1

Macroeconomic and Market Outlook1

Quarter 1, 2018

Sustaining the upturn: More hope than fear

Highlights

The global economic momentum is continuing moderately. Global economic growth is

projected to pick up to 3.9% in 2018, as broad based activity firm up in both advanced

economies and developing and emerging market economies.

The adjustment of Chinese economy is proceeding at a measured pace, as drivers of

growth shift from investment to consumption and services.

Sub-Saharan Africa will continue to recover gradually, helped by improving external and

domestic demand, pick in oil and other commodity prices, and policy support.

Oil prices are expected to average $60 per barrel in 2018. Other commodity prices are

expected to firm up moderately, as global demand and supply find a balance.

Financial conditions remained benign, with low volatility in 2017, helping to hold up

sentiment.

Monetary policies in advanced economies are expected to start to normalize in 2018, in

response to firming growth and inflation. However, they will remain accommodative.

Global trade is rebounding, but elevated trade policy uncertainties continue to cloud the

outlook.

The optimistic outlook is subject to some downside risks emanating from trade policy

uncertainties and the rise of protectionism in the US, the pace of US interest rate hikes,

Chinese’s economic rebalancing process amid cooling of the housing market,

uncertainties around Brexit negotiations, geopolitical, political and security risks

1 This report was prepared by the Quantum Global Research Lab team, with contributions from Mthuli Ncube, Seedwell Hove, Jeremy Wakeford, Fernando Barbi, Lacina Balma and Milton Delo.

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Table of Contents

1 Global Economic Outlook ...................................................................................................................................... 3

2 Outlook for Advanced Economies ......................................................................................................................... 5

3 Outlook for Emerging Market and Developing Economies (EMDEs) ..................................................................... 9

4 Macroeconomic outlook for Africa ...................................................................................................................... 12

5 Outlook for individual African countries.............................................................................................................. 17

6 Financial Markets Outlook ................................................................................................................................... 23

7 Commodity Markets Outlook .............................................................................................................................. 28

8 Risks to monitor and Implications for investments ............................................................................................. 31

9 Conclusion ........................................................................................................................................................... 32

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1 Global Economic Outlook

Global economic activity strengthened considerably in 2017, and the momentum is expected to continue in 2018. The global economy accelerated by an estimated 3.7% in 2017 and broad based across developed and emerging and developing economies, with more half of the world’s economies increasing their GDP. Developed economies expanded by an estimated 2.3% in 2017, led by strong expansion in the US, Euro Area, and Canada. Emerging and developing economies rebounded strongly by 4.7% as key economies such as India and China maintained strong growth rates, while others such as Brazil and Russia recovered

from recessions (Figure 1). The simultaneous recovery in developed and emerging and developing economies has been reinforced by a rebound in manufacturing and investment providing a boost to global trade, against the backdrop of benign financing conditions, accommodative monetary policies and supportive fiscal policies. Commodity prices have firmed up from the record lows, consumer and business confidence remained buoyant, volatility is declining, while some risks perceived at the beginning of 2017 have moderated somewhat.

Figure 1: Global economic growth and projections

Source: IMF and World Bank

The global economy is projected by the IMF to expand by 3.9% in 2018-2019, reflecting the continuation of the momentum for both developed and emerging and developing economies2. This reflects a 0.2 percentage point upward revision from the October, 2 IMF, WEO Update, January, 2018 3 IMF, WEO Update, January, 2018

2017 forecasts. Advanced economies are seen growing by more than 2.3% in 2018, led by the US, Canada and the Euro Area. Emerging market and developing economies (EMDEs) are expected to 4.9% in 2018, edging up to 5% in 20193, as the cyclical

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upturn continues in commodity exporters, and robust activity ensue in commodity importers. The World Bank is more bearish, seeing the global economy expanding by 3.1% in 2018, with advanced economies advancing by 2.2%, and emerging and developing economies growing by 4.5% in 2018. In our view, the outlook for the global economy will remain upbeat in 2018, expanding at rates between 3.5-3.7%, as the strong broad based performance continues in both advanced and emerging and developing economies. We believe that economic activity will continue to solidify in advanced economies in 2018, especially in the US, Japan and the Euro Area benefiting from loose financial conditions and supportive fiscal policies. The recently approved tax cuts in the U.S are likely to provide a boost to the US economy, with favorable demand spillovers to its trading partners such as Canada and Mexico. The

global financial conditions are likely to remain favorable, while strong sentiment will help to sustain the robust demand, especially investment and consumption. The economic recovery is likely to gather more steam in Brazil, Russia and other commodity exporters, as commodity prices firm and past policy support bear fruits. India should continue its positive growth trend, as the effects of currency reforms and the goods and services tax dissipate, while China’s economy will continue its managed slowdown. High frequency economic and sentiment indicators point to continued strengthening of momentum (Figure 2). While downside risks are still present, especially related to trade policy uncertainties, geopolitical tensions, potential tightening of financial conditions and the rebalancing of the Chinese economy, they now appear to be less pronounced than at the beginning of 2017.

Figure 2. Composite PMI for the Global economy, Developed Markets and Emerging markets

Source: Bloomberg

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Emerging markets comosite PMI Global composite PMI Developed Markets composite PMI

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Global inflation has remained moderately low at 3.6% in 2017. Inflation has remained below central bank targets in advanced economies, averaging 1.7%, despite the strengthening of activity, but core inflation has trended up. In emerging and developing economies, inflation has remained modest at 4.2%. The growing impact of cyclical factors such as tightening labor markets, stable and broader global growth, and a potential strengthening of commodity prices will likely to gradually push global inflation higher to levels above 3.7% in 2018. The relationship between lower unemployment rates and higher inflation which has weakened in the previous years should begin to re-emerge in 2018, and beyond especially in developed economies.

Global financial conditions have remained benign, as monetary policy remained largely accommodative and in 2017, despite prospects of further normalization of monetary policy in major advanced economies. Following 3 hikes in 2017, and start of the unwinding of its balance sheet, the US Fed is most likely to continue its two-pronged policy tightening cycle in 2018. The ECB announced that it will begin to tapper its asset purchase program until September 2018, but will likely to start rate hikes in 2019. We are likely to see other major central banks (e.g. Bank of Canada, Bank of England) raising interest rates and shrinking their central bank balance sheets in 2018 and 2019, as inflation picks up and in response to better growth. The phase of policy easing is likely to continue

in emerging markets, but possibly at a slower pace. While global monetary conditions will be relatively accommodative in 2018, they will likely turn less accommodative as we move to 2019, as inflation picks up and economic activity moderates. Global fiscal policy is likely to remain expansionary in 2018. Risks assets will likely continue performing well, as global prospects brighten in a more synchronized global economy, but corrections are a possibility in the near term.

Global trade has strengthened significantly in 2017, expanding at 4.3%, benefiting from a cyclical recovery in global manufacturing and investment growth, robust external demand and firming commodity prices4. Global trade growth is set to moderate to about 4%, in 2018-19, as the capital spending in advanced economies and the Chinese economy continue to decelerate. In the medium to long term, structural forces, including the slower pace of global value chain integration and trade liberalization will constrain growth. Commodity prices generally recovered in 2017 especially, energy and metals prices, but agricultural prices remained stable. Oil prices increased to about $60/bbl in Q4, 2017, supported by strengthening demand, falling stocks, and an agreement in late November to extend production cuts until the end of 2018. Oil prices are projected to average $60/bbl. in 2018, while other commodity prices will remain steady or increase modestly, supported by stronger global economic growth.

2 Outlook for Advanced Economies

Advanced economies have recovered more than expected in 2017, with positive 4 World Bank, Global Economic Prospects, January, 2017

surprises in growth occurring in countries where estimates for output were below

6

potential in 2016 and well above expectations in the US, Euro Area and Canada. GDP growth rebounded to 2.3% in 2017, supported by a pickup in capital spending, a turnaround in inventories, and strengthening external demand, recovery in capital spending and exports. Growth of investment reflected increased capacity utilization, favorable financing conditions, rising profits and higher business sentiment, amid declining policy uncertainty, although still elevated. We expect GDP growth of

advanced economies to remain steady at 2.3% in 2018, and moderate to 2.2% in 2019, as monetary policy accommodation gradually unwinds and labor market slack diminishes and as output gaps close. However, risks from rising trade protectionism, Brexit negotiations and their implications and geo-political risks could trump the momentum. In the long term, weak productivity growth and mounting demographic challenges could constrain growth.

