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While mainstream financial commentators continue to grasp onto the Sub-Saharan (SSA) growth story in their arguably fruitless short term, safe-haven search, the IMF’s recent World Economic Outlook (WEO) report was a bit more circumspect in its nuanced observation that despite relatively strong fiscal and current account balances (versus advanced economies), growing cash reserve liquidity and the fact that it is “one of the few places in the world with a rising labor force”, the premise of contagion across many African frontier markets remains palpable.  To that end, the IMF noted,  “a faltering U.S. or European recovery could undermine prospects for exports, remittances, official aid and private capital flows.”  That said, emerging markets in general and select frontier ones should benefit from an expected paradigm shift–at least for the near term–of collective, central bank dogma away from rigid inflation targeting towards a more dovish, holistic approach to rate setting that would theoretically embrace more fluid inflation targets, especially to the degree that fiscal policy remains conservative.  Admittedly, this sort of monetary policy makeover across EM/FM central banks would likely need the initial support of their more developed brethren.  Moreover, not all markets are equally immune to  temporary bouts of price elasticity; while U.S. core PCE inflation (the Fed’s preferred gauge) hovers just under 2% y/y, the IMF expects SSA inflation to average 8.4% and 8.3% in 2011 and 2012, respectively (versus 7.5% in 2010), testament to a stickier and hence greater vulnerability to enhanced energy and food commodity volatility.  Yet to the extent that central banks choose to overlook breached inflation target ceilings, growth should be smoother across more emerging and frontier markets than not, a phenomenon displayed nearly by The Economist’s graph, inset.

South Africa’s monetary policy committee (SARB) harped on the receding global backdrop in its recent dovish decision to maintain the benchmark rate at a 30-year low; yet coupled with continued albeit slowed growth in output in demand-led sectors (i.e. retail trade, financial and personal services) as well as in discretionary spending (in a bit of warning sign, on a 3m/3m seasonally adjusted and annualized basis sales growth turned negative for the first time since October 2009) and discretionary credit (last up 20.2% YTD in Q2), the SARB’s general theme underscored a mantra of growth support (it downgraded its GDP forecasts to 3.2% for 2011 and 3.6% for 2012, from 3.7% and 3.9%, respectively, previously) compared with concern over inflation (though a weakening rand, per our somewhat prescient forecast from this spring, complicates matters), and we suggest studying other markets to ferret out similar dynamics whereby dovish policy could provide a fillip to aggregate domestic demand.  Moreover, certain economies like Ghana (and other key commodity exporters) could be set to see the best of both worlds, i.e. lingering accommodative policy together with hitherto low inflation.  While not “safe”-havens per se, these are the kinds of economies to key in on when discerning among emerging and frontier economies and while developed growth sputters.

Market frenzy received additional filips this week upon rumors that not only may China opt to essentially underwrite Italian debt (adding further confusion, perhaps, to the whole ‘Made in Italy/China” kerfuffle), but furthermore that perhaps the entire BRIC contingent would pass around a continent-wide, boosting collection jar in what some cynics quipped would ultimately amount to an ironic albeit ill-fated form of reverse-colonization.  The comment ties nicely with last week’s Economist piece noting Angola’s sudden Portuguese shopping spree, a “first for Africa” whereby national oil company-cum-sovereign wealth vehicle, Sonangol, “acts as the government’s main dealmaker and overseas investor.”  This got us to thinking that despite Absa Capital’s recent warning to clients that “the current bout of financial market turbulence and fears of a global economic slowdown . . . provide a new impediment to [sub-Saharan] growth . . . which may have a dampening effect on growth prospects in the region” there should emerge a divergence in performance between the region’s commodity net-buyers and sellers, which in turn should augment their respective monetary policy flexibility (i.e. to not have to choose between growth and inflation, a priceless luxury for any economy and especially against a stagnating global backdrop).  The former group, admittedly, is commodity-derived cash rich and thus dependent on its exports to help build FX reserves, temper policy rates and buoy credit.  Yet, per Absa, “in the absence of a sharp deterioration in global growth, commodities should remain an important pillar of growth [in Ghana, Nigeria and Angola], where firm oil prices of above USD110/bbl continue to support growth [and help] economic activity remain robust.”  The latter group, meanwhile, already victims largely to poor diversification among its economic sectors, may get stuck in an inflation-importing conundrum a la Kenya currently, where climbing inflation (16.7% in August) sits in stark contrast with, per comments made by the country’s monetary policy committee, a relatively glum growth outlook for 2011H2.

While core inflation surprised to the upside earlier this week, registering 5.15% y/y compared with consensus expectations of 4.6% (and the first 5% plus month since June 2009), most economists still believe that Bank Indonesia (BI) will likely keep its 6.75% policy rate unchanged when it meets today given its habitual emphasis on  inflation-oriented policy and price stability which, despite the aforementioned rise remains “comfortably within its 2011 target band of 4-6%” per Barclays.  This is good news for equities given investors’ apparent indifference towards an ever-lingering backdrop of corruption (one oft-cited reason, interestingly, for India’s hitherto under-performance) in the name of consumer-lead high growth (BI 2011 estimate of 6.5%) and low inflation.  That said, BI’s alleged counter-cyclical bend my be tested sooner rather than later, and not just because a (suddenly easing?) China may be ready to re-inflate the commodity world just in case (or because) Ben Bernanke won’t/can’t; a shrinking current account surplus (as a % of GDP) is on one hand symptomatic of a, dare we suggest it, ‘safe’ and relatively decoupled haven/engine for growth (which coincidentally is also a proxy on EM-Asian demand given that roughly one-third of exports are destined for China, Singapore and South Korea), but also of an increasingly wage and price-sticky environment that should accelerate an already chugging, self-fulfilling feedback loop of liquidity, currency appreciation and inflation expectations that will ultimately test a given central bank’s resolve to slow down the ride just as it really starts to get going.  Yet as the number of high-net worth individuals is set to triple by 2015, staying ahead of the [yield] curve will require a completely new paradigm lest credit-induced bubbles begin to loom, a feat which won’t be made any easier if political and corporate crookedness is at all endemic.


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September 2011
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