Welcome to the latest edition of ICAEW’s Economic
Insight: Africa, the quarterly economic forecast
for the economies of the sub-Saharan Africa
(SSA) region prepared for finance professionals
whose work focuses on Africa. This edition was
produced by Oxford Economics, ICAEW’s partner
and acknowledged expert in global economic
forecasting, and NKC African Economics.
In this issue of Economic Insight: Africa we provide
insight on the dynamics of financial access in the
region.
Key findings
Can finance drive development?
• On aggregate, SSA performs poorly when
compared to other regions on access to finance,
but some countries like Rwanda are showing an
outstanding performance. In many countries,
banks are well-capitalised and enjoy healthy
asset quality, implying considerable scope for
expansion.
• There is a large variation in borrowing costs
across the continent. Broadly speaking, West
African economies face more expensive
borrowing costs than East Africa, as authorities
try to curtail serious inflation.
Economic Insight:
Africa
• This divergence continues when looking at GDP
growth in the region. Greater diversification
in East Africa should allow stronger economic
growth in 2017 and beyond, while the major
West African economies continue to suffer the
fiscal and monetary consequences of lower oil
prices.
• Economic risk remains much higher in Africa as a
whole compared to other major emerging market
regions, but there are a number of bright spots.
Botswana, Namibia and Mauritius all fare well by
global emerging market risk standards.
Quarterly briefing Q3 2016
BUSINESS WITH CONFIDENCE
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Angola came in at the bottom of the rankings, and it is
much more difficult to get credit there than in SSA on
average. Angola only made one reform to facilitate access
to credit in 2010-16. While Angola has the third largest
banking system after Nigeria and South Africa in SSA, only
a small portion of the population uses the banking system
and few businesses apply for loans.
Economic report Q3
Access to finance
In this edition, we look at the role financing can play in
economic development across the continent and likely
developments in the cost of financing in the coming
years. By and large, formal financial inclusion is still at
very low levels in Africa. This represents a key hurdle to
development as access to financing is critical for funding
much needed investment and improving productivity.
Rwanda performed the best in SSA in terms
of getting credit, followed by Zambia,
Kenya, Ghana, Mauritius and Uganda.
Credit metrics
By and large, formal financial inclusion
is still at very low levels in Africa. This
represents a key hurdle to development.
According to Making Finance Work for Africa (MFW4A), in
2015 only 23% of African households had access to formal
or semi-formal financial services. There is significant
variation between countries’ levels of financial sector
development. Private sector credit extension (PSCE) to
GDP ratios reflect the extent to which banking sectors
provide capital to business (Figure 2). Most SSA countries
have relatively low PSCE to GDP ratios, which is indicative
of the underdeveloped nature of the banking sectors and
the limited availability of private credit in these countries.
To get a sense of the availability of credit, it is
interesting to compare performances in the ‘Getting
Credit’ indicator as reflected in the World Bank’s Doing
Business rankings. The Distance to Frontier (DTF) score
captures the gap between an economy’s performance
and a measure of best practice across the entire sample
– with 100 being the frontier.
Figure 2: Banking sectors still underdeveloped in most
of sub-Saharan Africa
SSA performs relatively poorly in terms of getting
credit compared to other regions of the world, with a
regional average DTF score of 35.9 – only the Middle
East and North African region does worse. However,
the 10 top performing countries (out of 15 SSA countries
in this analysis) have an average DTF score of 67, which
is notably better than the SSA regional average as well
as the East Asia & Pacific (50.6), Latin America &
Caribbean (39.6) and South Asia (41.3) regions.
Private sector credit as % of GDP
150
120
2000s
1990s
2010s
90
There is a cluster of countries around a DTF of 60. Of
these, Nigeria and South Africa have relatively strong
financial and banking markets; however, in Nigeria,
insufficient foreign exchange and maturing debt
obligations pose a risk to accessing credit.
60
30
0
In the 2016 rankings (Figure 1), Rwanda performed
the best in SSA in terms of getting credit, followed by
Zambia, Kenya, Ghana, Mauritius and Uganda. Rwanda
has made six reforms to facilitate getting credit during
2010-16, through strengthening borrowers’ and
lenders’ collateral laws.
South
Africa
Mauritius
Kenya
Angola
Ivory
Coast
Ghana
Nigeria
Source: IMF/NKC
There is significant variation between
countries’ levels of financial sector
development.
Figure 1: Access to credit varies considerably
Ease of getting credit, countries and regions
Rwanda
Zambia
Kenya
Ghana
Mauritius
Uganda
Namibia
Nigeria
South Africa
Botswana
Zimbabwe
Ivory Coast
Tanzania
Ethiopia
Angola
East Asia & Pacific
LatAm & Caribb.