The US economy was resilient in 2017, despite the effects of hurricane-induced disruptions. The economy expanded by an estimated 2.3% in 2017, surpassing its long-term trend of 2% a year for the first time in three years, supported by improving labor market and relatively low inflation driving growth in household spending, strengthening private investment, diminished drag from capacity adjustments in the energy sector, and robust external demand. The labour market remains solid, almost reaching full employment, with unemployment rate declining to a 17 year low rate of 4.1% in December 2017 (Figure 3). Investment rates have rebounded but remain below previous cyclical highs, and could grow faster, if rising business confidence or growth-enhancing policies unlock pent-up demand for capital spending. Inflation inched up to 2.2% in November, prompting the U.S. Federal Reserve Bank to continue its monetary policy tightening cycle. The Fed raised interest rates again in December, reaching a cumulative 125 basis points since the start of its tightening cycle in December 2015. It started to gradually

reduce the size of its US$4 trillion balance sheet in October 20175. We believe the Fed will still continue with this tightening cycle and have 3 rate hikes in 2018 and possibly 2 hikes in 2019.

The recently legislated corporate and personal income tax cuts are expected to lift economic activity this year, particularly to investment and keep business sentiment buoyant. We expect the U.S. growth to pick up to 2.7% in 2018, as the tax cuts and solid labour market help to sustain robust household spending. However, the benefits of tax cuts could be constrained by the economy which is nearing full capacity and the pace of monetary policy normalization possibly accelerating6. However, risks on trade policy front continue to cloud the outlook, as the outcome of NAFTA renegotiations remains uncertain and monetary policy direction with the new Fed chair, Jerome Powell and the mid- term elections in November. Over the long term, low labor participation and weak productivity trends remain the most significant drag on U.S. growth.

5 US, Federal Open Market Committee minutes, December 2017.

6 World Bank, Global Economic Prospects, January, 2017

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Figure 3: US economic indicators

Source: Bloomberg

The outlook for the Euro Area continues to brighten. The region posted a stronger than expected economic growth of 2.4% in 2017, with broad-based improvements across member countries, spurred by loose monetary policy, low inflation, employment growth and stronger global growth, which are helping to push consumption and investment growth higher as well as favorable external sector. Growth rates for many member countries have been marked up, especially for Germany, Italy, and the Netherlands. The unemployment rate reached its lowest level since 2009 (8.8% in October), but, wage growth remained subdued. Economic sentiment remain upbeat, while the composite PMI which rose to 58.1 points in November, continue to signal strong activity. Political risks around major elections in 2017, have diminished.

7 Eurostat data, 2017

Inflation inched up to 1.5% in December, 2017 from 1.4% in October, still below the ECB’s target of 2%, but core inflation remained soft at 0.9%7. The ECB has announced a reduction its bond-buying program in October, from EUR 60 billion to EUR 30 billion until September 2018, in response to positive economic dynamics. With inflation remaining below the target, the ECB could start to raise interest rates in 2019. The aggregate fiscal stance of the Euro Area was expansionary in 20178. The cyclical upturn is expected to continue albeit at a slower pace of 2.2% growth in 2018, as domestic demand moderates somewhat after strong gains in 2017, and policy stimulus unwind gradually. Growth could further slow down to 2% in 2019, as labor market slack dissipates. The main risks to the outlook relates to lingering political

8 European Commission, European Economic

Forecast, Spring 2017

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Manufacturing PMI Inflation (right) Unemployment (right) Wage growth (right)

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challenges in some key economies. For instance in Germany, the CDU is failing to form a coalition government with other parties due to differences in immigration

policies. Italian elections scheduled for 2018 and disputed referendum for Catalonia Independence from Spain are other important political risks for Europe.

Figure 3: Euro Area economic and business indicators

Source: Bloomberg

UK’s outlook is mixed. The economy expanded by 1.7% in 2017, 0. 2 percentage point lower than in 2016. The services and industrial sectors remained resilient in 2017. The composite PMI firmed to 54.9 points, but the Services PMI dipped in November. The labour market remained solid, with unemployment rate declining to a multi-decade low of 4.3% in Q3. However inflation continued to trend upwards, reaching 3.1% in November, reflecting import cost pressures from the depreciation of the pound. Consumer confidence edged down from minus 12 points in November to minus 13 points in December, with the index remaining entrenched in negative territory, since April last year, reflecting consumers’ broad pessimism. The economic outlook for 2018, remains challenging, with business investment suffering from significant uncertainty over Brexit Our base case scenario is for growth to range between 1.5%– 1.8% in 2018, as the pervasive

uncertainties generated by Brexit especially on policy frameworks that will govern trade, financial and migration arrangements between the UK and EU countries. The major effects of Brexit will however be felt only once the country actually leaves the European Union (EU), which won’t happen until 2019 and possibly later depending on the agreement.

Japan’s prospects are optimistic. The economy expanded by 2.5% (seasonally adjusted annualized) in Q3, 2017, marking the 7th consecutive quarter of expansion, buoyed by the stellar export performance and robust domestic demand. Growth is estimated at a higher than expected rate of 1.8% in 2017. PMI edged up to a four year high of 54 points in December, signifying robust economic activity. The government unveiled a tax reform plan in December, which includes measures to lower taxes for firms that increase wages by 3% and firms that increase investments and productivity.

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Composite PMI Inflation (right) Business climate indicator (right)

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This is likely to shore up salary increases and boost household spending. Inflation accelerated to 0.6% in November, from 0.2% in October and is expected by the BoJ to increase gradually toward its 2% target amid increase in mid- to long-term inflation expectations, improving output gap and upward pressure on wage levels and impact of proposed 10% sales tax hike in October 2019. We expect the BoJ to keep its monetary policy stance and reduce the pace of government bond purchases (currently at JPY 80 trillion (USD 705 billion) annually). Growth could accelerate further in 2018, and

even be as high as 2%, according to some market forecast, carrying over from stronger-than-expected activity in 2017. However, it could moderate somewhat in 2019, as fiscal stimulus and export growth ease and private consumption growth moderate in response to the sales tax hike. The main downside risks to the outlook relates to U.S trade policies, adjustment of the Chinese economy and appreciation of the yen. Over the medium term, a shrinking Japanese Labor force, aging population and persistently high public debt could undermine GDP growth.

3 Outlook for Emerging Market and Developing Economies (EMDEs)

The outlook for EMDEs continue to strengthen. GDP growth edged up to 4.7% in 2017, as key commodity exporting economies such as Brazil and the Russian emerged from recession, most commodity prices pick up, confidence improve, global trade recovers and investment growth turned up after a prolonged period of weakness. Growth in EMDEs was led by strong growth in emerging Asia, especially China, Indonesia, Malaysia, Philippines, Thailand and Vietnam, driven by strong world economy, private consumption and business investments9. The region continues to account for over half of world growth. A number of recent high-frequency indicators—such as industrial production and PMIs of EMDEs point to continued strong activity (Figure 2). We expect the cyclical momentum to continue to propel growth of EMDEs to above 4.9% in 2018 and 5% in 2019, as commodity prices continue to stabilize and global trade remain robust.

9 IMF, World Economic Outlook, October 2017.

The Chinese economy continues to rebalance, with drivers of activity shifting away from state-led investment to consumption and services. The economy expanded by 6.8% in Q4, 2017, bringing overall growth for 2017 to 6.9%, exceeding market expectations. This reflects continued fiscal support and the effects of reforms, as well as a stronger-than expected recovery of exports.10 Private consumption remains the main driver of growth, as reflected in the continued strong increase in sales of consumer goods in 2017. However, fixed asset investment growth eased in November, as the property market continues to cool down, and industrial production moderated (Figure 4). Credit growth decelerated modestly in November, as authorities to tighten financial markets regulations including new guidelines on wealth management products, foreign ownership of foreign financial institutions and restrictions on online micro-lending. Inflation remains low at 1.8% in December. The PBoC also raised its de facto policy rate

10 World Bank, Global Economic Prospects, January, 2018

10

(the 7-day reverse-repo rate) by 5 bps immediately after the Fed’s hike in December, but the move did not have impact on the interbank market. This could suggest that further tightening is coming in 2018.11 On the external sector, the current account surplus continued to narrow, but with a moderation of net capital outflows, foreign exchange reserves recovered in 2017.

GDP growth is expected to moderate to 6.5% in 2018, and inch down to 6.3% in 2019. We expect household spending to remain robust, supported by healthy wage growth, rising disposable income and steady job creation. The key downside risks to the outlook stem from financial sector

vulnerabilities, the cooling of the housing markets amid high corporate debt levels, US trade protectionist policies, rising geopolitical tensions. A downturn in Chinese growth would be a risk to global financial markets and commodities. Potential trade tensions with US could force China to slow down purchase of US treasuries and induce volatility in global financial markets. However, we do not anticipate a Chinese “hard landing” in 2018, mainly because the unwinding of the oversupply and overcapacity in the property market and industrial sectors are likely to be less intense going forward. At the same time, the Chinese policymakers seem to have the levers and tools to cushion any rapid fallout.

