African risk premia falling as polycrisis recedes

African risk premia falling as polycrisis recedes
Risk premia in Africa in many countries as the polycrisis begins to recede / bne IntelliNews
By Ben Aris in Berlin July 2, 2023

Risk premia in Africa have experienced a decline over the past month as the worst of the polycrisis begins to recede, says Capital Economics in a note on June 30.

In Nigeria, the largest economy in the region, this shift can be attributed to significant policy changes since President Tinubu assumed office in late May.

The removal of costly fuel subsidies and the devaluation of the naira have played a role. Other factors include the commitment of policymakers to fiscal consolidation in Kenya, easing geopolitical tensions in South Africa, and progress in debt restructuring talks in Zambia and Ghana. However, as advanced economies slip into recession, we anticipate a worsening of global risk appetite in the coming months. Any signs of fiscal slippage in Africa could reignite concerns about debt.

Nigeria's departure from "Buharinomics" will result in some short-term economic challenges, with inflation expected to exceed 35% year on year. The central bank is likely to implement further monetary tightening. While the balance of payments should become more sustainable, we hold a less optimistic view regarding the authorities' ability to prevent a continued increase in public debt.

South Africa received some rare positive news in the past month. GDP data confirmed that the economy managed to avoid a technical recession in the first quarter. Additionally, the rand appreciated against the dollar, and inflation declined more than anticipated in May. Coupled with the recent decrease in risk premia, these developments might be sufficient for the South African Reserve Bank to maintain interest rates at July's meeting rather than raise them.

Angola's economy appears to have recently slowed down, accompanied by significant policy changes. The central bank allowed the kwanza to weaken, resulting in a 35% depreciation against the dollar since mid-May. The removal of fuel subsidies will lead to increased inflation and may prompt the central bank to reverse its recent easing measures.

In an effort to prevent a sovereign default, Kenya's approved budget for 2023/24 outlines further fiscal consolidation measures. However, the economy seems to be facing challenges, and a rise in inflation in May led the central bank to raise interest rates at an unscheduled meeting.

The latest data indicate that the worst impacts of Ghana's recent crisis on the real economy have subsided, reports Capital Economics. GDP growth improved in the first quarter, and low-level indicators continued to show further improvement at the beginning of the second quarter.

In financial markets, significant movements have occurred in some of the region's currencies over the past month. The Nigerian naira and Angolan kwanza both depreciated by more than 30% against the dollar. Meanwhile, sovereign dollar bond spreads generally narrowed across the region.


President Bola Tinubu of Nigeria wasted no time dismantling the unorthodox and distorting policies implemented by his predecessor. In a surprising move during his inauguration speech, Tinubu announced the immediate removal of costly fuel subsidies (1). Additionally, following the suspension of CBN Governor Godwin Emefiele, the naira was devalued and the exchange rate windows were unified. As a result, the naira is currently being traded at around 760/$, compared with the previous rate of 460/$ and close to the parallel market exchange rate of 770/$ (2).

However, this rapid policy shift is expected to bring about some short-term economic challenges. Inflation, which had already reached a 17-year high of 22.4% y/y in May, is anticipated to climb even further, surpassing 35% y/y in the coming months (3). Consequently we now predict that the central bank will implement an additional 500 basis points of interest rate hikes, bringing the rate to 23.50%. Moreover, we have revised down our GDP growth forecasts, projecting a mere 2.0% growth for this year and 2.3% in 2024.

“We are sceptical that this represents a full U-turn from “Buharinomics” but if the policy shift sticks, the balance of payments will be placed on a more sustainable footing. Admittedly there will be little boost to exports, as these are mainly oil, and imports may rise if FX restrictions are scaled back (5). But foreign investment should recover. The fall in risk premia suggests this may already be happening. Any boost to the public finances is likely to be limited, given the president’s preference to spend any additional resources,” said Jason Tuvey, deputy chief emerging markets economist at Capital Economics, in a note.

South Africa

South Africa's economy has received some rare positive developments in the past month. It managed to avoid a technical recession in the first quarter, with a quarterly GDP growth of 0.4% (7). The growth would have been stronger if not for a temporary decline of 12.3% in agricultural output during the same period. Furthermore, April's activity data suggest a promising start to the second quarter (8). However, the economy will still face challenges due to tight policies and ongoing power outages, which will weigh on future growth.

In terms of currency, the South African rand has experienced an appreciation of approximately 6% against the US dollar this month, although there has been a recent minor decline (9). This appreciation has helped partially recover the losses suffered earlier in the year. Additionally, the narrowing of the current account deficit in the first quarter to 1% of GDP, down from 2.3% in the fourth quarter, has contributed to the currency's strength (10).