South Asia
SSA
MENA
South Africa and Mauritius have the highest PSCE to
GDP ratios on the continent, with South Africa’s figure
estimated at 150% in 2015 while Mauritius’s ratio is
estimated at around 104%. These figures are high even
in a global context: South Africa’s ratio is higher than the
UK’s (134%), while Mauritius’s figure is slightly above
the global middle-income weighted average of 102%.
The high ratios result from the fact that these countries’
finance sectors are more sophisticated than those of other
SSA countries.
Beyond South Africa, the countries with the largest
banking sectors in SSA, Nigeria and Angola, have
relatively low PSCE to GDP ratios of 14% and 27%
respectively.
0
20
40
Distance to Frontier
60
1=worst
80
100=frontier
Source: Doing Business 2016
icaew.com/economicinsight oxfordeconomics.com
100
Turning to financial soundness, a good indicator to
assess a banking system’s balance-sheet exposure is the
regulatory capital to risk-weighted assets ratio.
ECONOMIC INSIGHT – A FRIC A Q3 2 016
Looking at asset quality, Burundi, Ghana and Cameroon
perform poorly in non-performing loan (NPL) to total
gross loan ratios (Figure 3). While the Organisation for
Economic Cooperation and Development (OECD) median
ratio is around 3.2%, Burundi, Ghana and Cameroon have
figures of 17.9%, 14.7% and 10.5% respectively. Most SSA
countries in the sample have relatively high NPL ratios,
with Namibia and South Africa being the only countries
with NPL ratios below that of the OECD median.
Figure 3: Considerable scope for credit expansion
%, 2015 H1
%, 2015 H1
Cameroon
Namibia
South Africa
0
Nigeria
0
Lesotho
3
Ghana
5
Rep. of Congo
6
Burundi
9
10
Mauritius
15
Kenya
12
Tanzania
15
20
Uganda
25
Rwanda
18
Seychelles
21
30
Swaziland
35
Regulatory Capital to Risk-Weighted Assets (lhs)
Non-performing Loans to Total Gross Loans (rhs)
Source: IMF
Cameroon performs particularly poorly on financial
soundness: it has the lowest capital adequacy ratio in
the sample, while having the third-highest NPL ratio. In
many SSA countries the combination of healthy capital
adequacy ratios and relatively low NPL ratios suggests
considerable scope to increase credit extension.
Monetary policy and outlook
Another key factor when assessing finance is the cost
of finance. In this context, there are important regional
differences across sub-Saharan Africa (Figure 4).
Through the past 12 months or so, East African countries
have eased monetary policy while their West African
counterparts tightened it in an effort to slow inflation. In
Kenya, lower inflation allowed monetary authorities to
cut rates by 1% to 10.5%. Ugandan authorities, having
raised the benchmark rate by a cumulative 6% in 2015,
eased policy on two occasions during the first six months
of 2016.
Through the past 12 months or so,
East African countries have eased
monetary policy while their West African
counterparts tightened it in an effort to
slow inflation.
icaew.com/economicinsight oxfordeconomics.com
Figure 4: Big variation in inflationary pressures
30
CPI Inflation, % in year to June 2016
For emerging and developing economies, this ratio is
around 17% according to IMF figures. The accompanying
graph shows that some African countries have ratios that
deviate notably from this figure. In both Swaziland and
Rwanda the ratio exceeds 22%. While positive from a
financial soundness perspective, these high ratios also
indicate that there is considerable scope to increase
banking activity in these countries if banks can streamline
their risk assessment processes. At the other end of the
spectrum, Cameroon, South Africa and Namibia have
relatively low capital adequacy ratios, and in the coming
years this might limit banks’ appetite to lend.
Ghana
25
20
Angola
Uganda
15
10
Nigeria
Kenya
South Africa
Namibia
Botswana
Mauritius
Ivory Coast
0
0
5
10
5
15
20
25
30
35
Benchmark Policy Rate, %, June 2016
Sources: National central banks and statistics agencies
In August, Kenya enacted a law prohibiting banks from
lending at rates of more than 4% over the Central Bank
Rate. Commercial banks’ weighted average lending rates
were recorded at 18.2% in June, which, when adhering to
the new legislation, would be decreased to a maximum
of 14.5%. This could distort credit markets, but on a
more positive note could spur greater competition and
incentivise more accurate credit scoring. Both would be
positive for access to finance in the longer term. Given
that banks will require some time to adjust to the new
regulation, and considering uncertainty related to global
financial conditions, Kenyan authorities are expected to
adopt a cautious approach towards monetary easing.
Uganda still has scope to reverse some of the aggressive
tightening undertaken last year, and monetary authorities
will be looking to do their part to support economic
growth following the disappointing growth figures record
in Q1 2016.
