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From Alterio’s SSA report last week:

Countering relative disinflationary trends across SSA are diverging currency dynamics which can be swayed by both fundamental and technical reasons.  The Central Bank of Kenya’s somewhat surprising decision this week to keep its policy rate unchanged at 18 percent, for instance, is otherwise shilling supportive in both the near and medium-term as it comes despite higher-than-anticipated declines in both headline CPI (16.7 percent y/y in February from an 18.6 annual average over the preceding two months) as well as private sector credit growth (28% y/y in January versus 30.9% in December 2011) and against a backdrop of lower food inflation and impending base effects which should further reduce price pressures despite hitherto sticky core inflation (ex food and fuel) that detracts from the country’s balance of payments.  Technically the shilling has returned to levels not realized since last April at which point it began a fairly hasty plummet of over 20 percent against the dollar (characterized by a nasty feedback loop whereby negative real rates on short term [91/182-day] debt—which ultimately rose over seven-fold over the course of just a few months—initiated ever strident dollar demand as the central bank furiously tried to maintain its import cover ratio) while finally peaking in October.  Given our subdued outlook for inflation as well as the central bank’s hitherto ‘ahead of the curve’ hawkishness over the past year (+1200bp overall since January 2011) other things being equal (they never are) present levels (i.e. 82-84 consolidation) should support a USD/KES bottom and ultimately provide an impetus to the upside past 83.6 and through the 84 level.  That said even if the shilling ultimately retraces some of its near-term rally, macro conditions are such that 2011’s volatility can be comfortably set aside for the appreciable future, a plus for both public and private equity risk sentiment.

That said, though credit growth has subsided Kenya’s MPC remains unsatisfied, we feel, by demand-related pressures on both imports and consumer goods.  As a percentage of output Kenya’s private sector lending still outpaces M2 money supply, a relationship authorities would prefer to invert.  Therefore KES weakness may also be dependent on the pace of further private sector deleveraging.  Looking to Nigeria, on the other hand, one may find a potential USD/NGN bottoming that could signal perceived transitory inflation dynamics are extensively capped to the downside as well given an ongoing secular trend of dollar demand for imports continuously exceeding supply.  Fundamentally the currency has deteriorated for over a year as dollar demand for imports generally exceeded supply while last fall the central bank, failing to meet demand at the official market, lowered the midpoint of its exchange-rate band to 155/dollar from 150.  Concurrently, however, from a technical level the pair also looks problematic; indeed a glance at the weekly chart since Q42010 shows both strong support and resistance at 155, while recent hammer patterns indicate that a move back towards 160 is increasingly likely.

Per this week’s Economist: “Growth in sub-Saharan Africa scarcely missed a beat through the global crisis thanks to improved macroeconomic policy. The good times should continue. Growth in 2011 is forecast to be rapid and broad-based. Botswana and South Africa suffered setbacks in 2009, but have returned to expansion despite increased burdens of debt. The economies of Ethiopia and Uganda grew rapidly right through the crisis; their growth rates remain enviable. Strife-riven countries like Eritrea and Zimbabwe lagged behind in recent years but are looking healthier. Exports from the region as a whole have yet to recover fully, but strengthening links with emerging Asia should keep the boom going.”

That said, myriad hurdles remain.  Gary Becker, economist and Nobel laureate, writes:

“Africa still gets too much foreign aid that raises government spending at the expense of the private sector.  Net official aid to Africa has risen sharply since 1970 as shares of both government spending and GDP.  In 2008, such aid constituted more than 30% of government spending and 4% of African GDP.  India discovered during its first 40 years of independence that foreign aid (India used to be the world’s largest recipient of foreign aid) only slowed down the necessary adjustments toward a smaller government sector and a larger competitive private sector.  Africa needs to learn the same lesson.”

JGW

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