“Inflation declined in May to a weaker-than-expected 6.3% y/y, leaving it only slightly above the upper end of the Reserve Bank’s (SARB’s) 3-6% target range. Core inflation fell too. And taken together with the decline in South Africa’s country risk premium, which the SARB is incorporating to a greater extent in its rate setting decisions, we feel more confident in our view that the tightening cycle is now at an end,” says Tuvey.


Angola's economy experienced a slowdown towards the end of the previous year, and the latest data indicate that the first quarter of this year was even weaker. In Q1, industrial production witnessed a decline of over 6% y/y, primarily driven by a double-digit decrease in output from extractive industries. This decline can be attributed to a sharp fall in oil production, although there has been a recovery in production levels in April and May.

On the policy front, notable developments have taken place. The central bank of Angola has allowed the national currency, the kwanza, to weaken. As a result, the kwanza has depreciated by 35% against the US dollar since mid-May. Fortunately this depreciation in the currency has not significantly intensified concerns regarding sovereign debt.

“But it, alongside the recent decision to remove fuel subsidies, will push up inflation, which came in at 10.6% y/y in May (the lowest reading recorded on the current inflation series). And the resulting rise in inflation could prompt the central bank to reverse its recent easing cycle,” says Tuvey.


Kenya's parliament has given its approval to the 2023/24 budget, which outlines the government's efforts to achieve further fiscal consolidation and prevent a sovereign default. Under the Ruto administration, the aim is to reduce the budget deficit from 5.8% of GDP in the current fiscal year to 4.4% of GDP in 2023/24, with further reductions to 3.6% of GDP in 2025/26 (19). This will primarily be accomplished through tax increases. Additionally, President Ruto has unveiled plans to repurchase half of a $2bn Eurobond before its maturity in June 2024.

While there has been a narrowing of dollar bond spreads (20), it remains uncertain whether the authorities can sustain austerity measures, especially considering the potential risk of social unrest. The country's foreign exchange reserves have been declining (21), leaving little room to avoid default. Meanwhile, the economy is facing challenges. The purchasing managers' index (PMI) showed a slight improvement in May, reaching 49.4, but still indicating contraction (22). Although tourist arrivals have been gradually recovering, they have not yet reached their pre-pandemic peak (23).

“Meanwhile, inflation edged up from 7.9% y/y in April to 8.0% y/y in May (24). The rise in inflation was broad-based across sub-categories with non-food, non-transport inflation hitting 6.4% y/y – its highest level since late-2018. This prompted the central bank to hike interest rates by 100bp, to 10.50%, in an unscheduled meeting this month. We think that marks the end of the tightening cycle,” says Tuvey.


The most recent data confirms that Ghana's economy is overcoming the severe impact of the recent crisis. The latest GDP figures reveal that the economy experienced a 1.1% quarter-on-quarter expansion in Q1, marking its strongest performance since Q4 2021. This positive growth has contributed to a y/y growth rate of 4.2%. The breakdown of the data indicates that the surge in the services sectors has been a key driving force behind this improvement.

Timely indicators further suggest that the recovery has extended into the beginning of Q2. The overall economy's PMI has rebounded, indicating a strengthening of growth to approximately 1.5% q/q. Additionally, the Bank of Ghana's business and consumer confidence indices continue to show signs of recovery (28). Despite these positive developments, we expect growth to remain subdued and fall short of most expectations throughout 2023-2025.

While the recent data provides encouraging signs of a resilient recovery, there are still underlying challenges that may hamper sustained growth. External factors, such as global economic uncertainties, can have an impact on Ghana's economy. Moreover, domestic factors, including inflationary pressures and fiscal constraints, may pose risks to the pace of recovery. Therefore it is essential to remain cautious and monitor these potential headwinds.

Nevertheless, Ghana's ability to bounce back from the worst effects of the recent crisis and achieve positive growth is a welcome development. The strong performance in the services sectors and the ongoing rebound in business and consumer confidence demonstrate resilience within the economy. With continued efforts to address the challenges and pursue supportive policies, Ghana can navigate its path towards sustainable and inclusive growth in the coming years.

"After declining from a peak of 54.1% y/y in December, inflation edged up to 42.2% y/y in May. The rise was primarily due to a jump in food inflation, whereas non-food inflation continued its downward trend. This is unlikely to prompt the Bank of Ghana to restart its tightening cycle and we still expect rate cuts to come on to the agenda later this year. Finally, the finance minister said that the government hopes to conclude its debt restructuring by September, which supported a narrowing of dollar bond spreads," says Tuvey.