Africa Weekly Review: Economic policy post-Mbeki in South Africa and the emergency meeting of the MPC in Nigeria.

This week we comment on both of our core sub-Saharan African economies. This is unusual because we will shortly distribute our quarterly reports for both South Africa and Nigeria.

We have opted for advance comment due to unfolding events: the resignation of President Mbeki and the market turmoil following the short-lived resignation of finance minister Manuel in South Africa, and the emergency meeting of the monetary policy committee in Nigeria.

South Africa: Manuel the totem

The local market sold off sharply on 23 September when a presidency statement announced that 14 members of the government including Trevor Manuel, the finance minister, had resigned. It subsequently emerged that many of the ministers including Manuel and his deputy, Jabu Moleketi, were open to reconsidering their decision. The markets then rallied, and by the close it was clear that Manuel, Moleketi and several others would be pleased to serve the expected new president of the republic and current deputy president of the ruling African National Congress (ANC), Kgalema Motlanthe.

Manuel argued that he and his colleagues were duty bound to resign because they had been appointed by Thabo Mbeki, the head of state from 1999 until his resignation on 20 September after a stormy meeting of the national executive committee of the ruling African National Congress (ANC). The currency opened 23 September at 8.00 per US dollar, tumbled to 8.22 on the release of the statement, recovered briefly to 8.02 and closed at 8.14. The market was closed today for a public holiday.

The sharp price swings in the currency and other markets yesterday reflect the totemic importance of Manuel as the person who presided over the longest run of successive quarters of growth in South African history, its first ever budget surpluses, its introduction of inflation targeting and its attainment of investment-grade credit status. He has considerable stature at home and, particularly, abroad, after 10 years in the post but there would be others to take the reins and maintain the policies, such as Lesetja Kganyago, the director-general of the National Treasury.

Zuma headed for the presidency

The market focus is naturally on the economic policies after the elections in mid-2009 when Jacob Zuma, the president of the ANC, will become head of state unless his legal difficulties re-emerge. High Court Judge Chris Nicholson threw out corruption charges against Zuma on a technicality on 12 September, and also opined that Mbeki’s government had exercised political influence over the National Prosecuting Authority.

The case, however, is not closed. The prosecutor’s office plans to challenge the ruling of Judge Nicholson. Also, Mbeki himself wants to contest the judge’s statement about political influence, which turned the meeting of the ANC national executive against him. It is unlikely that either challenge will derail Zuma’s progress towards the presidency of the republic next year.

ANC the dominant partner in the ruling alliance

The ANC’s formal partners in the ruling alliance, the trades union umbrella group Cosatu and the South African Communist Party (SACP), are pushing for a change in direction. They consistently supported Zuma against Mbeki within the ANC throughout his legal difficulties, and are now looking to call in their debts. Zwelinzima Vavi, the head of Cosatu, has all “conservative” policies in his sights for reversal, and has a particular dislike of the budget surplus and inflation targeting. He has also called for unspecified action on land redistribution.

Net non-resident portfolio flows (ZAR bn; 3-month moving average)

Vavi’s views are clear market negatives. However, while the presidency will now listen more respectfully to Cosatu and the SACP, which Mbeki largely ignored, the ANC is the senior party in the alliance and will continue to call the shots. More significant than Vavi’s views are those of Gwede Mantashe, the party’s secretary-general, who has outlined a vision of future economic policy as being marked by change and continuity.

The new presidency from next year will see higher government spending and, very likely, the sacrifice of Manuel’s treasured budget surplus. Nonetheless, the National Treasury will produce its annual Medium Term Budget Policy Statement next month, and we have little doubt that the projections over three years will maintain the familiar conservative fiscal stance. The ANC leadership (if not its counterparts in Cosatu and the SACP) has a reasonable grasp of the power of market forces and is wary of introducing too much change at the expense of continuity. It is worth noting that black business leaders such as Tokyo Sexwale and Cyril Ramaphosa have considerable influence on the leadership.

Undiminished current-account pressures

South Africa’s current account moved back into deficit in 2003 and the gap has since increased alarmingly, to a peak of 9 per cent of GDP in the first quarter of 2008.. Because net foreign direct investment is patchy and often negative, the market waits nervously for the release of the Reserve Bank’s Quarterly Bulletin for the balance-of-payments data. On the day the data for the first quarter of 2006 were published, the rand depreciated by more than 4 per cent against the US dollar.

The Mbeki/Manuel era has seen strong net inflows of portfolio funds. In 2006 they soared to ZAR129 billion (US$19 billion) and more than covered the current-account deficit of ZAR112 billion. In 2007 the flows were still ZAR83 billion. Our chart captures the sharp movements in portfolio flows and the current deteriorating trend. Global credit conditions are a risk to both portfolio flows and “other investment” flows (principally bank credit lines), which have been substantially positive in net terms in recent years. Government policy ambiguities are an additional risk, to which the ANC leadership is alert. The domestic markets (particularly currency and equity) are fragile, and highly vulnerable to negative headlines.

Nigeria: The unclear impact of the global credit crunch

The monetary policy committee held an emergency meeting on 18 September. It was due to meet as scheduled in the first week of October, and many market-watchers including ourselves expected a hike in the policy rate in response to worse-than-expected August inflation data. The meeting, however, was called because of global credit conditions and brought the following steps to increase liquidity in the market:

• A cut in the monetary policy rate of 50 basis points to 9.75 per cent;
• A reduction in banks’ minimum cash reserve ratio from 4 per cent to 2 per cent;
• A reduction in banks’ minimum liquidity ratio from 40 per cent to 30 per cent;
• The go-ahead for repo transactions against permitted securities for 90 days, 180 days and 360 days; and
• The return of the central bank to the role of buyer and seller of securities.

CBN Governor Soludo explained that the draconian measures, which amount to a NGN1 trillion (US$8.5 billion) injection of liquidity, were necessary to halt a possible credit crunch.

Possible overreaction by the MPC

He cited one solid piece of evidence: the slow release of NGN400 billion allocated to the ministries for their capital budgets. In other respects we cannot test his claim. Interbank rates rose sharply in the second half of August and it is likely that many foreign institutions reduced their credit lines to Nigerian banks. It is also possible that Soludo and the MPC were reacting to reports received by the industry regulator (a department of the CBN) of pressures at particular institutions.

However, the sector as a whole is achieving very strong growth in deposits, which is greater than the 70 per cent rise in lending to the core private sector reported by the CBN for the year to the end of August. If the measures of 18 September prove to have been a case of overkill, they can be reversed.

For the record, consumer price inflation slowed in August from 14.0 per cent the previous month to 12.4 per cent year on year, and food price inflation from 20.9 per cent to 18.8 per cent. .

Recent research reports:

Sudan: Potential rewards for the patient investor
Ultimate recovery hinges on several complicated political variables

African property: Magnet for remittances
Real estate attracts diaspora and regional institutional investor interest as a play on economic recovery

South African mining: Opportunities in a changing regulatory environment
Government negotiations are not one-sided

With best regards,
Gregory Kronsten
Director, Africa Research
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