Renaissance Capital lowers growth forecasts for Nigeria and Kenya

08 Jul 2015
Financial Nigeria

Summary

Muted economic growth has implications for slowdown in corporate earnings and consequently a negative impact on equities.

Nigerian President, Muhammadu Buhari

Renaissance Capital has lowered its 2015 growth forecast for Nigeria and Kenya. In a report, Sub-Saharan Africa’s growth slows: A look at Nigeria and Kenya, released on July 8th, the U.S.-based IPO investment adviser said a number of factors including, low commodity prices, weak global demand and domestic structural constraints have contributed to a slowdown of Sub-Saharan Africa’s oil exporting and importing economies.

Over the past two months, the Central Bank of Kenya has tightened monetary policy and increased the policy rate by 300 basis points to 11.5% – above market expectation. Renaissance Capital says it expects further hikes in 2H15 – in a bid to defend a weakening shilling. The negative impact of this policy stance would be slow growth in credit. Downside risks to Nigeria’s growth outlook continue to mount. These include what has become recurrent fuel shortages, which has remained for the better part of 2Q15 due to unresolved fuel subsidy payments. Fuel marketers have held back supply of PMS over unpaid subsidy arrears of $1.5bn. At the height of the crisis in May, major businesses including banks and telecommunication companies were shuttered due to acute fuel scarcity.
 
In Kenya, there has been a decline in the activities of the hotel and restaurant sector due largely to persistent insurgent attacks on the country, not unlike in Nigeria. Tourism is a significant contributor to Kenya’s GDP. Given these headwinds, including decline in exports, Renaissance Capital has lowered the growth forecast for Kenya to 5.2%, from 6.0%.

“We expect the (investment-driven) acceleration in Kenya’s growth to be deferred, partly due to tighter monetary policy. Although growth quickened in 1Q15 to 4.9% YoY, from 4.7% YoY a year earlier, it was softer than the previous quarter’s growth of 5.5% YoY,” Renaissance Capital reported.  

Meanwhile, it has lowered Nigeria’s growth forecast from 4.5% to 3.4% for 2015. Renaissance Capital sees demand-side headwinds such as unpaid salaries of government workers who constitute about one-third of the country’s 11 million formal workforce. The government of President Buhari has announced the sharing of some dividends accruing to the Federation Account and a CBN intervention fund to bail out the indebted states. The fall in government revenue, the ban on the sourcing of foreign exchange for the importation of some 41 items have material implications for growth in Nigeria. The CBN forex embargo “is negative for consumption and makes it harder to invest, which is negative for growth. The prices of these items are likely to rise in the short term, on the back of this policy,” said Renaissance Capital in its report.

The investment research provider further states that: “We see inflation (in Nigeria) at c. 13% at YE15, from 9.0% YoY in May. The halving of the oil price implies government spending is a fraction of what it was a year ago, which is negative for growth. We think our 3.4% growth forecast for 2015 (which we lowered from 4.5% in our 14 April note, Nigeria GDP: How low could growth go?)...”

According to the RC, muted economic growth has implications for slowdown in corporate earnings and consequently a negative impact on equities. But there might be some opportunities. For instance, in Nigeria, government borrowing may provide needed liquidity and compensate for revenue shortfall. In Kenya, a weakened shilling may be positive for Kenyan exports and tourism, if security concerns do not offset that advantage.


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