while, others (e.g
cocoa) have declined amid excess supply.
Coffee has been less volatile, and got some
support from higher demand growth in
Asia, as consumers shift from tea to coffee,
and weaker harvests in some leading
producer countries such as Columbia,
Vietnam and Brazil.
Overall, most commodity prices are
expected to remain relatively steady or
increase slightly this year, as global
demand is expected to strengthen
somewhat on the back of faster economic
growth. The outlook for commodity prices
depends on the decision to extend
production cuts by OPEC, supply response
of shale oil producers especially the US (in
the case of oil), the Trump Administration’s
economic and trade policies, the path of US
interest rates and the value of the dollar, as
well as global demand especially from
China and India. Detailed report on the
commodity markets is available at: QGRL
Commodities Outlook, 2nd Quarter, 2017).
Risks to Monitor
The outlook is positive but remain subject
to some downside risks. On the external
front, key risks relates to uncertainty of the
Brexit process amid calls for elections in
June this year, uncertainty of US policies,
elections in France and Germany and the
26
slowdown in China. Domestic related risks
relate to political and security concerns in
some countries and effects of La Nina-
driven floods in 2017.
The UK has triggered Article 50 by the UK in
March, but uncertainties about the
outcomes of the exit negotiations of the UK
especially on access to the EU single market
and immigration continue to linger,
possibly affecting trade and investment in
Europe and other countries especially in
Africa. Theresa May has called for early
elections in on 8 June, further complicating
the Brexit process and raising uncertainties
as new leadership will be expected. The
weakening of global trade could dampen
commodity prices and slow global growth.
One of the biggest risk fact to monitor is the rise in protectionism and immigration controls in the US under Trump administration. Possible trade restrictions could weaken U.S import demand, threaten global trade and integration and undermine global business confidence and investment. For SSA, the biggest risk relates to uncertainties on the Africa Growth and Opportunity Act (AGOA) trade agreement and other bilateral trade agreements, the Power Africa initiative and development assistance from the US to SSA such as the President's Emergency Plan for AIDS Relief (PEPFAR). Already the Trans Pacific Partnership agreement has been terminated, and there are indications that the US could cut global aid to developing countries by 30 percent. A cut in development assistance will mostly hurt the SSA’s smaller and fragile economies, which been relying on foreign aid. Africa could slide down the foreign priority list of the new Trump government, which could reduce investors’ risk appetite for the African markets.
In Europe, the heavy elections calendar presents a risk for African countries in 2017. While the Dutch elections in March were favorable for the markets and for European Union, elections in France and Germany continue to raise uncertainties, amid rising tide of populism and Eurocentric sentiments. French Elections will be held in April and possibly a runoff in May in case of no majority winner. France is an important partner to Africa. It keeps the foreign exchange reserves of 14 African economies in its Central Bank, provides significant development assistance and is considered a key player for political stability in the region. A victory by Le Pen could imply significant changes to French policies on Francophone Africa, affecting trade, investment, development aid and migration. Also the possible withdrawal of France from the EU (one of Le Pen’s central policies) could cause financial turmoil, dampen trade, investment and threaten the future of the European Union. A victory by Macron could be favorable to Africa. In Germany, there are questions about the survival of Angela Merkel, who is seen as a pillar for future of the EU. However, the risk in German is not as pronounced as in France, given that the other top contender, Schulz is pro-European Union and would possibly continue with European integration policies.
