MACROECONOMIC & MARKET OUTLOOK

Q3 / 2016

Seedwell Hove and Jeremy Wakeford

Quantum Global Research Lab AG

Bahnhofstrasse 2 · 6300 Zug · Switzerland · Phone +41 41 560 29 00 · Fax +41 41 710 63 00

www.quantumglobal.ch

Macroeconomic and Market Outlook1

Third Quarter, 2016

Highlights

Despite the calming of conditions after a difficult start to 2016, global markets faced

another wave of volatility in June, sparked by the Brexit vote.

The global economy is expected to remain tepid, amid downside risks affecting high

income and emerging markets which could keep global growth below the projected

2.4 percent in 2016.

High income economies’ growth momentum will be dampened by the Brexit shock.

Developing and emerging countries are facing headwinds from several factors,

including: persistent low oil and other commodity prices; weak global trade amid

the slowdown and rebalancing in China; tightening of financial conditions; and the

Brexit vote.

Growth in Sub-Saharan Africa in 2016 is now projected to be less robust than

initially envisaged, under the weight of both external and domestic challenges.

Oil and other commodity prices have picked up in the second quarter, after a slump

at the beginning of the year. Oil prices are forecast to average $43/bbl in 2016 and

$52/bbl in 2017, an upward revision from the previous forecasts in April.

The macroeconomic outlook is overshadowed by downside risks emanating from

the slowdown in large emerging market economies, notably in China amid that

economy’s rebalancing, lower commodity prices and prospects of financial

tightening and possible disorderly unwinding of Brexit negotiations. African

countries are also subject to risks related to political uncertainties, security threats

and drought.

1 Prepared by Seedwell Hove and Jeremy Wakeford

2

Global Macroeconomic Outlook

After a turbulent start to 2016, global markets calmed down during the second quarter. This

was marked by a pick-up in oil prices and improved sentiment, but the world economy remains

tepid. Market volatility returned after the unexpected result of ‘Brexit’, when Britain voted to

leave the EU on June 23. The World Bank has revised down its global growth projections for

2016 to 2.4 percent, amid slower than expected growth in high income countries and the

continued slowdown in developing and emerging market economies. Given the Brexit outcome

and inherent risks in emerging market economies, we believe that global growth could remain

subdued and well below the projected 2.4 percent in 2016. However, global growth could pick

up marginally in 2017 as some of the headwinds subside, but this will largely depend on how

Britain’s exit from the EU is handled and possible ripple effects it may cause.

Despite a boost from lower energy prices and improvements in labour markets, growth in

advanced economies could be less than expected 1.7 percent in 20162. The US economy is

forecast to grow at 2.4 percent in 2016. While lower oil prices, an improving housing market

consumer spending, and reduced fiscal drag continue to support economic activity, the

challenges in the oil sector and manufacturing sectors are tempering US economic growth3.

The US Fed left interest rates unchanged at its June meeting amid weak jobs data and concerns

about the global economy. We expect the Fed to remain on its glacial normalisation path.

Further tightening of monetary policy is unlikely in 2016, given the uncertainty surrounding

the process of the UK’s exit from the EU and its implications for the global economy.

Economic activity in the Euro Area was modest in the first quarter, supported by

accommodative monetary policy, low oil prices, and some expansionary fiscal policies, but the

Brexit vote will put the recovery at risk. The Brexit is likely to weaken Europe’s economic

growth prospects, and possibly drag it into recession. A disorderly unwinding of Brexit could

disrupt economic activity and trade, strain financial systems and further complicate the migrant

crisis. Market sentiment has been fragile and volatile in the immediate aftermath of the

referendum. The Euro Area is much more important for the global economy than the UK, as it

accounts for about 16 percent of the global economy. Hence its slowdown could weigh on

global growth prospects. Although the ECB recently provided some stimulus to the zone,

additional policy support could be needed to safeguard confidence and avert global contagion

effects. The Brexit shock has happened when the world economy is still grappling with weak

commodity prices and subdued global trade. As such, growth momentum may be weakened.

The medium term prospects for Europe largely depend on how and when the UK will leave the

EU and how the Brexit process will unfold, amid contentious issues of trade and access to the

EU’s single market, investment and migration.

