In 2021, Sub–Saharan Africa’s (SSA) macro outlook will be shaped by three themes: FX policy; a sluggish services sector and a fiscal overhang, according to Renaissance Capital.

Yvonne Mhango, Sub-Saharan Africa Economist, Head of Research, SSA, Renaissance Capital, said:  “We think an imminent IMF programme for Kenya and a less expensive and more flexible shilling (KES) are growth-positive and make it a compelling growth story, ahead of the 2022 elections. Ghana is vulnerable. But we are encouraged by the economy being under the stewardship of an administration with a better track record on fiscal prudence. This improves the probability of contained inflation and accommodative monetary policy which will support a recovery.”

“We are cautious on Nigeria, where we expect inflation to remain elevated and the naira (NGN) overvalued. We expect monetary tightening, which will undermine growth, and a pick-up in yields, albeit moderate. We expect Nigeria’s fixation on a stable, (10%) overvalued NGN to persist in 2021. This implies monetary policy tightening and weak growth (1.0% in 2021E). Inflation will remain high in part due to pressure on the NGN to depreciate (FX rate of NGN429/$1 at YE21E), structural constraints and monetisation of the deficit. That and the maturing of the bulk of open market operation (OMO) bills by March lead us to believe there is 100-200-bpt upside for yields on Treasury securities, and the policy rate.”

“The KES depreciated by 10% vs the dollar in 2020, to KES112/$1, after being flat for four years. We think this is partly because access to commercial debt, a significant source of FX, fell away in 2020. We think this increases the probability of an IMF deal in 1Q21, which would pave the way for the government to access $3.8bn in financing from multilateral lenders in 2021. We expect these proceeds to help boost FX reserves, stem KES weakness, contain inflation, and allow for monetary policy to remain accommodative, which is growth-positive.”

Services accounts for half of SSA’s GDP implying its performance has material implications for growth.

According to Mhango, the ongoing global rollout of vaccines is positive, but this is largely happening in developed markets, as most of SSA lacked the resources to pre-order vaccines.

“In addition, the cost of a comprehensive vaccination campaign is beyond that of several SSA governments. We believe a vaccine rollout in SSA may only begin in earnest in 2022. This implies the region is likely to see waves of the virus recur in the short term. Severe lockdown is unlikely to be the policy response as SSA economies cannot afford it. But we expect some form of restrictions to remain in place to alleviate pressure on the healthcare system. For this reason, we expect services’ recovery to be muted in 2021, which will undermine the region’s recovery.”

She added that recessions across most of SSA in 2020 implies that government revenue fell across the board.

So, SSA governments are starting off the year with sharply lower revenue, and limited access to external financing, given the run-up of debt in 2020.

“We think the depth of the fiscal deterioration in several countries may compel some governments to hike taxes in the short term. We think there is little risk of that happening in Nigeria, where the economy is in recession and is in for a protracted, weak recovery,” Mhango said.

“In Kenya, tax cuts that were made in April to mitigate the impact of the crisis will be reversed in January, implying upside for tax revenue from 2H FY20/21 onwards. Kenya lost $600mn of tax revenue because of the tax cuts, according to the finance ministry.

Ghana, which has a double-digit budget deficit, has preliminary plans to raise revenue by one-quarter in FY21. We think this is ambitious. We believe there is upside risk to taxes in Ghana, particurlarly if the government plans on bringing down the deficit to the fiscal responsibility threshold of 5% of GDP by 2024.”