Time for a Policy Reset · ²The frontier markets spread includes the spreads of Côte d'Ivoire, Gabon, Ghana, Kenya, Nigeria, Senegal, Tanzania, and Zambia. International Monetary

International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016

1

Time for a Policy Reset

Regional Economic Outlook for sub-Saharan Africa

African Department International Monetary Fund

May 2016


Outline

• Anatomy of a slowdown

• Policy reaction so far

• Time for a policy reset

2


Global Factors

• Slowdown in commodity prices – impacted global investment and trade

• Rebalancing in China

• Slowdown in capital flows and financial market volatility

3


4

Real GDP Growth, 2000–16

A sharp slowdown in growth since mid-2014…


… with a significant slowdown in oil exporters …

5

Oil Exporters: Real GDP Growth


… and in most other commodity exporters.

6

Other Resource-Intensive Countries: Real GDP Growth


But countries not heavily reliant on commodity exports are generally faring well

7

Non-Resource-Intensive Countries: Real GDP Growth


… with Sub-Saharan Africa’s trade balance with China turning into a deficit

8

Sub-Saharan African: Trade Balance with China, 2005–15


9

At the same time, external financing costs have increased sharply for the region’s frontier markets

Sovereign Bond Spreads

(EMBIG spreads)

Note: Data as of April 21, 2016. 1The emerging market average includes the Emerging Market Bond Index Global (EMBIG) spreads of Argentina, Brazil, Bulgaria, Chile, Colombia,

Hungary, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Turkey, and Ukraine.

²The frontier markets spread includes the spreads of Côte d'Ivoire, Gabon, Ghana, Kenya, Nigeria, Senegal, Tanzania, and Zambia.

International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 10

Fiscal policy has responded to the shock, but not yet sufficiently…

Change in Government Expenditure and Revenue, Average 2010–13 to 2015


… triggering increased debt financing…

Total Public Debt, 2010–15


… rising domestic financing costs…

12

Fiscal Stance and Increase in Treasury Bill Rates

Size of bubbles proportional to increase in treasury bill rate, January 2014 to latest available


… and in some cases increased recourse to Central Bank financing

13

Advances from the Central Bank, 2010–13 and 2015


Many countries have allowed the exchange rate to absorb part of the shock…

Sub-Saharan Africa: Depreciation of National Currency Against U.S. Dollar

Since October 2014 (+ indicates depreciation)


…while deploying monetary policy to mitigate inflationary pressures

Change in Monetary Policy Rate

Since December 2014 Change in Base Money Growth

From 2014 to 2015


Meanwhile, private sector borrowing is decelerating…

Private Sector Credit Growth

16


…with financial soundness indicators weakening

Nonperforming Loans, Average 2010–13 versus 2015

17


So, is Africa still Rising?

• The underlying drivers of strong medium-term growth prospects remain in place

– A much improved business environment

– Favorable demographics

• But a policy reset is required to realize the region’s potential


19

So far, three key factors underpinned the solid performance of the last decade

Better policies and

institutions

High Commodity

Prices

Capital Inflows


20

… but oil producers face a historically large and likely long-lasting shock

Largest Episodes of an 18-month Decline in Real Crude Oil

Prices,1970–2015


-4

-3

-2

-1

0

1

2

3

4

5

2000 04 08 12 16 20

April '08 April '11 April '16

AEs: Real GDP Growth (percent; various WEO forecast vintages)

Sources: IMF Staff estimates.

Global growth baseline -- moderate and uneven

21

0

1

2

3

4

5

6

7

8

9

2000 04 08 12 16 20

April '08 April '11 April '16

EMs: Real GDP Growth (percent; various WEO forecast vintages)


… and risks to the outlook are tilted to the downside

Global

• A renewed decline in oil and commodity

prices

• Further volatility in global financial

markets

• A further slowdown in Europe

Domestic

• Protracted policy adjustment

• More prolonged drought in eastern and

southern Africa

• Intensification of security challenges in

the region

22


A prompt and robust macroeconomic policy response is needed…

Fiscal Policy

• Fiscal adjustment is urgently needed

in oil exporters, but also in hard-hit

other commodity exporting countries.

• Oil importers, many of whom are

enjoying robust growth, should use

this opportunity to build buffers.

Monetary and exchange rate policy

• Outside currency unions, exchange

rates, combined with supportive fiscal

and monetary policies, should be the

first line of defense.