The UK economy’s growth rate decelerated to 0.4 percent in Q1 as exports contracted, domestic

demand stalled and uncertainty continued to dampen investment. The Brexit shock could

further slowdown the economy and even push it into recession, amid uncertainty in the

negotiation process. The EU is the destination for more than 50 percent of UK merchandise

2 World Bank, Global Economic Prospects, June 2016 3 Federal Reserve Bank data, 2016.

3

exports. While the impact of the shock could be significant for the UK economy, the direct

impact on the global economy could be limited, given the relatively small contribution of the

UK to the global economy (3.7 percent)4. However, the contagion risks could be substantial

because of significant trade and financial sector linkages. A deleveraging cycle may create

strains for the UK banking system which, although considered too big to fail, can also be too

big to bail. The Bank of England and the UK treasury have indicated their readiness to intervene

to mitigate the fallout. However, the latitude for monetary and fiscal policy seems limited as

interest rates are already low, while the fiscal deficit and public debt are still large. The outcome

also raises the threat of political discontent within the UK. Scotland and Northern Ireland,

where a majority of voters in the referendum voted to remain in the EU, could call for

independence, a process that could heighten uncertainty and further diminish confidence.

Japan’s growth (projected at 0.5 percent in 2016) is held back by the strong yen and weak

private consumption, despite accommodative monetary policy and lower oil prices. Prime

minister Shinzo Abe has delayed the increase in consumption tax from 8 to 10 percent that was

scheduled for April 2017 until 2019, in order not to depress aggregate demand. Although

Japan’s trade linkages with the UK are limited, Brexit has led to further appreciation of the yen,

and could weaken demand for Japan’s exports, which are the traditional engine of its economy.

Actual and expected inflation in high income countries remain largely below policy objectives.

In the Euro area, inflation returned to negative territory in April, with prices falling 0.2 percent

on an annual basis, and now lingering in the danger zone (below 1 percent). Monetary policy

in developed countries remains largely accommodative, but the scope for further interest rate

cuts is limited. Global merchandise trade remains subdued, reflecting weaker demand from

commodity exporters and rebalancing in China. Global trade is expected to remain subdued in

2016 because of weak global investment, a muted global economic outlook and the Brexit

shock.

Emerging market and developing economies are still facing headwinds from persistently low

commodity prices, tightening financial conditions, subdued capital flows and lacklustre global

trade. Growth in 2016 could be well below the projected 3.5 percent5 as the initial headwinds

are further compounded by the Brexit shock. Current account deficits and fiscal deficits are

widening in a number of countries. As emerging market and developing economies account for

over 70 percent of global growth, their slowdown will continue to drag down global growth in

2016. Commodity exporting countries are struggling to adjust to the low levels of commodity

prices, but net importers are showing some resilience. Major emerging market economies are

facing challenges, with the synchronous slowdown of Brazil, Russia, China and South Africa

continuing to raising concerns. The Brexit shock is likely to dampen their prospects further, as

external demand could soften and commodity prices remain depressed.

4 MRB report, June 2016 5 World Bank, Global Economic Prospects, June 2016.

4

Figure 1: Global Growth and Projections

Source: IMF and World Bank

China continues its gradual economic rebalancing with a weakening of industrial activity, amid

continued unwinding of excess capacity in the manufacturing and real estate sectors. Growth in

the services sector, however, is robust. The economy is projected to slow down to 6.5 percent

in 2016 and further to 6.2 percent in 2017. The slowdown of the Chinese economy remains the

driving force behind low commodity prices, as it is a trading partner of more than 100

economies that account for about 80 percent of world GDP. China’s credit growth has been

steadily rising this year, amid policy stimulus, while fixed asset investment growth is bottoming

out in the rebalancing process. The property market has been booming in recent months, with

price increases experienced in several cities6. We do not expect a hard landing of the Chinese

economy as authorities continue to use their policy levers to avoid such an outcome.