The West African monetary environment presents a
stark contrast. The inflationary impact of a severe dollar
liquidity drought – forcing vendors to turn to the parallel
or black market – and administered cost increases, such
as petrol price hikes, prompted monetary authorities in
Business implications
Given that the cost of capital is lower in East Africa
than in West Africa, firms in West Africa may need
to be more creative in accessing finance to support
investment and growth. This could be done by using
alternative sources to bank finance, or by seeking
finance in economies where banking sectors have
more scope to offer finance. That said, given the
pressure for exchange rate depreciation/devaluation
in some commodity-producing economies, this could
increase financial strain on firms and risks of NPLs
for banks. Exchange-rate risk means that firms in
commodity-exporting economies may also experience
increasing problems in accessing foreign exchange in
the years ahead, until a more sustainable exchangerate policy is adopted. As Mauritius pivots even
more towards Africa, equity financing will naturally
seek out opportunities in East Africa, further driving
entrepreneurship and the expansion of maturing
businesses. This could further enhance the advantage
of firms in East Africa with respect to financing
compared to their Western neighbours.
ECONOMIC INSIGHT – A FRIC A Q3 2 016
Angola and Nigeria to tighten policy this year. Angola
lifted the policy rate by a cumulative 5% during H1, as
inflation accelerated from 17.3% to 31.8% over the same
period. Ghana’s interest rates are still high after aggressive
central bank moves in recent years to curb rampant
inflation.
Figure 5: East Africa enjoys an easier monetary
environment
25
East Africa
West Africa
Regional economic outlook
East and Southern Africa
The outlook for economic growth in East Africa remains
generally positive, largely because the region’s economies
are more diversified than those of the oil- or commoditydependent countries in other regions (Figure 7).
Figure 7: Growth prospects strongest in diversified
economies
20
Real GDP growth %
10
15
8
10
6
5
Prime lending rates, %
30
28
Ghana
26
Uganda
24
22
20
Kenya
Angola
Nigeria
Tanzania
18
16
14
12
10
Apr
2015
Jul
2015
Oct
2015
Jan
2016
Apr
2016
Similarly, exchange rate pass-through and poor liquidity
management forced Nigeria to abandon a peg and
embrace a more flexible exchange rate framework in June.
In reaction to the initial naira devaluation of some 41%,
the apex bank lifted the benchmark rate by 2% in July,
having already tightened policy by 1% in Q1. Looking
ahead, higher interest rates will be needed to attract the
foreign exchange that is currently in short supply in the
economy.
Taking these two broad trends together therefore,
monetary policy is broadly supportive of cheaper finance
in East Africa, but pushing borrowing costs up in the
western half of the continent (Figures 5 and 6).
Taking these two broad trends together
therefore, monetary policy is broadly
supportive of cheaper finance in East
Africa, but pushing borrowing costs up in
the western half of the continent.
icaew.com/economicinsight oxfordeconomics.com
Nigeria
Angola
Zambia
Ghana
Mauritius
Uganda
Kenya
Malawi
Ethiopia
South Africa
Figure 6: and usually lower borrowing costs
Jan
2015
0
Ivory Coast
Sources: National central banks and statistics agencies, June 2016
2
Senegal
Average
Policy Rate
%
Mozambique
Average
Inflation Rate
% y-o-y
Rwanda
Average
Policy Rate
%
Tanzania
Average
Inflation Rate
% y-o-y
DRC
0
4
Rwanda and Kenya in particular have maintained strong
growth momentum into 2016, recording real GDP growth
of 7.3% year-on-year (y-o-y) and 5.9% y-o-y in the
first quarter of the year respectively; Uganda recorded
a relatively disappointing 3.4% y-o-y rate in the same
quarter. Tanzania and Ethiopia have not released any GDP
growth figures for this year, but in Ethiopia the growth
outlook has deteriorated due to a severe drought. The
pressure on the agricultural sector has had spill-over effects
into other sectors such as services and manufacturing.
However, the drivers that have supported Ethiopia’s
remarkable growth in recent years remain in place.
Southern Africa is going through a difficult time owing
to drought-induced problems (higher food prices, strains
on hydro-dependent power grids), as well as to anaemic
growth in South Africa, the region’s biggest market. Risk
in Mozambique is trending negative as a public debt crisis
threatens donor funding and a militia insurgency from the
1980s refuses to go away. Zambia’s August election was the
tensest in its democratic history, partly because of soaring
food prices.
On the economic front, the GDP forecast for Southern
Africa has been revised lower to just 0.9% in 2016,
primarily due to zero growth forecast in the South African
economy, which accounts for more than half of regional
output. Forecast economic expansion in Mozambique,
which was once thought to be a rising star in the region,
has also been lowered sharply to 4.9% for 2016 due to
spill-over effects from the external debt scandals.