Figure 4: China’s economic indicators

Source: Bloomberg

Brazil’s outlook is improving gradually. The

economy expanded by 0.1% in the 3rd

quarter, supported by strong exports growth

11 MRB Partners Report, December 2017

and improvement in investment and

consumption due to lower interest rates,

rapid disinflation, recovering business

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House Price Index Inflation Li Keqiang Index of Economic Activity PMI (right)

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sentiment and stronger dynamics in the

labor market. Growth is estimated to have

averaged 1.1% in 201712. High frequency

indicators suggest continued recovery: The

manufacturing PMI increased to 52.4 in

December, 2017, while consumer and

business confidence remain high.

Unemployment declined to 12% in

November, while inflation remain below the

central bank target range of 3-6%, at 2.8%.

The favorable inflation outturn prompted

the Bank of Brazil to cut the benchmark

SELIC interest rate by 50 basis points to

about 7.0% in December. The outlook for

2018 looks positive, with GDP growth

expected to accelerate to 1.9%, on the back

of policy support, expected firming of

commodity prices, improving confidence

and historically-low inflation supporting

private consumption. However, a number of

obstacles including: sizable fiscal deficit

(9%), elevated public debt (85% of GDP), and

political and institutional uncertainty ahead

on elections in October 2018 could saddle

the recovery momentum.

The outlook for India remains upbeat, as the economy expanded by 6.7% in 2017, underpinned by robust private consumption, public investments and ongoing structural reforms. Robust momentum will continue as the effects of the Goods & Services Tax (GST) launched in July 2017 and lingering disruptions associated with the currency exchange reforms introduced in November 2016 wane. Real GDP is expected to expand robustly by 7.4% in 2018, buoyed by strong private consumption moderate growth of 12 IMF, World Economic Outlook, October, 2017.

exports, improving business investments and as previous policy reforms bear fruits. The uniform tax system will support the medium-term prospects for the economy by creating a single national market, and enhancing the efficiency of domestic trade, while improving fiscal revenues. Manufacturing PMI jumped to 54.7 in December of 2017 from 52.6 in November, on high growth potential, while industrial production and business confidence also firmed up, suggesting that the impetus could continue. Moody's upgraded India's sovereign rating by one notch to Baa2 in November, while the World Bank gave India a 30 place jump on its Ease of Doing Business ranking. Despite a recent uptick, inflation remained within the Reserve Bank of India’s (RBI) target band of 2-6 %, following a steady decline over the past year to 1.3 % in July. Risks to the outlook for the Indian economy emanate from the potential adverse effects of the US monetary policy normalization on the financial markets, the slowdown in China and trade policy uncertainties from the US and Europe.

The outlook in other emerging and developing countries remains variegated. Emerging and developing Eastern Europe experienced an upturn, with growth of 3.1% in 2017, especially with the recovery in Russia, strong growth in Romania, Turkey and Poland, supported by Strong domestic demand and external demand from the EU and looser fiscal policy. Recovery in Russia is underpinned by improvement in oil prices, strong consumption growth, appreciation of the ruble which is driving exports, easing inflation and policy support. Private consumption is playing an increasing role, in particular, in Albania, where employment

12

and wages have increased. The outlook for Latin America will continue to strengthen in 2018, as major economies such as Brazil and Argentina have exited recession, helped by pick up in commodity prices, easing monetary policies and improving labour market conditions. Political uncertainties will however remain a concern in 2018, amid looming elections in Brazil, Colombia, Mexico and Paraguay. Mexico’s outlook is also affected by the negotiations on NAFTA. The political, economic and humanitarian crisis in Venezuela is deepening further, with the country now in technical default. The MENA region experienced temporary

slowdown in 2017, but growth could pick up moderately in 2018 and 2019. While stronger oil prices are helping a recovery in domestic demand in oil exporters, such as Saudi Arabia, the needed fiscal adjustments will weigh on growth momentum, while geopolitical and oil market developments will also shape outlook. The main risks for emerging and developing economies largely stem from the economic rebalancing process in China and implications for commodity prices, potential faster pace of monetary policy normalization in the United States and trade policy uncertainties in developed economies.

4 Macroeconomic outlook for Africa

The outlook for Sub- Saharan Africa continues to hold up. Economic recovery will strengthen, to see GDP growth recovering to 2.7% in 2017, from the sluggish 1.4% in 2016. The recovery is supported by improving commodity prices, strengthening external demand and policy support. The large economies-Nigeria, Angola and South Africa, which suffered slowdowns or recessions in 2016 rebounded moderately. Nigeria exited a five-quarter recession in Q2, 2017 to see growth averaging about 0.8% in 2017, while South Africa emerged from a short technical recession in the second quarter, with growth estimated at 0.9% in 2017. An uptick in metals prices, along with a recovery in the agricultural sector, supported a modest

rebound in metals exporters. Some non-resource intensive frontier market and low income countries such as Cote d’Ivoire, Ghana, Senegal, Ethiopia and Tanzania continued to grow at robust paces in 2017,well above 6%, sustained by strong domestic demand, increased infrastructure spending and policy support. Political instabilities stymied economic activity in South Africa, Kenya and DRC, while drought blighted agricultural production and exacerbated food shortages in the Horn of Africa. GDP per capita growth returned to positive growth of 0.3% in 2017, following a 1% contraction in 2016, while investment growth remained sluggish.13

13 World Bank, Africa’s pulse, Volume 16, October 2017

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Figure 5: Growth estimates and forecasts for selected African countries, 2017 and 2018

Sources: World Bank, IMF

We expect Sub-Saharan Africa’s economic momentum to continue, with GDP growth rising to levels above 3.3-3.5%14 in 2018-2019. Growth will be led by oil importers, which are expected to grow at 4.4%, while oil exporters will expand at 1.8%. Excluding Nigeria and South Africa, SSA growth will even be more upbeat with growth rate of 5.1% in 2018. The moderate increase in commodity prices, gradual strengthening of domestic and external demand, improved access to international financial markets and surging FDI will drive growth. Non resource-intensive economies will expand at solid rates, while most resource-intensive economies will consolidate recoveries from the 2014 terms of trade shock. However, growth will be weak in some metal and oil exporters which adjusted slowly to lower commodity prices, as fiscal consolidations and adjustments further constrain public investments. For instance Equatorial Guinea

14 This projection is in line with the IMF projection from the WEO Update, January, 2018.

(which joined the OPEC in May 2017) is expected to remain in recession in 2018.

About 8 SSA countries are anticipated to grow at rates above 6% in 2018, while over 20 economies will expand at rate overs 5%, reigniting the “Africa rising” narrative. Ghana will be the fastest growing economy in SSA, with 8.9% growth, followed by Ethiopia and Cote d’Ivoire which will expand at 8.5% and 7.3% respectively. Growth in these countries will be propelled by vigorous infrastructure investments, dynamic expansion of services sectors and a recovery in agricultural production. Among the low income countries, Benin, Burkina Faso, Senegal, Sierra Leone and Tanzania will also grow at robust paces, well above 6%, propelled by increasing domestic demand, infrastructure spending and policy support. The region’s three biggest economies- Nigeria, South Africa, and Angola will further

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gain their momentum in 2018, with growth rates of 2.1%, 0.9% and 1.6 %, respectively. Although still below average, their growth rates will be helpful in keeping the region’s growth above the 2016-2017 levels. Growth will remain barely above population growth, to see GDP per capita at 1% in 2018, which is

not big enough to reduce poverty. Numerous risks are clouding the outlook for SSA, including political and security risks from upcoming elections, inadequate fiscal adjustments, rising public debt and faster tightening of global financing conditions.

Table 1: Selected Macroeconomic Indicators for Sub-Saharan Africa

2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP Growth (%)

6.9 5.1 4.1 4.1 4.6 3.4 1.4 2.7 3.3

Real Per Capita GDP growth (%)

4.5 2.6 1.8 2.8 2.6 1 -1.0 0.3 1

Inflation (%, yoy ave.)

8.2 9.5 9.4 6.6 6.3 7.0 11.3 10 9.0

Fiscal Balance -3.4 -1.1 -1.8 -3.1 -3.5 -4.3 -4.7 -4.7 -4.3 Total Public Debt (% of GDP)

27.7 28.3 28 29 31.6 37.4 43.2 45.1 45.7

CA Balance -0.9 -0.7 -1.9 -2.4 -3.9 -6.1 -6.1 -4.2 -3.6 Net FDI (% of GDP) 2.7 2.1 2.0 1.3 1.6 1.9 2.6 2.6 2.7 Total Investment (% of GDP)

20.3 19.7 20.3 20.3 21.2 20.4 18.9 19.0 19.5

Reserves (Months of imports)

4.2 4.6 5.3 5.0 5.6 5.4 5.1 4.8 4.7

Broad Money Supply growth (%)

13.4 12.6 16.8 7.8 15.5 10.9 11.3 12.5 14.2

Private sector credit (% of GDP)

29.2 27.9 28.0 27.7 28.0 28.7 28.5 - -

Sources: IMF, World Bank

Stabilizing exchange rates and declining food

prices in some countries will help to reduce

the region’s inflation from the estimated

10% in 2017. Price pressures eased in Ghana,

South Africa, Malawi, Mozambique and

Zambia and remained muted in the CFA

region, due to the stable peg to the Euro.