Continued geopolitical and unstable security conditions in the Middle East, especially in Syria and Iraq, continue to raise potential threats to global trade, undermine business confidence and economic activity. The recent attacks by US in Syria is heightening tensions with Russia and complicating the peace process. The risk of a significant deceleration in China’s housing market remains a risk in 2017, with a re-emergence of hard landing fears, especially since activity is showing signs of cooling. The disorderly unwinding
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of the housing market could ignite volatility in global financial markets, complicating the rebalancing process, and scuttling recovery of commodity prices. Emerging market risks assets would be most affected. The US Fed has raised policy interest rates for the third time on 15 March h to the 0.75-1% range, as widely expected by the markets. However, a faster-than-expected pace of interest rate hikes in 2017 could induce volatility in the financial markets, tighten in global financial conditions and lead to a sharp appreciation of the dollar, raising the cost of financing in frontier market economies in the SSA region. Forthcoming elections in Africa presents potential stumbling blocks for economic activity in some countries. Polls in 2017 include Kenya, Angola, DRC, Rwanda, Senegal, Sierra Leone and Liberia22. In DRC, the political environment remain plagued by political unrests. However, the death of a senior opposition leader earlier this year has severely weakened the opposition’s cohesion, with infighting in different parties slowing the implementation of the agreement to form a transitional government, which could guarantee a peaceful power transition. The environment remains tense. Elections in Kenya, Liberia and Sierra Leone could possibly delay plans to consolidate fiscal positions and allow the needed economic adjustment. In South Africa, political tensions continue to rise after the replacement of the respected Finance Minister, with continued calls and protests for President Zuma to resign. This has adversely affected investment and weakened business and market sentiment, while the rand has depreciated markedly, prompting credit rating downgrades. 22 National Democratic Institute:
https://www.ndi.org/electionscalendar
In East and Southern Africa, while La Nina weather conditions brought above normal rainfall, which improved electricity production and agricultural production, but caused severe floods which damaged crops and infrastructure in South Africa, Zimbabwe, Mozambique and Malawi. Meanwhile, the Horn of Africa, including
Somalia, Ethiopia, South Sudan, Kenya and
northern Uganda remain in a drought
which is causing food shortages to some 16
to 20 million people23.
Conclusion
The global economy is gradually gaining
momentum, following sluggish growth in
2016. Global growth is projected to
strengthen to 3.5 percent in 2017, on the
back of continued broad based recovery in
the high-income countries, especially US,
Canada and Japan and easing of conditions
in developing and emerging economies.
The recovery pattern is quite uneven
between countries. High income countries
are anticipated to grow at 2 percent, while
developing countries are expected to grow
at 4.5 in 2017. Growth in high income
countries is supported by continued
accommodative monetary policy and
expansionary policies while emerging and
developing economies are benefiting from
improving commodity prices and easing
constraints in large economies such as
Brazil and Russia. The rebalancing of the
Chinese economy is on course, but
concerns about the housing market are
raising hard landing scares in 2017. Growth
in Sub-Saharan Africa is expected to
rebound moderately in 2017, supported by
improving external demand, expected
23 http://reliefweb.int/report/somalia/drought-horn-africa-points-need-long-term-solutions
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recovery commodity and policy
interventions.
Monetary conditions are expected to
remain accommodative in many developed
economies, while the pace of
normalisation of US monetary policy could
increase somewhat. Global financial
markets have been generally stable since
the beginning of the year, and sentiment is
holding up, but remain prone to some risks
in 2017. The rally in equity markets seen
towards the end of 2016 is likely to fade
soon, with correction phase for risk assets
likely to prevail in the near term.
Commodity prices have also stabilized
following some improvement towards the
end of 2016. Oil prices averaged $44 per
barrel in 2016 and are projected to average
$55 per barrel in 2017, as the agreement by
OPEC and several other exporters to cut
production takes shape. Other commodity
prices are expected to strengthen
moderately, as global demand improve and
markets balance. Global trade is expected
to gain strength in 2017, but the risk of
rising protectionism remain visible. Global
inflation is gradually picking up, lifted by
the upturn of commodity prices and rising
import prices. The outlook is subject to
some downside risks emanating from
policy uncertainties related to the rise of
protectionism in the US, the pace of
interest rate hikes in the US, major
elections in Europe and African countries,
uncertainties surrounding the Brexit
process, possible unwinding of China’s
housing market, geopolitical risks, political
and security risks in Africa and La Nina
driven floods. Despite these risks
uncertainties, the economic outlook
especially in Sub-Saharan Africa is
brightening.