Brazil is still in recession, with output expected to contract by 4 percent in 2016. The economy

contracted by about 5 percent in the first quarter, the fifth straight quarterly slump, amid a

myriad of challenges: low commodity prices, rising inflation, depressed investor confidence

and the political crisis7. The escalation of political tensions saw President Dilma Rousseff being

suspended in May, pending an impeachment trial within 6 months on allegations of fiscal

mismanagement and corruption. The government of interim president Michel Temer is

proposing drastic fiscal reforms to reduce a massive budget deficit (more than 10 percent of

GDP). Recent economic data however reveals the tough road ahead: retail sales contracted in

March, while the manufacturing PMI fell to the lowest level in over seven years in April on the

back of weak domestic demand, tightening credit conditions and fiscal tightening. The new

central Bank governor Goldfajn is expected to focus on fighting inflation to restore the policy

credibility and investor confidence. This implies that monetary policy is likely to remain tight.

6 MRB Report, 12 May 2016 7 Brazil Central Bank, Economic Indicators

-6.0

-4.0

-2.0

-

2.0

4.0

6.0

8.0

10.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

World Advanced economies

Euro area Emerging market and developing economies

Sub-Saharan Africa

5

Russia is struggling to keep its head above the water, with the economy projected to contract

by 1.2 percent in 20168. As the economy continues to adjust to lower oil prices and international

sanctions, it contracted by 1.2 in the first quarter. The fiscal deficit widened in April, prompting

the government to withdraw some part of the Reserve Fund. However, recent data on industrial

production and exports shows budding signs of economic recovery. Inflation decelerated to 7.3

percent in May, prompting the central bank to cut its policy rates by 50 basis points to 10.5

percent9.

Economic activity in other commodity-exporting EMEs such as Mexico, Malaysia, Venezuela,

Chile and South Africa continue to be buffeted by the persistently low commodity prices.

However, constraints are easing in some net oil importing countries such as India, Indonesia,

Malaysia, Hungary and Kenya, which are benefiting from lower oil prices. India is projected

to grow at a robust pace of 7.6 percent in 2016, supported by strong investor confidence, capital

inflows, low oil prices and expectations of good monsoonal rains which are forecast to be the

strongest in 22 years.

The outlook for emerging and developing countries for 2017, is subject to a number of factors:

the rebalancing process in China, Brexit negations and the resultant adjustment process, policy

responses to the current headwinds and commodity prices.

Macroeconomic Outlook for Africa

In Sub-Saharan Africa (SSA) growth is projected to be more moderate than previously

envisaged, due to external and domestic constraints. As the severe external shocks persist,

average growth for the region is projected at 3 percent in 201610 (Table 1). Lower oil and

commodity prices, the slowdown in China, tightening global financing conditions and a

possible slowdown in Europe following the Brexit will continue to weigh on the region’s

outlook (For detailed analysis, see the paper: Potential Implications of Brexit for African

Economies). Commodity prices are expected to remain below their 2015 levels in 2016, and

may not rise to super cycle levels any time soon. The situation is more challenging for oil

exporters (such as Angola, Nigeria and Equatorial Guinea) and non–oil commodity exporters

(Ghana, South Africa, Zambia and Zimbabwe), as their exports and fiscal revenues are reduced,

exerting pressure on fiscal balances, external accounts and exchange rates. Global financial

conditions are tightening, reflecting volatile financial markets especially after the Brexit in

June. This will increase the financing costs for SSA borrowers and affect infrastructure

financing. The difficult economic conditions are exerting pressure on fiscal balances, external

accounts and exchange rates.

8 IMF, World Economic Outlook, April 2016 9 The Central Bank of the Russian Federation, Inflation Report June 2016 10IMF, World Economic Outlook, April 2016.

6

Table 1: Macroeconomic Indicators for Sub-Saharan Africa

2010 2011 2012 2013 2014 2015 2016 2017

Real GDP Growth

(percent) 6.9 5.1 4.1 4.1 4.6 3.4 3.0 4.0

Nominal GDP

(USD Billion) 1275 1428 1526.3 1607 1670 1560 1478 1620

Inflation (percent,

yoy ave.) 8.2 9.5 9.4 6.6 6.4 6.9 9.0 8.3

Oil production

(mbpd) 5.4 5.4 5.6 5.2 5.3 5.1 5.0 5.4

Net FDI (percent of

GDP) 2.7 2.1 2.0 1.3 1.3 2.1 2.2 2.4

Fiscal Balance -37.4 -1.1 -1.8 -3.1 -3.5 -4.3 -4.6 -4.1

Total Public Debt

(percent of GDP) 27.7 28.3 28 29 29.9 30.7 37.2 36.8

CA Balance -0.9 -0.7 -1.9 -2.4 -4.1 -5.7 -6.2 -5.5

Reserves (Months

of imports) 4.2 4.6 5.3 5.0 5.6 5.1 4.2 3.9

Sources: AFDB, IMF, World Bank, IEA

Most oil importers are generally faring better, with growth in excess of 5 percent and even

higher in countries such as Côte d’Ivoire, Kenya, and Senegal. In these countries, strong growth

is supported by infrastructure investments, agriculture and strong private consumption

buttressed by lower oil prices.