Easing inflationary pressures will provide

space for central banks to continue with

monetary policy easing to support economic

activity. However, inflation remains elevated

in DRC, Angola and Sierra Leone. In DRC,

inflation topped 71% in August, 2017, before

declining to 62% in December, fueled by

steep depreciation of the domestic currency,

amid low commodity prices and high

government deficits (Figure 6). We expect

the region’s inflationary pressures to recede

further in 2018, as past price impulses

dissipate and currencies stabilize further.

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Figure 6: Inflation rates of selected African countries (%)

Source: IMF

Fiscal pressures for the region are easing moderately. The region’s fiscal deficit is projected to narrow slightly to 4.3% of GDP in 2018 from 4.7% in 2017, on the back of improving commodity prices and fiscal adjustments. Oil and metals exporters are likely continue to run sizable fiscal deficits, reflecting slow fiscal adjustments to lower commodity prices and limited progress in increasing fiscal space.15 In some countries, such as Côte d’Ivoire, Cameroon and Equatorial Guinea, fiscal stabilization has come at the expense of decreased expenditure as opposed to structural fiscal reforms. The decline in fiscal revenues forced Benin, Cameroon, Chad, Gabon, Niger, Sierra Leone and Togo to seek financial assistance from the IMF in 2017. Burundi, Equatorial Guinea, Kenya, Mozambique, Niger and Zambia are expected to have fiscal deficits above 6% of GDP in 2018.

15 World Bank, Africa’s Pulse, October 2017

The region’s debt to GDP ratio has increased to 45.1% of GDP in 2017 from 30% of GDP in 2013. The debt ratio is project to increase and average 45.7% in 2018, reflecting elevated fiscal deficits, growing interest payments and valuation changes from exchange rate depreciation and more borrowing. About 62% of countries will retain debt levels above 45.7% of GDP in 2018. Debt levels will be higher among oil importers (52.8% of GDP) than in oil exporters (35.1% of GDP), especially in Burundi, Cape Verde, Mozambique, Togo and Zimbabwe (Figure 7). Countries which have borrowed in international markets will face higher borrowing costs and US interest rates increase coupled with an appreciating US dollar. Several countries across the continent had their sovereign credit ratings downgraded in 2017, on debt sustainability concerns, putting upward pressure on external financing costs.

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January 2017 December 2017/ Latest SSA Average

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Moderately increasing commodity prices and recovering external demand have contributed to narrowing of current account deficits, especially among the commodity-dependent economies. The region’s current account deficits narrowed to 3.4% of GDP in 2017, from 4.2% of GDP in 2016. An improvement in external financing conditions has also led to a decline in borrowing costs and improved access to finance. This has enabled some countries such as Nigeria, Cote d’ Ivoire and Senegal to re-enter the Eurobond market in 2017, as improved global sentiment toward emerging

and frontier markets helped to narrow sovereign bond spreads. We are likely to see more sovereign bond issues in 2018, as countries try to close their financing gaps amid declining bond spreads. The region’s current account position is projected to widen slightly to 3.6% of GDP in 2018, especially in oil importers. Tanzania, Ethiopia and Kenya, Mozambique, Sierra Leone and Guinea will have current account deficit above 10% of GDP, reflecting high imports of capital goods for infrastructure and a higher cost of fuel imports as oil prices pick up (Figure 7).

Figure 7: Current Account Balances of Selected African Countries (2017 and 2018)

Source: IMF

African currencies have continued to stabilize in 2017 compared with 2016, contributing to easing inflationary pressures. A number of currencies have overall appreciated between January and December

2017. The Mozambican metical made a huge upturn, appreciating by 18.3%, while the Congo Republic Franc and the South African Rand appreciated by appreciated by 10.5% and 9.8% respectively (Figure 8). The

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MozambiqueGuinea

Sierra LeoneCongo Republic

RwandaGabon

EthiopiaEquatorial Guinea

KenyaGhana

MauritiusTanzaniaSenegalAngola

DRCZambia

CameroonZimbabwe

Sub-Saharan AfricaCôte d’IvoireSouth Africa

ChadNigeria

Bostwana

2017 2018

17

Angolan Kwanza was stable during the year 2017, but depreciated by 25% between 5-20 January 2018, after the central bank floated the exchange rate. The Nigerian Naira depreciated by 18.4%, reflecting the slowdown of the pace of depreciation as the exchange rate balances, and the official and the parallel exchange rates narrow. Interventions by the Central Bank of Nigeria are likely to keep the naira relatively stable on the parallel market in 2018. However, the Congolese (DRC) franc and the Sierra Leone leone remained under pressure,

depreciating by 48.2% and 39.1% respectively. The Congolese Franc is weakened by the continued political instability, and diminishing foreign exchange reserves despite a rise in copper prices, while the leone is destabilized by the slump in exports and dwindling foreign exchange reserves. The Ethiopian Birr lost 21.5% of its value in the year, following a significant devaluation of the currency by the central bank in October 2017 to boost lagging exports. We expect most currencies to continue to stabilize in 2018.

Figure 8: Changes of selected African currencies against the US$ (January - December 2017)

Source: Bloomberg

5 Outlook for individual African countries

Nigeria: Facing the twin challenges of recovering the economy and boosting national security, Nigeria’s economic outlook has been improving following the carryover of sub-zero rates from 2016, thanks to strong dynamics in the oil sector and agriculture sector. The Nigerian

economy gained further steam in Q3, 2017 registering a growth of 1.4% after exiting recession, with 0.6% growth in Q2, 2017. Higher oil production and oil prices drove the buoyant acceleration of the oil sector GDP of 25.9% in Q3, 2017. Oil output averaged 2.03 mb/d per day Q3, and well above the 1.87

-60.0 -50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0

DRC Congolese FrancSierra Leone Leone

Ethiopian BirrNigerian NairaGhanaian Cedi

Rwandan FrancTanzanian Shilling

Angolan KwanzaUgandan Shilling

Kenyan ShillingZambian Kwacha

Malawian KwachaEgypt Pound

Guinea FrancMauritius Rupee

Botswana PulaCôte d’Ivoire CFA Franc

Senegal CFA FrancSouth African Rand

Cameroon CA FrancCongo Republic CA Franc

Mozambiquan Metical

18

mb/d average in Q2, helped by the completion of the repairs and maintenance work in the oil fields and improvement of security situation in the Niger Delta. The non-oil sector however performed poorly, contracting by 0.8% in Q3, 2017. The economy grew by an estimated 0.8% in 2017. Manufacturing and non-manufacturing PMI have recorded steady improvements, closing at new highs of 59.3 and 62.1 points respectively in December. The PMI has sustained 8 months of successive expansion, fostering quick recovery. Inflation declined to 15.4% in December, from 18.7% in January 2017, but remains in the double digit ranges and above the Central Bank’s target range of 6%–9%. The Nigerian Stock Exchange (NSE) recorded substantial progress, performing behind best performers such as the Argentina’s Merval and Mongolian Stock Exchange in 2017.

The Naira exchange rate has remained stable with minimum distortions, supporting a pickup in equity and portfolio flows. The IMF projects growth to rise to 2.1% in 2018, on the back of a gradual improvement in oil prices and strong public investment spending. Oil prices currently averages US$70/bbl against the oil price assumption of $47/bbl. The positive outlook is subject to some risks. Growth remains fragile as most non-oil sectors are still sluggish. An eminent political derailing over reforms outlined in the Economic Recovery and Growth Plan 2017–2020 remains a concern. Both the state and the federal governments are facing diminishing fiscal capacity, raising the need to implement significant fiscal adjustment policies to sustain macroeconomic stability

16World Bank, Global Economic Prospects, January, 2018

and economic recovery. At the same time, the situation in the Niger Delta remains fragile, with possible further violence especially in the run-up to the 2019 elections. The outlook for Nigeria appears good in 2018 only to the extent that oil price does not fall short a wide gap from the $47/bbl benchmark assumed in the budget.

