Africa’s Reshuffled Ratings Deck

South African shares after barely positive Q1 performance on the MSCI index stumbled as longtime Finance Minister Gordhan was replaced by the former Interior Minister, a close President Zuma ally amid widening splits in the ruling African National Congress ahead of meetings to choose a successor especially if the full term is shortened with his resignation. S&P led the sovereign ratings downgrade charge to junk with the move, as political infighting will not end stagflation with 1 percent growth and 5 percent inflation forecast this year. Commodities have been battered by severe drought and mining sector consolidation despite better terms of trade bringing the current account deficit below 3 percent of GDP. The rand had stabilized as an emerging market proxy with global investor asset class embrace, but the party intrigues resumed its plunge to the 13/dollar level, postponing possible central bank rate cuts indefinitely. Local debt was not downgraded but fund managers have turned wary and are lukewarm as well on major bank prospects given high consumer borrowing. The fiscal gap target was unlikely to be met with lagging tax collection, and with Gordhan’s ouster the state enterprise reform push may also sputter, increasing contingent liabilities. The government has tried to access development bank lines for flagship utilities like Eskom, but these institutions have insisted on governance and tariff changes. President Zuma’s ex-wife, formerly a top Africa Union official, is in the running for the scheduled 2018 race but her candidacy may be tarnished with name notoriety and lack of business experience. Commentators have raised the prospect of a Trump-like challenger from outside the traditional power bases, including high-tech entrepreneurs, but none have announced intentions and the ANC stranglehold on the nomination process may be too formidable.

Kenya’s MSCI frontier gauge was flat through March ahead of August elections which will rematch incumbent President Kenyatta against perennial opposition stalwart Odinga, who has criticized preparations to date. Growth is favorable at 6 percent but the budget gap is also at that level, and the planned even split between domestic and foreign financing may prove difficult in view of investor memories of past violence and current market conditions. Inflation is again in double digits and Treasury issuance is behind schedule on higher yield demands, drifting toward the 14 percent bank lending rate cap. Externally a $750 million syndicated loan must be repaid in the second half, and concessional source reliance could be jeopardized if the polls again invite tribal warfare. Nigeria placed a Eurobond but the internal debt service/revenue ratio remains steep at 60 percent. The stock market is depressed on meager 1 percent growth, a dollar squeeze as the central bank refuses to relent on official rate control, and poor earnings and prudential results at leading banks. The current account surplus should exceed 1 percent of GDP mainly on import compression as oil production is still constrained by inefficiency and attacks despite rising world prices. The President’s return from unexplained extended medical leave abroad has not lifted sentiment despite his pledge to overhaul the economy with the fervor of the Boko Haram anti-terror campaign, which has overturned previous internal displacement numbers.