Figure 2: Growth estimates and forecasts for selected African countries, 2016 and 2017

Source: IMF and World Bank

On the domestic front, drought, political instability and security threats, and electricity

shortages are further hampering economic activity. The El Nino driven drought is undermining

economic activity in several Eastern and Southern African countries in 2016. About 40-50

million people will experience food insecurity in 2016. Budgets and external positions are

strained, while a lot of pressure is exerted on exchange rates and inflation. A number of central

-10

-8

-6

-4

-2

0

2

4

6

8

10

2016 2017

7

banks have responded by tightening monetary policy (Angola, Ghana, Mozambique, South

Africa, Uganda, Zambia). Political instability in South Sudan, and security threats linked to

Boko Haram in Nigeria, Cameroon and Chad continue to negatively affect economic activity,

forcing governments to divert resources from development goals towards security. In South

Africa, Zambia and Zimbabwe, electricity shortages also continue to constrain economic

activity.

Fiscal positions are expected to weaken in most oil exporting and commodity exporting

countries, amid decrease in fiscal revenues driven by low commodity prices (Congo Republic,

Angola, Cameroon, Equatorial Guinea and Zambia (Figure 3). Current account deficits will

also widen in these countries. This is inducing currency depreciations, cutting back foreign

exchange reserves and increasing external debt. Investments in exploration and extraction are

being curtailed or delayed in some cases (e.g. in Mozambique, Tanzania and Uganda). Private

consumption growth will remain weak in oil exporters as revenues decline and as subsidies are

removed in some countries, while depreciation-induced inflation will weigh on consumers’

purchasing power. Government debt ratios have continued to rise, especially in oil producing

countries and frontier economies which have recently accessed funds from international

financial markets. Private sector debt is also rising in some countries, manifesting in significant

increases in nonperforming loans in some oil exporters (Angola, Equatorial Guinea) and small

and fragile states (Gambia, Malawi, Sierra Leone, Zimbabwe).11 With deteriorating economic

conditions, sovereign debt ratings have been recently downgraded in Mozambique, Republic of

Congo, and Zambia.

Figure 3: Fiscal Balances in selected African countries (percent of GDP)

Source: IMF

11 IMF, Regional Economic Outlook, SSA, April 2016

-14 -12 -10 -8 -6 -4 -2 0 2 4

Zimbabwe

Zambia

Tanzania

South Africa

Sierra Leone

Senegal

Nigeria

Mozambique

Kenya

Guinea

Ghana

Gabon

Ethiopia

Equatorial Gunea

DRC

Cote D Ivoire

Congo Republic

Chad

Cameron

Bostwana

Angola

2015 2016

8

Capital flows to the region are expected to slow further in 2016, especially cross-border bank

lending and bond issuances, as global financial conditions tighten. Bond spreads have however

reversed their upward trends, but remain higher than global averages (Figure 5). Because of

high borrowing costs, some countries are negotiating favourable credit facilities with the World

Bank and IMF (e.g. Angola, Zambia and Ghana). Increased external pressures were met with

reserves drawdowns and currency depreciations in many countries, raising public debt

denominated in foreign currency, as well as inflation rates. The South African rand depreciated

by more than 23 percent since January, with new lows experienced after the Brexit in June. The

Angolan kwanza lost 23 percent of its value in the first half of 2016, while the Zambian kwacha

fell 14 percent in the second quarter. The Nigerian naira depreciated by 42 percent following

the liberalisation of the foreign exchange market on June 20, while the Mozambique metical

plunged 14 percent in May and further 8 percent in June to a record low against the US$. In

Angola, Mozambique, Nigeria and Zambia, inflation has increased sharply, reaching double-

digit figures of 29.2 percent, 18 percent, 15.6 percent and 21.3 percent, respectively, and

exceeding the central banks’ targets.