South Africa: For the first time since 2014, the South African economy has expanded at a rate of 2.0% or more for two consecutive quarters after a short recession. Real GDP growth rate moderated to 2.0% in Q3, 2017 after a rebound to 2.8% in Q2, 2017. The agriculture sector was the largest contributor to growth in real GDP in the third quarter, while the services sector slowdown somewhat. Growth in 2017 is estimated at 0.9% from the 0.3% growth rate registered in the preceding year. Political uncertainty continues to weigh on confidence and investment. According to the World Bank, South Africa's economy is expected to grow by 1.1% in 2018 (one of the lowest rates in sub-Saharan Africa) as stronger activity in trading partners boosts exports16. Inflationary pressures have subsided in 2017, and inflation has declined to 4.6% in November, allowing for a moderately expansionary monetary policy to support economic activity.

Although the rise of Cyrill Ramaphosa in the higher rank of ANC may have renewed business prospects in the long-term, the ABSA PMI for the South African economy has been stuck below the neutral 50-point-mark for the past seven consecutive months, recording 44.9 points in December 2017, signaling difficult business conditions. S&P downgraded South Africa’s local currency

19

credit rating to sub-investment grade in November, on concerns of high debt levels and poor health of public finances. There is a rising risk of further credit downgrades by other rating agencies, if conditions worsen further. South Africa’s economic outlook is still looking bleak as policy uncertainty persist. Growth will remain positive, and steady at 0.9% in 2019, amid still weak investor confidence and subdued domestic demand due to lackluster labour market with high unemployment of 27.7% in Q3, 2017. The outturn of commodity prices will be key to South Africa’s prospects in 2018. The high dependence on external financing is the main source of financial vulnerability as lowering investor confidence and further credit rating downgrades may contribute to a massive net outflow of foreign investment in the coming years.

Angola’s economic outlook is moderate. The economy is set to expand modestly, on the back of rising oil prices amid still existing structural imbalances. The World Bank has revised the country’s economic growth forecast to 1.6%, in 2018 up 0.7 percentage points from its previous forecast. The Economic Climate Indicator fell by 49 points between the fourth quarter of 2014 and the fourth quarter of 2016. Since then it has begun a recovery cycle, having increased by 12 points by the end of the second quarter of 2017, yet still in the negative territory, suggesting that business conditions are still difficult. Oil production marginally increased to 1.61 mb/d in November, after a slide to 1.6 mb/d in October from the high level of 1.68 mb/d in August. Moderate pickup in oil prices expected at US$60/bbl, against Angola’s oil price assumption of US$50/bbl will support economic recovery in 2018. The floating of the exchange rate in January following a lengthy period of overvaluation,

will help to preserve the foreign exchange reserves which declined by 30% to US$14.25 billion between January and November, 2017. The exchange rate depreciated by over 25% between 5-20 January 2018. Inflation which moderated to 23.7% in December, is rise again in 2018, following the floating of the Kwanza.

The Central Bank has hiked its policy rate by 200 basis points in November, for the first time since 2016 under the new governor, setting the tone for a new tightening cycle in 2019. Despite the rising oil prices that could support economic recovery, the economy is still restrained by existing structural imbalances imposed by excessive reliance on oil. These include high inflation, shortage of foreign currency, soaring public debt estimated at more than 60% of GDP, current account and fiscal deficits. While oil production fell by 5.5% in the first half of 2017, it is expected to drop further. With the aim of addressing such imbalances, the government has initially established a Macroeconomic Stabilization Program (PEM) focused on fiscal consolidation and the stabilization of foreign exchange markets, to jumpstart the economy and subsequently implement the National Development Plan (PND 2018 – 2022).

Zambia’s outlook is promising. GDP expanded by an estimated 4% in 2017, driven by increase in copper exports. Overseas sales of copper grew 25.2% in October compared with September boosting overall exports and contributing to a reduction in the trade deficit. Increased agriculture production and improved electricity generation also contributed to the positive dynamics. Inflation has been gradually declining from a peak of above 20% in February 2016 to 6.1% in December

20

2017, supported by the continued stability of the exchange rate, lower food prices in view of a good harvest and improved market confidence in the country’s policy direction. This has led the central bank to ease monetary policy, reversing the pressure on credit growth. The monetary policy rate was cut from 11% to 10.25% in November 2017. Growth in Zambia remains dependent on the price of copper, and will be held back by deficiencies in the electricity supply, 97% of which is generated by hydropower. The World Bank, however, forecasts growth to strengthen by 4.5% in 2018 and 4.7% in 2019, driven by strong mining and agricultural output, and higher investment in construction and manufacturing sectors17. However, the high debt burden (56% of GDP in 2017) and wide fiscal deficit (-8% of GDP in 2017) poses downside risks to the outlook and calls for reforms and deepening of fiscal consolidation efforts. The government has recently announced its intentions to refinance USD 2.8 billion worth of Eurobonds in 2019 to reduce debt servicing costs.

Some frontier market economies including Cote d’Ivoire, Ghana, and Senegal are anticipated to continue with their robust paces in 2018. Cote d’Ivoire continues to record strong and resilient economic performance in 2018, despite the fall in cocoa prices in 2017 which weighed down household spending and weakened fiscal and export revenues. The economy expanded by 7.6% in 2017 and is projected by the IMF to grow by 7.3% in 2018. The service sector, mainly transport, trade and telecommunication, a robust domestic consumption and public and private investments will constitute the drivers the

17 World Bank, Global Economic Prospects, January, 2018

strong economic growth. The economy will also continue to benefit from the extensive international support, policy reforms and improving business and macroeconomic environment, which is boosting confidence. IMF disbursed nearly US$137 million as part of the second review of its ECF/EFF arrangement in 2017. Inflation is expected to remain low at about 2% in 2018, below the 3% regional threshold of the WAEMU, partly due to the peg of the CFAF to the Euro. The fiscal deficit widened to 4.5% of GDP in 2017, well above the Western Africa Economic and Monetary Union (WAEMU) regional deficit norm of 3% of GDP and is expected to be 3.75 % of GDP in 2018. It will eventually converge to the WAEMU regional norm by 2019 if fiscal consolidation measures under the IMF program remain on track.

Ghana’s outlook remain on the upside, with growth projected to edge up strongly to 8.9% in 2018, from about 6% in 2017. It will be the fastest growing economy in SSA in 2018. The economy expanded robustly, by 9.3% in Q3 2017, buoyed by a jump in the oil and gas sector expansion, timely resolution of disruptions in the Jubilee oil and gas field and a restoration of energy supply, supporting a rise in exports. Exports of gold, cocoa and oil surged at the end of the year, pushing the trade balance into a surplus. The PMI which has been above the 50-point threshold for 22 consecutive months notching 54.8 points in November, signaling robust economic expansion. Non-oil growth is estimated at 4% in 2017 and expected to rebound to 5% in 2018 and 6% in 2019, gradually converge to its potential level of 5% in the long run. Inflation has been declining since Q2 2016, reaching 11.7% in

21

November 2017, helped by monetary policy tightening and exchange rate stability. This, combined with fiscal discipline and IMF support helped to loosen monetary policy. The central Bank of Ghana has cut the policy rate by 100 basis points 20% in November. Going forward, inflation is expected to fall within the BoG’s band (8 ± 2 %) by early 2018 and remain firmly inside it over the medium term. Ghana has issued a $1.4 billion non- sovereign bonds in local currency in November 2017 to help clear energy sector debts owed to banks. The bond was undersubscribed, at 19% yield, as it was not guaranteed by the government. Ghana’s credit rating outlook was upgraded to positive in October 2017 by S&P.18 However, the favorable outlook could be saddled by the country’s elevated public debt burden (71% of GDP) in 2017 and a high level of non-performing loans in the banking sector (21.6% in October, 2017)19.

The Kenyan economy transcended through a rough patch in 2017, which has seen the economic growth moderating to 5% in 2017, from 5.8% in 2016. The economy faced a number of headwinds, including prolonged tumultuous political tensions around elections, drought and decline in credit to the private sector. Kenya’s outlook remains positive with projected growth of 5.5% in 2018, on the back of a recovery in the agricultural sector; a stable macroeconomic environment; continued low international oil prices; continued stability of the Kenya shilling (KES); and political stability. The political dust is settling after Uhuru Kenyatta was finally sworn in as the President of Kenya for a second term on 28 November, following a prolonged tumultuous and

18 IMF staff report, 2017

disputed elections, marked with protests and sporadic bouts of violence since August 2017. High frequency data suggest continued a durable upturn: The PMI jumped to 53 points in December 2017, from 42.8 in November, exceeding the critical 50 point threshold for the first time since May 2017. Thanks to prudent monetary policy, inflation has remained in the single-digit ranges and fell to 4.5% in December, despite adverse conditions and disruptions caused by tumultuous election period. However, the drop in private sector credit growth, and high debt levels remains key constraints to growth going forward.

