time for a policy reset · ²the frontier markets spread includes the spreads of côte...
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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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Outline
• Anatomy of a slowdown
• Policy reaction so far
• Time for a policy reset
2
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Global Factors
• Slowdown in commodity prices – impacted global investment and trade
• Rebalancing in China
• Slowdown in capital flows and financial market volatility
3
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
4
Real GDP Growth, 2000–16
A sharp slowdown in growth since mid-2014…
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… with a significant slowdown in oil exporters …
5
Oil Exporters: Real GDP Growth
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… and in most other commodity exporters.
6
Other Resource-Intensive Countries: Real GDP Growth
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
But countries not heavily reliant on commodity exports are generally faring well
7
Non-Resource-Intensive Countries: Real GDP Growth
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… with Sub-Saharan Africa’s trade balance with China turning into a deficit
8
Sub-Saharan African: Trade Balance with China, 2005–15
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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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.
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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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 11
… triggering increased debt financing…
Total Public Debt, 2010–15
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… 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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… and in some cases increased recourse to Central Bank financing
13
Advances from the Central Bank, 2010–13 and 2015
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 14
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)
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 15
…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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Meanwhile, private sector borrowing is decelerating…
Private Sector Credit Growth
16
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
…with financial soundness indicators weakening
Nonperforming Loans, Average 2010–13 versus 2015
17
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 18
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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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So far, three key factors underpinned the solid performance of the last decade
Better policies and
institutions
High Commodity
Prices
Capital Inflows
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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… 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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
-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)
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… 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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 24
… 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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
The Case of Nigeria
25
Large External Shock and Worsening Macroeconomic Conditions
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Nigeria: Macro-financial map
26
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Macroeconomic conditions worsened
-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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Macroeconomic conditions worsened
-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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
Macroeconomic conditions worsened
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)
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
… 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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 32
… tax capacity is too low for strong growth
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 33
… Actual vs. potential tax capacity
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
…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)
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
…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.
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
36
Policy adjustment is necessary and urgent to deal with
external and domestic shocks
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 37
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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016
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
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International Monetary Fund, Regional Economic Outlook for Sub-Saharan Africa, April 2016 39
Thank you!
The online edition of the Regional Economic Outlook
for sub-Saharan Africa is now available online at
www.imf.org