In our view, 2016 will be difficult for many SSA countries and economic activity will remain

subdued as the external environment remains less favourable. The outlook largely depends on

the pace of rebalancing of the Chinese economy, how the Brexit negotiations unfold and how

the world economy will respond, and developments in the commodity and financial markets.

Commodity prices are expected to remain low, while external financing conditions might

tighten further. Although oil prices have improved somewhat in the second quarter, we believe

that they will remain at levels around US$50/barrel, not enough to lift up growth prospects for

oil exporting countries in 2016. SSA growth could inch up marginally to about 4 percent in

2017, as commodity prices stabilise and policy interventions responding to Brexit begin to take

effect.

The prospects for individual countries is uneven. Nigeria’s growth is projected to slow down

to 2.3 percent in 2016, from 3 percent in 2015, amid persistent low oil prices, foreign exchange

shortages and oil production12 disruptions by the Niger Delta Avengers militant group. GDP

contracted by 0.4 percent in the first quarter of 2016, dragging the economy into recession for

the first time in 12 years.13 In the non-oil sector, activity is weighed down by declines in

manufacturing, financial services and real estate, despite strong growth in agriculture and

telecommunication services. The escalating economic challenges are manifesting in rising

unemployment (12 percent in the Q1 from 10.4 percent in Q4 of 2015). Security concerns from

Boko Haram militants and infrastructure and electricity deficits also continue to hamper

economic activity. The Nigerian naira depreciated by about 42 percent on June 20 when the

central bank liberalised its foreign exchange market, ending the 16-month peg to the US dollar

and raising import prices. This is likely to push up inflation, which has already notched up a

six-year high of 15.6 percent in May. The central bank might be forced to tighten monetary

policy. Capital flows slowed in first quarter of 2016, which could further complicate the

implementation of the new exchange rate mechanism. Nigeria is planning a Eurobond sale later

12 The oil sector contributes about 10.29 percent to GDP 13 National Bureau of Statistics, Nigeria, GDP Report, Quarter1, 2016

9

in 2016. On the outlook, Nigeria’s growth could marginally pick up in 2017 as activity in non-

oil sectors improves, and the new government implements structural reforms and normalizes

oil production.

Angola’s growth prospects are blighted by low oil prices. Growth is forecast at 2.5 percent in

2016, but could inch up marginally to 3.8 percent in 2017 if oil prices stabilize.14 Fiscal revenue

shortfalls will persist and the budget deficit is expected to widen to 7.1 percent of GDP in 2016

from 4 percent of GDP in 2015. The government is implementing expenditure measures,

including removing fuel subsidies and freezing public sector hiring, as it adjusts to a new normal

of lower oil prices. Foreign exchange shortages remain acute and the exchange rate gap between

the official exchange rate and the parallel exchange rate continues to widen. As the central bank

continues to manage the exchange rate, foreign exchange reserves have fallen by 1.5 percent to

$24.4 billion in May from April. Inflation accelerated to 29.2 percent in May, the highest level

in 10 years, fuelled by the depreciation of the kwanza (23 percent this year), removal of fuel

subsidies, and loose monetary conditions.15 This prompted the central bank to raise its

benchmark interest rate in June by 200 basis points to 16 percent. The imbalances in the foreign

exchange market calls for gradually phasing out of the administrative restrictions on access to

foreign exchange at the official rate. The outlook for 2016 remains difficult, despite some

increase in oil prices in May/June. However, a modest recovery could materialize in 2017, if

Angola’s terms-of-trade improve and shortages of foreign exchange are addressed.

In South Africa, growth in 2016 is projected to inch below 0.6 percent, dampened by low

commodity prices, a severe drought, the slowdown of China, and low investor confidence. The

economy shrank by 0.4 percent in the first quarter, amid an 18-month slide in the mining sector

resulting from persistent weak commodity prices. The mining sector (8 percent of GDP)

contracted by 18.1 percent, while the agriculture sector (2.2 percent of GDP) slumped by 6.5

percent in the first quarter. The government is struggling to restore investor confidence in the

wake of deteriorating economic conditions and corruption scandals surrounding President

Zuma. Unemployment increased to a staggering 26.7 percent in Q1. Inflation inched down from

6.3 percent in March to 6.2 percent in April, but still remains above the inflation target range

of 3-6 percent. Monetary policy is likely to remain tight until inflation is within the target range.

