The recent shift to a more dovish tone from the Fed has allowed African central banks to begin a cautious easing of their domestic monetary stances, with rate cuts so far this year in Nigeria, Ghana, Kenya, Tanzania and Malawi.
African leaders are hoping the recent creation of a colossal 54-nation trade agreement, the African Continental Free Trade Area, will connect 1.3 billion people, create a $3.4 trillion economic bloc, and improve commerce within the continent itself.
Central bankers across Africa are paying special attention to the noises coming out of the U.S. Federal Reserve as they mull impending calls on monetary policy easing.
On Thursday, the South African Reserve Bank announced its first cut to interest rates in over a year, lowering rates by 25 basis points to 6.5% as the continent’s most industrialized economy tackles low inflation and its starkest contraction for over a decade in the first quarter.
Ghana, Nigeria, Kenya and Angola will all set rates this week. Nigeria recently passed measures compelling banks to boost lending, while a drought in Kenya drove up inflation.
“Monetary policy in Africa has been held hostage to the Fed hiking cycle for the past 18 months, with African central banks maintaining nominally high domestic interest rates to protect their currencies against capital outflows, despite an improving inflation outlook,” Ipek de Vilder, European executive director at international brokerage network Auerbach Grayson, told CNBC.
“The policy is working as 2018 was the first year since 2015, when African currencies were essentially flat vis-à-vis the U.S. dollar relative to annual deprecation about -10% over the previous four years,” she added.
When the Fed tightens policy for an extended period it tends to lower demand for traditional U.S.-based safe haven assets, sending investors searching for return elsewhere. This often facilitates a windfall for emerging markets and causes central banks to mirror Fed measures to stabilize supply and demand.
The recent shift to a more dovish tone from the Fed has allowed African central banks to begin a cautious easing of their domestic monetary stances, with rate cuts so far this year in Nigeria, Kenya, Tanzania and Malawi. Ghana’s monetary policy committee on Friday voted to maintain its current policy rate of 16%.
Thus far, these have been within the 50 to 100 basis point range, though with inflation generally on the slide, de Vilder suggested that further easing of monetary policy could be due this year. While all are due to vote on rates before the U.S. central bank makes its decision on July 31, the Fed’s dovish stance might lessen pressure on tightening and provide room for easing.
“As rates trend downwards, we are likely to see domestic institutions shift back towards higher equity allocations and underpin a rerating of the market,” de Vilder said.
Roadside vendors in Lagos central district, Nigeria.
Pius Utomi Ekpei | AFP | Getty Images
Beware the headline figures
In the context of escalating geopolitical and market uncertainty in developed economies, investors are increasingly likely to explore opportunities in “frontier” markets, according to Jeff Gable, head of research at pan-African bank Absa Group.
“I do think this is the place to be for the next 10, 20, 30 years but that doesn’t mean every day is going to be easy,” Gable told CNBC on Friday.
He stressed the importance for international investors of looking beyond the headline figures, which in aggregate terms are weaker now than they were a few years ago.
“African economies tend to be less diversified and the markets tend to have a large reliance on the informal economy. This makes it more complicated in comparing countries. For example simply looking at debt to GDP (gross domestic product) in isolation, l might not provide a useful picture. What is the debt level as compared the country’s ability to generate tax revenues, for example, or as compared the level of interest rates?” Gable explained.
The other key draw for investors in the coming years is going to be the continent’s “insatiable appetite for infrastructure,” he projected.
Voters want clean water, access to roads, housing, a health care system and education for their children, all of which cost governments money but are indispensable at the ballot box.
“In an environment where the balance sheet is more constrained, governments are going to have to be reaching out to the private sector to look to provide infrastructure services, so those companies that are exposed to this are going to be more attractive,” Gable explained.
De Vilder also highlighted trends of generally higher GDP growth, underpinned by relatively young populations, relatively low debt and urbanization.
“In the 1950s in Africa only 20% of the population was living in the cities, these days 40% and by 2050, we are expecting this number to increase 75%. This will mean increase labor productivity, specialization and increased consumption,” she said.
At present, only 19% of African nations’ trade happened within the continent in 2018, compared to 59% and 69% for Asian countries’ intra-Asia trade and European countries’ intra-Europe trade respectively, according to Brookings Institution’s January numbers.
But the recent creation of a colossal 54-nation trade agreement, the African Continental Free Trade Area, could be set to change all that.
If the massive deal works as hoped, it will connect 1.3 billion people, create a $3.4 trillion economic bloc, and improve commerce within the continent itself.