Senegal’s GDP growth will remain robust in 2018, sustained by the implementation of the government new development plan, the “Plan Sénégal Emergent” and public investments in energy and transport. The economy expanded by 7.1% year-on-year in Q3, 2017, after a 6.4% growth in Q2, driven by strong expansions in industrial sector (10.7% especially constructions and energy), and services sectors (6.5%, especially transport and financial services) Growth is estimated at 6.8% in 2017, edging up to 7% in 2018. However, rising public debt, increasing financing needs for the public investments and low domestic resource mobilization suggest the need for reforms to sustain growth momentum. Reforms are also needed in order to open up the economic space for the private sector, as growth in the last three decades were largely driven by public sector. The government has adopted a triannual plan of reforms of the business environment and competiveness for 2016-18, aimed at reducing structural bottlenecks to private sector development

19 Bank of Ghana, Banking Sector Report, Vol 2.4, November 2017

22

by reducing factor costs, and the cost of energy. Moody's upgraded the credit rating for Senegal to Ba3 from B1, with stable outlook in April 2017. This helped the oversubscription of the US$1.1 billion Eurobond issuance at a yield of 6.5% in May 2017.

Ethiopia’s outlook remain very buoyant. Despite falling global prices for coffee, oil seeds and gold and re-emergence of drought conditions in parts of the country, the Ethiopian economy showed strong resilience in 2016-17. GDP expanded by an estimated 8.5% in 2017, sustained the government’s infrastructure program under the second Growth and Transformation Plan (GTP II) 2016-2020. The economy is projected to be the region’s second best performer in 2018, with 7.5% growth, propelled by fiscal stimulus, robust foreign direct investments, public infrastructure investments (dams, highways, railways) and manufacturing, diversification of the economy towards tourism and agricultural expansion due to improved weather conditions this season. Ethiopia has overtaken Kenya as East Africa’s biggest economy, with GDP of US$87.3 billion. Monetary policy remains prudent and focused on maintaining price stability and credit expansion to the private sector. Inflation edged up from 12.2% in October to 13.6% in November, fueled by higher food prices. The high debt level (59% of GDP in 2017) and wide current account deficits (-7.4% of GDP in 2018) and a scarcity of foreign reserves pose substantial risks to growth and stability, however. Medium-term growth prospects are favorable driven by the country’s ambition to achieve agricultural-and export-led industrialization which will support strong private investment, infrastructure development, and rising productivity.

Tanzania’s economic performance remains strong. The economy expanded briskly at 7% and 6.5% in 2016 and 2017 respectively, making Tanzania one of the best performing and stable economies in Africa. The growth momentum is driven mainly by strong performance in industry, construction and service sectors. The medium term outlook is favorable and growth is projected to pick up to 6.8% in 2018 and stabilize at around 7% in the medium term, sustained by increasing public investments in infrastructure, robust household spending and stronger agricultural activity. Inflation came down to 4.4% in November, falling below the authorities’ target of 5% and is expected to remain close to the target in 2018. A new gas and electricity generation from the Mtwara pipeline completed 2015 will provide cheap power to domestic industries. Downside risks to economic growth, however, stem from the currently tight liquidity conditions and slowdown in private sector credit growth, the slow pace of implementation of public investments and external financing challenges. In addition, the recent government’s crackdown on mining companies is likely to slow down activity in the extractive industry and FDI.

Prospects for Rwanda remain upbeat, with the economy expected to expand by 6.8% in 2018, following a strong 6.2% growth in 2017. Robust growth is driven by the dynamic services sectors and large infrastructure spending under the "Vision 2020" development strategy which aims to move the country to middle-income status by 2020. Monetary policy has been prudent, amid decelerating inflation which closed the year in the negative territory (-0.2% in December, 2017). The main risks to economic growth emanates from serious drought affecting agricultural production,

23

high dependence on aid, low commodity prices and security concerns in the region. The rapid decline in foreign exchange reserves due to decline in export earnings and external flow of aid led the central bank to implement a flexible exchange rate regime.

In Botswana, Mauritius, Mozambique and Zimbabwe, activity will be moderate in 2018, amid possible below normal rainfall this season. In Zimbabwe, high debt levels, structural and institutional constraints, liquidity challenges will constrain economic activity as the country undergoes political transition. The Mozambiquan economy will strengthen moderately with 5.3% growth in 2018, following a painful debt distress in

2016/2017. The external sector remain unfavorable, and the debt levels remain elevated, further containing growth. The outlook for Mauritius is modest with the economy expected to expand by 4% in 2018, from 3.9% in 2017, largely driven by growth in service sectors (financial, tourism, ICT, real estate and retail trade sectors). The Central Bank of Mauritius has cut its policy rate by 50 basis points to 3.5% in September in a bid to support domestic consumption and cool the exchange rate. The offshore corporate sector will continue to support net inflows of foreign direct investment, contributing to the steadily rise in international reserves which are currently at 9 months of imports cover.

6 Financial Markets Outlook

The benign global financial conditions that characterized 2017 are expected to continue, with strong market sentiment and low market volatility. Monetary policies will remain largely accommodative, despite prospects of further normalization of monetary policy and hawkish tones of major central banks. As expected in the 2017, Q4 Macro Outlook, the US Fed hiked its policy rate in December, bringing the rate hikes to three in 2017 and reaching a cumulative 125 basis points since the start of its tightening cycle in December 2015. It has started to unwind its US$4 trillion balance sheet in October 2017, but the target level over the medium-term has not yet been specified. We expect three interest-rate hikes in 2018 and possibly two in 2019. The expected hikes are likely to translate into additional pressure on corporate margins and profitability. We believe that the most

20 Vanguard Economic and Market Outlook for 2018:

Rising risks to the status quo, December 2017.

pronounced risk to the status quo in the US could be a tightening labor market that will drive the unemployment rate well below 4%. An uptick in wages and inflation will justify the Federal Reserve’s raising rates to at least 2% by the end of 201820.

The ECB has announced that it will begin to tapper its EUR 30 billion per month asset purchase program until September 2018, and will probably start to hike its rates in 2019. The Bank of England raised its policy rate by 25 basis points to 0.50% in November, while keeping the bond purchasing programmes unchanged, reflecting shift to a dovish stance. However, the Bank of Japan is likely to keep its interest rates low and its quantitative easing program, albeit at a reduced pace. We are likely to see more rate hikes and further shrinking of balance sheets in 2018 and 2019, as inflation picks up and in

24

response to better growth. As we move to 2019, monetary policy conditions in developed economies will likely turn less accommodative. Improving economic conditions and subsiding risks have provided some space for central banks in EMDEs including Brazil, Chile, India, Russia, South Africa, Ghana, Mozambique and many others to cut their policy interest rates by between 25-100 basis points in 2017 to stimulate economic activity21. However, some few central banks such as Argentina, Czech Republic, Mexico, South Korea and Ukraine raised their policy interest rates to tame rising inflation and support currencies. We believe that the disinflation seen in 2017 has lost momentum and policy easing cycle is likely to slow down in 2018.

Amid further synchronized strength in advanced economies (AEs), mostly solid growth in EMDEs and, the general low inflation, global asset markets added to their

year-to-date stellar performance. Equity prices in advanced economies continued to rally, buoyed by generally favorable sentiment regarding earnings prospects, expectations of a gradual normalization path for monetary policy, and low expected volatility in underlying fundamentals. The MSCI world index increased by 17% in 2017, while the Euorstoxx and S&P gained by 17% and 15.7% respectively. Emerging market equity indices have risen further since August, lifted by the improved near-term outlook for commodity exporters. The MSCI emerging markets edged up by 26% to see the index closing 2017 at 1158.5. Earnings are expected to rise at a high single-digit rate, in 2018, providing further support to equities. Reported earnings were above market expectations in 2017. The cyclically-adjusted price-earnings ratios to multi-year highs could reflect that stock market valuations are overstretched.

Figure 9: Equity Valuations

Source: Bloomberg Finance L.P. / graph: Quantum Global Investment Management (rebased $100, indexed) indices: U.S. Earnings rebased $100 (lhs): S&P 500 Reported Earnings Share Weighted avg. Gain or Loss. U.S. Equities: rebased $100 (rhs): S&P 500 Index

21 http://www.cbrates.com/

2017

25

The appreciation of stock prices is based on a combination of corporate earnings growth, stable to higher dividend payouts, lower cost of capital rates and ratio multiple expansion (Figure 9). Downside risks are more elevated in the equity market than in the bond market, even with the expected inflation as dividends per share of US equities have been growing at a much faster rate since the 2008 crisis, raising questions about long-term sustainability. Market analysts expect higher risks and moderately lower returns given the elevated valuations, low volatility, and secularly low bond yields22.