High unemployment and tight monetary policy will limit private consumption. South Africa

narrowly escaped a credit rating downgrade in May, but could succumb later in 2016 as external

conditions worsen, especially after the Brexit shock. The outlook for 2017 points to a slight

recovery, with real GDP growth forecast at 1.1 percent, as electricity supply improves and

commodity prices stabilize.

Economic activity is expected to pick up moderately in Ghana in 2016, helped by improving

investor sentiment, increased oil production in new oilfields, and the improvement in electricity

supplies. However, low oil prices could keep growth from leaping beyond the projected 4.5

percent in 2016. The fiscal consolidation has largely remained on track, with some notable

improvement in the overall fiscal deficit, expected at -3.9 percent in 2016. The government’s

major challenge is to avoid slippage from the fiscal consolidation program in light of the

14 World Bank, Global Economic Prospects, January 2016 15 IMF Statement, June 2016.

10

upcoming general elections in late 2016. Inflation edged up to 18.9 percent in May from 18.7

percent in April. In Zambia, Africa’s second biggest producer of copper, headwinds from

depressed copper prices, electricity shortages, high interest rates and drought continue to sap

growth.16 Zambia’s credit rating was downgraded by Moody’s in April on a bulging budget

deficit (over 7 percent of GDP) and rising government debt ahead of elections in August 2016.

In some frontier economies such as Kenya, Cote d’Ivoire and Senegal, growth is robust.

Kenya’s growth is projected at 6 percent in 2016, supported by strong growth in agriculture,

accommodative monetary policy and a stable exchange rate. Inflation declined to 5.0 per cent

in May, on the back of a stable exchange rate and lower food and oil prices, allowing the central

bank to lower interest rates. However, the likely slowdown in the UK and Europe following

Brexit is likely to affect Kenya’s horticultural exports. Cote d’Ivoire is anticipated to grow at

8.5 percent in 2016, buoyed by higher cocoa prices, good agricultural production and reforms

from a progressive government. Fiscal discipline is also helping to sustain Cote D’Ivoire’s

external debt and fiscal deficit. Senegal’s strong growth of 6.6 percent in 2016 is bolstered by

improving agricultural productivity and a dynamic private sector.

In some low income countries (Mozambique, Rwanda and Tanzania) strong growth is

supported by infrastructure development, mining expansion and consumer spending. These

countries are anticipated to grow at 6 percent or more in 2016 and 2017.17 Mozambique’s

prospects however are dented by negative effects of a financial scandal (undisclosed borrowing

that exceeds US$1 billion) which has led to the suspension of financial assistance by the IMF.

The country’s debt and looming risk of default has prompted a credit rating downgrade in

March. Delayed investment into the liquefied natural gas sector, rising inflation, and low

investor confidence will weaken Mozambique’s medium term prospects. In Ethiopia, Zambia,

Malawi and Zimbabwe, economic activity is affected by a severe drought, which is holding

back agricultural production. The Ebola affected countries - Guinea, Liberia, and Sierra Leone-

are gradually recovering as the effects of Ebola wane.

Commodity Markets

Commodity prices recovered from the January lows but remain low on the back of abundant

supply and weak demand. Brent crude oil prices increased to about $47/b in May from about

$42/b in April, marking the fourth consecutive monthly increase since recording a 12-year low

of $31/b in January. Oil prices rebound was supported by supply disruptions in Canada, Nigeria,

Libya and Venezuela and a decline in shale oil production in the United States (For detailed

analysis of the oil market, see QGRL Oil Market Outlook,3rd Quarter, 2016). The UK

referendum outcome to leave the European Union immediately triggered a 6 percent decline in

the dollar price of oil as the dollar strengthened and concerns about future global economic

growth grew more pessimistic. Continued volatility in the financial markets after the Brexit and

a strong U.S. dollar will continue to put downward pressure on oil prices in the short term.

