Africa’s Capped Goodwill Deposits

As the US research group Freedom House reported that Africa’s number of democratic leaning countries was down to 60 percent, election-related political and economic jolts took their toll on MSCI frontier markets, which lagged the core universe fund flow and performance surge. Kenyan banks sold off steeply as President Kenyatta ahead of polls next year signed legislation to cap loan and deposit rates, over central bank and industry association protests. Maximum borrowing cost will be 4 percent above the benchmark rate, and savings accounts must yield at least 70 percent of that level. The banks’ lobby called the restrictions “populist and retrograde,” as it assembled a cheap credit facility to  stave off the measure, but the President argued that with double-digit rate spreads  sector return on equity was extreme for the region, and business and public opinion surveys reinforced his stance. Small and midsized firms in particular lack affordable terms, and a separate $650 million commercial-official European bank initiative, Arise, will launch in 2017 in Eastern and Southern Africa, as the IMF predicts Sub-Sahara GDP growth at just 1.5 percent for the first per-capita income drop in decades. Zambian securities were battered and the future of Fund program discussion was in doubt after the opposition presidential candidate, a wealthy entrepreneur, contested results showing a razor-thin ruling party re-election victory. The dispute may be settled in court, but shops closed in preparation for trouble. The challenger, running a second time, campaigned on an anti-corruption and economic reform platform, with cabinet ministry elimination a centerpiece. Copper is two-thirds of exports and the currency has fallen 40 percent against the dollar the past two years with price reversal. The incumbent took the post after his predecessor’s death and early in his term conducted negotiations with the IMF, but agreement was missed over required subsidy cuts to slim the budget deficit and government debt. The media questioned another arrangement given the history of confrontation with Washington, and the main independent newspaper was shuttered over alleged overdue taxes, drawing criticism from international watchdogs.

In Zimbabwe MSCI losses mounted as demonstrations spread beyond army veterans to the general public, who faced off directly against security forces. New elections are not due for two years, but opposition parties have begun to debate joint strategy to force President Mugabe’s earlier departure as his age and health also may hasten transition. Longtime ZANU party loyalists have broken with the regime, and civil servants have not been paid for months with empty coffers. China will no longer bankroll abuses and management in exchange for natural resources, and reconciliation with the Bretton Woods development lenders has been slow under shareholder doubts and outstanding arrears. The IMF notes mixed progress under a staff-monitored agreement, but current reliable statistics are absent, and signature policies such as farm nationalization are anathema to deeper engagement. The indigenization law has been adapted and delayed to allow continued foreign majority ownership, and local-currency reintroduction did not pass the planning stage. South Africa had been an escape route but sentiment has turned against immigrants, and experts fear the worsening unrest could prompt military takeover to altogether erase competitive space.

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