The African stocks markets have also closely tracked the emerging markets indices in 2017 (Figure 10). Ghana stock market performed above the benchmark MSCI-EME since July 2017, largely reflecting broad improvement in the macroeconomic fundamentals (strong growth, low inflation and interest rates and stable cedi). The Nigerian stock markets trailed below the MSCI–EME in 2017, but only exceed it in January 2018, while the South African stock market has remained below throughout 2017. Nigeria Stock market benefited from the floating of the currency and the introduction of the Exporters and Investors FX Window since April 2017.

Figure 10: African Stock Markets, 2017

Source: Bloomberg

Bond market reaction to shifts in advanced economies monetary policies has been muted, with yield curves tending to flatten as short-term rates have risen more than longer-term rates (e.g., in the United States, United Kingdom, and Canada), consistent with still-subdued market expectations of sustained upside surprises on inflation23. The

22 BIS Quarterly Review, December 2017

Major long-term US government bond yields traded mostly sideways in Q4, 2017. The 10-year Treasury yield received a boost in early September at the beginning of balance sheet unwinding appeared to be certain, but its momentum fizzled out as the quarter progressed (Figure 11). The response was stronger at shorter tenors, with the two-year

23 (IMF WEO Update, January 2018)

90

100

110

120

130

140

150

160

Jan

, 20

17

=10

0

S.Africa MSCI EME Nigeria Ghana

26

Treasury yield increasing about 50 basis points from early September (right-hand panel). Yields at both ends of the term structure barely moved in the Euro Area and Japan, underlining the overall stability of policy expectations. Only UK gilt yields shifted significantly upwards in late September, with term spreads staying roughly unchanged as short and long yields

moved in lockstep.24 Sovereign spreads in EMEs continued to narrow in 2017, while the sovereign credit default swap (CDS) spreads were at the lowest since the end of the 2008 financial crisis. The resilience in sovereign spreads and strength in equity markets have been buttressed by sustained capital inflows throughout 2017.

Figure 11: Bond yields (10 Year Bonds) of selected high income countries

Source: Bloomberg

Capital inflows to EMDE have improved from the very low levels of 2016 at the same time as borrowing costs have declined, driven by a surge in portfolio flows and bank lending, as the search for yields continue. However, FDI flows to Asia remained strong, supported by a robust growth outlook and policy efforts to attract FDI (e.g., India, Indonesia, and Vietnam). FDI flows to Sub-Saharan Africa rose only slightly on the back of a moderate rise in commodity prices and an increase in non-commodity investments25. We expect capital inflows to

24 https://www.bis.org/publ/qtrpdf/r_qt1712a.htm

EMDEs to continue to be sustained in 2018, supported by improved growth prospects, but could moderate thereafter, as global financing conditions tighten.

African countries such as Nigeria, Cote d’ Ivoire and Senegal returned to the Eurobond market, benefiting from decreased risk aversion regarding investment in EMDEs and low financial market volatility. The issues have helped finance infrastructure investments, current account deficits, and cushion foreign exchange reserves. Bond

25 World Bank, Global Economic Prospects, January, 2018

-0.5

0

0.5

1

1.5

2

2.5

3

07

.01

.20

16

07

.02

.20

16

07

.03

.20

16

07

.04

.20

16

07

.05

.20

16

07

.06

.20

16

07

.07

.20

16

07

.08

.20

16

07

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.20

16

07

.10

.20

16

07

.11

.20

16

07

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16

07

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17

07

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17

07

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17

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17

07

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17

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17

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17

07

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17

07

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.20

17

07

.10

.20

17

07

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17

07

.12

.20

17

US France Germany UK Japan

27

spreads have continued to decline in most African countries, as the waning effect of the terms-of-trade shocks combined with moderating inflation and improving balances, helped to strengthen market sentiment. Bond spreads for Angola and Zambia have remained above emerging market spread at 456 and 429 respectively

(Figure 12). The spread for Ghana has declined to 354, reflecting improving confidence as the economy gathers more momentum, while the spread for Nigeria widened at the end of 2017, reflecting slow progress in addressing structural challenges and credit rating downgrade by Moody’s.

Figure 12: Bond Spreads of selected African Countries

Source: Bloomberg

A number of African countries had their credit ratings downgraded, largely on rising fiscal pressures and debt sustainability concerns, while a few had upgrades in 2017. Angola’s credit rating was downgraded to B2 from B1 by Moody’s in October, on lower economic strength, fiscal pressures and rising public debt (estimated around 68% in 2017). Nigeria’s credit rating was downgraded to B2 by Moody’s amid slow progress in addressing structural weaknesses. Congo Republic was downgraded to CCC+ and Caa2 by S&P and Moody’s due to liquidity pressures which

could lead to defaults on Eurobonds. Gabon and Namibia were downgraded due to deteriorating public finances, while South Africa remains under close scrutiny for further reviews after a downgrade by S&P in November. The outlooks for Ethiopia, Senegal and Zambia have been upgraded to stable from negative by Fitch, Moody’s and S&P earlier in 2017. We are likely to see affirmations of current ratings or upgrades if economic conditions continue to improve in 2019. Table 2 shows credit ratings of selected African countries as at 31 December, 2017.

-

200

400

600

800

1'000

1'200

1'400

1'600

EME Africa Ghana Namibia NigeriaSouth Africa Zambia Angola Kenya Ivory Coast

28

Table 2: Credit Ratings of Selected African Countries

S & P Moody’s Fitch

Country Credit Rating Outlook Credit Rating Outlook Credit Rating Outlook Angola B- Stable B2 Stable B Negative Côte d’Ivoire B Not Rated Ba3 Stable B+ Stable Congo Republic CCC+ Stable Caa2 Negative CCC Not Rated DRC CCC+ Stable B3 Negative B+ Not Rated Ethiopia B Stable B1 Stable B Stable Gabon B Stable B3 Negative B Negative Ghana B- Positive B3 Stable B Stable Kenya B+ Stable B1 Stable B+ Negative Mozambique SD Negative Caa3 Negative CC Not Rated Namibia Not Rated Not Rated Ba1 Negative BBB- Negative Nigeria B Stable B2 Stable B+ Negative Rwanda B Stable B2 Stable B+ Stable Senegal B+ Stable Ba3 Stable Not Rated Not Rated South Africa BB Negative Baa3 Negative BB+ Stable Zambia B Stable B3 Negative B Negative

Source: Bloomberg

On the outlook, we expect that the US to

continue with the normalization of

monetary policies, while monetary policies

will remain somewhere between

accommodative and hawkish in most

developed countries. We believe that bond

yields will continue to rise as the Fed moves

to unwind its balance sheet. We keep

believing that equity markets may have gone

too high and may be subject to corrections in

the near term. Investors need to be cautious

and a bit selective.

7 Commodity Markets Outlook

The prices of the major commodities were mixed in the fourth quarter of 2017. The energy price index grew by a solid 13.6%, while the non-energy index dipped by 0.3%. The energy index has soared by an impressive 92% since the low point reached in January 2016, but it is still down about 45% from the pre-collapse level of mid-2014. The majority of commodity prices are expected to remain steady or increase modestly in the coming quarter and year, supported by stronger global economic growth.

The price of Brent crude oil has continued its upward trajectory over the past few months, climbing to $64/b in December following the

closure of the Forties pipeline in the North Sea. The rally continued into the New Year, with Brent registering $68/b by 9th January on the back of political tensions in Iran. WTI crude rose to $62/b as the pace of US shale drilling slowed. These are the highest oil prices seen in more than two and a half years. The fundamental driver of higher prices has been a drawdown of global oil stocks following the OPEC production cuts. In addition, a significant geopolitical premium seems to have returned to oil prices, with various tensions in the Middle East. Further support for prices came in November when OPEC and 10 non-member oil exporting countries agreed to extend their production cuts until the end of 2018.

29

The International Energy Agency (IEA) estimates that world oil demand will expand by 1.3 mb/d in 2018, while non-OPEC supply is forecast to rise by a robust 1.6 mb/d. Hence oil stock levels could rise again, leading to a slight easing of prices. However, much of the projected supply increase depends on the response of US tight oil

drillers to rising prices. The slow pace of drilling in recent months suggests that the optimism might be exaggerated, especially as producers have been focusing in the past couple of years on higher-yielding ‘sweet spots’, which are increasingly being exhausted. In the absence of shocks, Brent is expected to trade at around $60/b in 2018.

Figure 13: Commodity Price Indices

Source: World Bank

Figure 14: World Oil Demand/Supply Balance and Oil Prices.