Mauritius’s DTAA with India
The amendment of Mauritius’s Double Taxation Avoidance
Agreement (DTAA) with India is likely to have minimal
macroeconomic impacts, but certain sectors and
economies do stand to see some gains. Recently, the credit
ratings agency Moody’s announced that the changes to
the DTAA with India ‘will likely only have a modest impact
on (Mauritius’s) growth due to the country’s sectoral and
geographic diversification’.
ECONOMIC INSIGHT – A FRIC A Q3 2 016
The amendment of Mauritius’s Double
Taxation Avoidance Agreement (DTAA)
with India is likely to have minimal
macroeconomic impacts, but certain
sectors and economies do stand to see
some gains.
Mauritius still has several Double Taxation Agreement
(DTA) treaties in place, the majority of them with other
African countries. This means that investments in Africa
will begin to look more attractive to bona fide asset
managers based in Mauritius than ones in India, whose
investments will henceforth be subject to capital gains
tax on exit.
Data from the venture capital industry is usually
difficult to obtain, but managers in Africa are partial
to the financial services sector and to consumer
goods and services. The former accounted for 24%
of sales by private equity managers (‘exits’) on the
continent in 2014-15, and the latter for 16%. South
Africa is still the dominant space for private equity
operators, accounting for 40% of exits, but East Africa
is becoming more important: it accounted for 14% of
exits in the period, up from 10% in 2007-13. Kenya is
by far the most active market in the region. As far as
listed equity goes, the shares of the top companies in
the region – like Safaricom, Equity Bank and East Africa
Breweries – are perennial features in asset managers’
portfolios.
West Africa
Africa’s two largest oil producers, Nigeria and Angola,
remain under immense pressure as a result of
low-trending crude oil prices. The Nigerian economy
performed dismally in H1 2016 and we forecast
a contraction of -0.8% for the full year, the first
contraction since 1991. Further, the flexible exchange
rate arrangement has thus far had limited success,
and despite the naira’s slide, US dollars remain in
short supply.
Angola’s central bank has abandoned the strategy of
periodically devaluing the kwanza exchange rate, with
the local unit remaining artificially stable since April.
Tighter forex liquidity conditions have seen the parallel
market exchange rate weaken significantly, driving
inflation above 35% y-o-y in July.
Luanda has also decided to abandon talks with the
International Monetary Fund (IMF) on a possible
reform programme supported by credit, with China
stepping in as key lender. This bodes ill for prospects of
growth-enhancing structural reform and development
in the non-oil economy, since China’s financing is
unlikely to be tied to these kinds of measures, as would
be the case for IMF financing. We expect growth of
only 1.2% in 2016 and 2.3% in 2017.
icaew.com/economicinsight oxfordeconomics.com
Ghana has continued to make good progress in relation to
fiscal consolidation under the auspices of an IMF support
programme. Inflation peaked in Q1 2016 and is set to
trend lower; investor sentiment has improved; and credit
disbursements have bolstered foreign reserves and the
cedi. Ghana’s continued participation in the IMF support
programme is important to watch. If it continues, our
forecast is for real GDP growth of 4.3% in 2016 and 4.7%
in 2017.
Overall, risk in SSA is higher than in other
regions, but a closer look reveals pockets of
lower risk in selected countries.
Risk evaluation by country
In order to examine in more detail specific areas of
vulnerability in Africa we use our Risk Scorecard, developed
using data from the Oxford Economics-Control Risks
Economic and Political Risk Evaluator (Figure 8). The
indicators encompass various dimensions including political
(the risk of political instability), business environment (the
regulatory and legal framework), economic (the resilience
of the economy), exchange rate (the potential for sharp
currency moves) and credit rating (sovereign debt default
risk). Economies are ranked 1–10 on each metric (10 being
the highest level of risk). Green circles denote scores of 0–2,
grey denotes scores of 3–5, and red denotes scores of 6–10.
Overall, risk in SSA is higher than in other regions, but
a closer look reveals pockets of lower risk in selected
countries. Botswana, Namibia and Mauritius are Africa’s
outliers on measures of risk. There is some exchange rate
pressure in the latter on weak European demand, but in
the former two the currency peg with the South African
rand, small populations, stable institutions and generally
business-friendly regulations make for an attractive and
relatively low risk business environment.
Figure 8: Economic risk high in sub-Saharan Africa
Political
Business
Environment
Economic
Exchange
Rate Risk
Credit
Rating
Angola
l
l
l
l
l
Botswana
l
l
l
l
l
Ivory Coast
l
l
l
l
l
Ethiopia
l
l
l
l
l
Ghana
l
l
l
l
l
Malawi
l
l
l
l
l
Mauritius
l
l
l
l
l
Namibia
l
l
l
l
l
Nigeria
l
l
l
l
l
South Africa
l
l
l
l
l
Tanzania
l
l
l
l
l
Uganda
l
l
l
l
l
Zimbabwe
l
l
l
l
l
ECONOMIC INSIGHT – A FRIC A Q3 2 016
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