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.