Growth pulse is at risk for net importing SSA’s whose inflationary pressure could shape tighter monetary policy direction
Growth has become a very topical issue globally especially in light of the autopsy of the trade impasse between United States and China. Brexit is another pain point breeding uncertainty that is manifesting in market nervousness across the European Union – EU area. Geopolitical tension between US and Asian nations is affecting supply of crude oil which is affecting global risk sentiment and appetite for assets.
The World Bank recently lowered growth forecasts for Sub Saharan Africa – SSA nations to 2.5% from 2.8% for 2019 while the IMF slashed global growth forecast to 3.5% for 2019. Much as Africa’s drivers of lower growth gravitates around ballooning debt fueling infrastructure spend, there is another risk to growth for net oil importers dubbed, ‘Oil price bulls.’
Crude reverberating at all time 2019 highs
Crude has recently been on an upward trajectory supported more by supply and demand fundamentals. On the morning of 25 April, the global bench mark for oil, ICE Brent futures, are trading for $74.5/bbl while WIT US futures are trading for $65.75/bbl. These levels have held firm for three weeks now as effects of Iranian sanctions transmit supply concerns backing the OPEC countries posture to cut production to 1.2 million barrels a day. This trend is expected to extend to periods after June. Oil supply has been affected by the turmoil in Venezuela, instability in Libya and South Sudan which have shorted the market supporting the price of crude upwards. The US this week gave an ultimatum to nations that were given waivers to buy Tehran oil earlier to cease by 01 May. The US has succeeded in costing Iran $10 billion in revenues from May 2018 when it imposed sanctions on Iran which ideally generates $50 billion annually in oil exports. The US is now the largest producer of crude after Russia and Saudi Arabia. Donald Trump has been the biggest suppressor of capping crude price rally’s through aggressive pumping of crude. See Brent crude graph below:
SSA could be pricing in more fuel price hikes
Most African nations will be re-looking their fuel pricing models in light of the bullish run which has seen Brent take recently. If this happens elevation in manufacturing costs curves will take effect and pressurize factory activity and manufacturing pulse. It will not be shocking to see weaker purchasing managers indexes in the coming months on the back of cost push inflationary effects from higher input costs which is usually the case with higher fuel costs. Nations like Zambia, Malawi, South Africa, Botswana, Kenya, Tanzania and other net importers will bear the brunt of higher crude prices. If oil bulls persist, growth risks will widen for SSA nations which already grapple with resource allocation constraints from high debt service.
Inflationary pressure could transmit to central banks
Inflation is a bigger evil in shaping monetary policy and to that effect if crude prices burden SSA nations, Africa may observe a higher price of money which could constrict economies threatening growth. However on the flip side of the coin, exporting nations will likely benefit from a wider revenue net to aid cushion fiscal budget deficits. The likes of Gabon, Angola, Nigeria, South Sudan etc will have their growth prospects accelerated.
Could also be a currency pressure driver
From experience, a higher crude costs entails a wider import cost both in dollar and local currency terms. The challenge most SSA’s have is sourcing the dollars to fund purchases and for those still riding on subsidies, the cost of cushioning and absorbing the incremental cost is massive. Some nations then start to burn reserves faster and risk depletion. The import cost paradox always has a way of exerting pressure on the local currencies and in a very strong dollar environment like currently evidenced by DXY index at 98.3 (DXY is the dollar index measured against a basket of 6 major currencies) depreciation pressure is very high on frontier currencies. And for nations with debt service obligations, the costs remain fairly elevated.
Written by Mutisunge Zulu an Economist and Finance expert serving as National Secretary for the Economics Association of Zambia.