• Monetary tightening should respond

to inflationary pressures, if they arise

from exchange rate depreciation.

• Central banks should limit

government financing.

23


… including on the structural front

• Countries should strengthen revenue mobilization as it is the most durable way to create fiscal space

• Countries should aim to better prioritize development spending, to effect development goals

• The current juncture is also a reminder of the need for all countries in the region to advance the economic diversification agenda


The Case of Nigeria

25

Large External Shock and Worsening Macroeconomic Conditions


Nigeria: Macro-financial map

26


Macroeconomic conditions worsened

27

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0Oil Non-Oil: Manufacturing Non-Oil: Other GDP

Source: Nationa Bureau of Statistics.

Nigeria: Contributions to Growth, 2011-15

(Percent)

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

CPI Core (excl. Farm Produce) Farm Produce

CPI Inflation (Percent, y-o-y)

Sources: NBS; and Staff estimates.



-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2009 2010 2011 2012 2013 2014 2015

Overall balance (rhs)

Revenue

Expenditure

Sources: Nigerian authorities; and IMFstaff estimates and projections.

Nigeria: Recent Fiscal Development

(percent of GDP)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Exports of goods and services Imports of goods and services

International Trade(y-o-y percent change)

Source: Haver Analytics.



-15

-10

-5

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015(f)

Current Account Balance

(Percent of GDP)

Non-oil exportsCurrent account balanceOil trade balanceNon-oil current account

Sources: Haver Analytics; and IMF staff estimates.

0

5

10

15

20

25

30

2011 2012 2013 2014 2015 (Q1-Q3)

Total Capital Inflows

(Billion U.S. dollars)

FDI Portfolio liabilities Other liabilities Total

Sources: Haver Analytics; and IMF staff calculations.



20

25

30

35

40

45

Jan-14 Jul-14 Jan-15 Jul-15

Gross reserves

Reserves minus cumulative inflows from FX swaps

Foreign Currency Liquidity

(Billion U.S. dollars)

Sources: Central Bank of Nigeria; and IMF staff calculations.

150

170

190

210

230

250

270

290

Jan-2014 July-2014 Jan-2015 July-2015 Jan-2016

Interbank Market 12-month NDF

Bureau de Change

Source: Bloomberg and CBN.

Exchange Rates

(Naira per U.S. dollar; monthly average)


… and pressures are emerging in banks

31

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2011

Q4

2012

Q4

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

Non-Performing Loans Net of Provisions to Capital

Regulatory Tier 1 Capital to Risk-Weighted Assets

Liquid Assets to Total Assets (Liquid Asset Ratio)

Nigeria: Financial Soundness Indicators, 2011-15(Percent)

Source: CBN.


… tax capacity is too low for strong growth


… Actual vs. potential tax capacity


…low debt but

34

BZL

CRI

EGY

ERI

GMB

GHA

GRC

IND

JAM

JPN

LBN

NGA

PAK

LKAYEM

0

50

100

150

200

250

300

0 10 20 30 40 50 60

Debt

(Per

cent

of G

DP)

Interest Payments (Percent of Gross Revenue)

Sources: IMF.

Niegria: Interest Payments, 2015 (Percent of Federal Government Gross Revenue)


…high debt service

35

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

AA

A

AA

+

AA

AA

-

A+ A A-

BBB+ BB

B

BBB-

BB+ BB BB-

B+

B B-

CCC

CCC

-

CC SD

NG

A

Nigeria: Interest Payments, 2015(Percent of Federal Government Revenue)

Sources: IMF; and S&P.


36

Policy adjustment is necessary and urgent to deal with

external and domestic shocks


Integrated Package of Measures

• Promote fiscal sustainability

• Reduce external imbalances

• Safeguard resilience and enhance financial system efficiency

• Improve competitiveness through structural reforms and infrastructure investment


Coherent policy mix

Growth

Employment

Resilience

FX market infrastructure;

FX regime

Fiscal policy: revenue;

expenditure; debt strategy;

SLG budget reform

Monetary policy; inflation; cost of capital; access

Structural reform: Business

environment; competitiveness; industrial policy

Communication policy

38


Thank you!

The online edition of the Regional Economic Outlook

for sub-Saharan Africa is now available online at

www.imf.org

Documents

Time for a Policy Reset · ²The frontier markets spread includes the spreads of Côte d'Ivoire, Gabon, Ghana, Kenya, Nigeria, Senegal, Tanzania, and Zambia. International Monetary