Sources: IEA and EIA

40

60

80

100

120

140

160

Jan10

Mai10

Sep10

Jan11

Mai11

Sep11

Jan12

Mai12

Sep12

Jan13

Mai13

Sep13

Jan14

Mai14

Sep14

Jan15

Mai15

Sep15

Jan16

Mai16

Sep16

Jan17

Mai17

Sep17

20

10

= 1

00

Energy Non-energy Agriculture Base Metals Precious Metals

Forecast

-3

-2

-1

0

1

2

3

4

5

6

84

86

88

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2012-Q1 2013-Q1 2014-Q1 2015-Q1 2016-Q1 2017-Q1 2018-Q1

World liquid fuels production andconsumption balancemillion barrels per day (MMb/d)

Implied stock change and balance (right axis)

World production (left axis)

World consumption (left axis)

Source: Short-Term Energy Outlook, December 2017.

MMb/d

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2014 2015 2016 2017 2018

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Crude Oil Prices

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The prices of precious metals (gold, platinum and silver) fell by 4.4% in the 4th quarter, reversing previous quarterly gains, but from January to December, they have risen by 7.2%. (Figure 15)Geopolitical risks could continue to support the gold price in 2018, although anticipated US monetary tightening and ensuing dollar strength could dampen the yellow metal. Furthermore, inflation remains below the targets level in most industrialized countries and many emerging markets, suggesting that there will not be much upward pressure on precious metal prices resulting from inflation hedging activities. Upside potential for gold in

particular could emanate from a further escalation of tensions surrounding North Korea’s nuclear weapons programme. Furthermore, if the US equities bull market runs out of steam, this could lead investors to switch into precious metals. The most important long-term driver of gold demand is, however, income growth. The positive outlook for world growth in 2018 – and particularly growth in China and India, the biggest gold jewellery consumers could further sustain the gold Bull Run. Platinum demand and prices are also likely to be supported by the uptick in global growth and vehicle demand.

Figure 15: Precious metal prices

Source: Source: World Bank

The performance of base metals in Q4 was quite variegated. The best performer was lead, which gained 5.7% between September and December. Copper rose by 3.9%, while Iron ore increased by 1% and nickel and zinc each edged up by 2.5%. Aluminum dipped by 0.8%, and tin recorded the heaviest loss of 6.3%. Overall, the metals and minerals index edged up by 1.7% in Q4, raising the annual increase to a solid 14.4%.

The index has climbed by 52.3% since the January 2016 low point. Stronger global growth should continue to support base metal prices in 2018, with additional impetus likely to come from supply constraints, especially for lead, nickel and zinc. Iron ore is the likely exception, as new mines in Australia and Brazil will start production this year.

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Gold Platinum Silver

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The food price index was almost flat in 2017Q4, as a slight increase in grain prices was offset by declines in oils and meals and other food. For 2017 as a whole, food prices eased by 2.2%. For grains, there were modest increases for rice and maize and decline in wheat. Bumper cereal harvests and record inventories are expected in 2018. The beverage price index slumped by 6.1% in 2017Q4, taking the 12-month decline to -11.4% on the back of solid production volumes. Timber prices changed marginally in Q4, with plywood slipping by 2% while pulp remained constant. Continued positive momentum in the global economy could support slightly firmer timber prices in 2018. Agricultural commodity prices are not expected to increase much in 2018, as

modest demand growth will likely be offset by productivity gains, but extreme weather events pose a downside risk especially to cereals and other crops. Overall, most commodity prices are expected to remain steady or increase modestly this year, supported by stronger global economic growth. The main downside risks, include geopolitical tensions from the Korean peninsula and in the Middle East, as well as the possible tighter monetary conditions and more protectionist trade policies. A more detailed report on the commodity markets is available at: https://quantumglobalgroup.com/knowledge-hub/outlooks/commodities-outlook/

8 Risks to monitor and Implications for investments

The outlook is shaped by both upside and downside risks. On the upside, the strengthening of the global economy could be stronger and durable than expected, as strong consumer and business confidence and easier financial conditions reinforce each other. Stronger-than-expected activity in advanced economies (e g U.S and Euro Area) could strengthen growth EMDEs especially Africa through higher demand for exports, investment, and remittances. On the downside, trade policy uncertainties amid the rise in trade protectionism especially in the US could fragment trade integration, dampen confidence and hinder a sustained global economic recovery, given the deep and mutually reinforcing linkages between trade, investment and productivity growth. In the UK, Brexit negotiations remains uncertain and challenging.

With interest rates and financial market

volatility at low levels, amid higher valuation

of asset prices and very compressed term

premiums, the outlook could be vulnerable

to sudden changes in market sentiment or

unexpected policy shifts. For example, a

faster than expected monetary policy

tightening in the US could trigger a sudden

correction in asset valuation, resulting in

tightening of global financial conditions,

further dampening growth and confidence.

This could also raise global risk aversion and

trigger capital outflows from emerging

markets, leaving economies with high gross

debt refinancing needs and unhedged dollar

liabilities particularly exposed to financial

distress. In Africa, this could thwart

sovereign access to financing, which has

been an important source for domestic

investment in recent years.

China’s housing market continues to cool down amid the rebalancing process. An abrupt slowdown in China could generate

32

adverse spillovers to African countries through lower-than-projected commodity prices, and lower exports, and decrease in FDI, further jeopardizing economic recovery momentum. African oil and metals exporters are particularly vulnerable to this risk. The disorderly unwinding of the housing market could also induce volatility and tightening of global financial, raising the cost of financing in Africa’s frontier economies. However, this likelihood of this risk materializing is low.

Rising geopolitical tensions relating to potential escalations of the North Korea crisis and in the Middle East (especially Iran and Saudi Arabia) continue to raise concerns. Fears of an escalation of tensions between the US and North Korea amid continued combative rhetoric could severely impact investor sentiment around the globe and cause greater financial volatility and oil prices and dampen global economic recovery. The pulling out of the nuclear deal with Iran by the US, could complicate the peaceful resolution of the nuclear debacle.

A number of African countries are facing elections in 2018 which need to be monitored. These include Cameroon, DRC, Mali, Mauritius, Madagascar, Sierra Leone, South Sudan and Zimbabwe in 201826. In Zimbabwe, the political transition is unfolding, after the resignation of President Robert Mugabe and the installation of Emmerson Mnangagwa in November 2017. Elections are expected in 2018, where Mnangagwa will contest against the opposition MDC Alliance and other parties. In DRC, the lack of progress towards the implementation of the 2016 electoral agreement and further delay of elections (since December, 2016) is fueling tensions and deepening political crisis. Elections are expected in 2018, but slow progress in preparations may delay them to 2019. Protracted political tensions are hurting confidence, deterring investment, hampering economic activity and diverting attention from economic policy issues.

9 Conclusion

The global economy is gaining momentum,

which is contributing to renewed optimism.

The global economy is projected to expand

by 3.8% in 2018-2019, as the cyclical

momentum continues both in high-income

countries and EMDEs. High frequency

economic indicators point to continued

strengthening of momentum. Growth in

high income countries will pick up to more

than 2%, while EMDEs will expand robustly

at 4.9% in 2019. The global economy will

26 https://www.ndi.org/elections-calendar?country=-1&region=1337&year=2018 and http://www.eisa.org.za/calendar.php

continue to benefit from loose financial

conditions and supportive fiscal policies in

2018. Economic activity will remain strong

in the US, Euro Area and Canada. At the

same time economic recovery will gather

steam in Brazil, Russia and other commodity

exporters, supported by firming commodity

prices and policy support. India should

continue its positive growth trend, as the

effects of currency reforms and the goods

and services tax dissipate, while China’s

33

economy will continue its managed

slowdown. Growth in Sub-Saharan Africa will

continue to recover moderately, supported

by stabilising commodity prices, improving

external demand and policy support.

Monetary conditions will remain broadly

accommodative, despite normalization in

the US and possible rate increases by other

major central banks. Financial conditions will

remain supportive, contributing to

improvement in market sentiment and

investor optimism. The buoyant cyclical

momentum of equity markets seen in 2017,

could continue in 2018, but a correction is

possible in the near term given very high

valuations. We maintain a moderately pro-

growth asset allocation bias, which favors

equities and equity-related credit risk over

currencies and bonds.

Global trade will strengthen moderately in 2018, in response to the pick-up in the global economy, but the risk of rising protectionism remains a concern. Commodity prices are expected to remain steady or increase modestly in the coming year supported by stronger global economic growth. Oil prices are projected to average $60/bbl in 2018. Global inflation is gradually picking up, lifted by firming commodity prices and rise in import prices

Both upside and downside risks continue to

shape the outlook. On the upside, the global

economy could gain more strength, raising

corporate profits as strong consumer and

business confidence continuing to hold up.

On the downside, risks may emanate from

policy uncertainties related to the rise of

trade protectionism in the US, the pace of

interest rate hikes in the US, escalation of

geopolitical tensions, China’s rebalancing

process and domestic political risks.