Brent crude oil prices are forecast to average $43/b in 2016 and $52/b in 2017.18 As oil

16 Copper accounts for 75 percent of exports in Zambia. 17 World Bank, Global Economic Prospects, June 2016

18 Energy Information Administration (EIA) Short-Term Energy Outlook, June 2016.

11

inventory accumulation is expected to remain elevated in 2017, a sustained price recovery is

unlikely before the latter part of next year. In light of the structural changes in the global oil

industry (especially new fracking techniques in the US) it unlikely that we will see a significant

price recovery in the medium term.

Metal prices have also rallied after January lows, on expectations of stronger demand, and

ongoing supply rebalancing from production cuts and lower investment in new capacity (Figure

4). The rebound was largely driven by the uptick in iron ore and metal prices. After the Brexit

vote, gold surged as much as 8.1 percent to $ 1 358 per ounce, reflecting its safe haven appeal.

However, prices of other metals (copper, iron ore, nickel) fell, reflecting concerns about the

implications of the shock for the global economy as well as the appreciation of the US dollar

(metals are usually quoted in US$). Metal prices are projected to decline by 14 percent in 2016

and to rise moderately in the medium term as the expansion of capacity slows.19Prices of

agricultural commodities also rebounded somewhat since February as the effects of the El Nino

effects in South America, East Asia and Africa offset the pass-through effects from lower

energy prices. Commodity prices are expected to remain low amid sluggish global economy

compounded by the Brexit shock. Reduced concerns about the near term Chinese growth

prospects and an improvement in risk sentiment are likely to support recovery in commodity

prices in 2017.

Figure 4: Commodity Price Indices

Source: IMF Primary Commodity System.

Note: Index (2005=100)

19 IMF, Commodity Market Developments and Forecasts, April 2016

0.00

50.00

100.00

150.00

200.00

250.00

300.00

All Commodity Price Agricultural Raw Materials Index

Metals Price Index Crude Oil (petroleum) Price index,

12

The lower commodity prices in 2016 will stifle economic of activity in the SSA region where

a large share of commodities in exports: fuels, ore, and metals account for more than 60 percent

of the region’s exports compared with 16 percent for manufactured goods and 10 percent for

agricultural products.

Financial Markets

Global financial market conditions calmed down somewhat in the second quarter, after the

turbulent start to 2016. However, volatility returned after the Brexit referendum, as the market

was not expecting the “leave” outcome. Global stocks tumbled significantly on the Brexit

outcome, marking the most severe return of market volatility since the beginning of the year.

The FTSE 100 Index plunged as much as 8.7 percent, the largest loss since 2008, while

European stocks slid 7 percent in their worst day since 2008. The MSCI’s global stock index

lost 4.8 percent in the biggest slide since August 2011. The Johannesburg Stock Exchange lost

3.5 percent while gold jumped by more than 8.1 percent to reach $1 358 per ounce. The British

pound sterling lost as much as 11 percent of its value, as investors searched for safer assets. The

euro was down 2.5 percent raising fears about its future, while the South African rand

depreciated by 4.9 percent to reach a cumulative loss of 21 percent so far in 201620. Crude oil

retreated as much as 6.8 percent to reach $46.70 a barrel following the shock, raising further

concerns for the prospects of oil exporting countries. While many of the stock indices recovered

somewhat in the ensuing days after the referendum, market sentiment will likely remain weak

and volatile until there is greater clarity about how the Brexit will unfold.

Capital flows to emerging and developing economies remain vulnerable to sudden reversals.

As volatility increase in the market after the UK referendum, economic uncertainty could slow

down or reverse capital flows (especially cross border lending and bond issuances) to emerging

market, as global financial conditions tighten. Foreign direct investment flows to developing

countries, e.g Africa could be reduced as the global economy slows. The strengthening of the

US dollar after the vote will raise the cost of servicing external debt, especially in frontier

economies (e.g. Ghana, Cote d’Ivoire, Angola and Zambia) which accessed Eurobonds in recent

years. Also, as risk averse investors seek safe havens, the risk of capital flight from African

emerging market economies such as South Africa, Nigeria and Kenya is possible.

Bond yields have declined at the beginning of the year, following an escalation of stimulus

policies from some large central banks (ECB, Bank of Japan and the European Central Bank)

and further after the Brexit vote. Although bond spreads widened markedly in 2015, the trend

reversed, with somewhat narrowing since beginning of 2016. However, the spreads for most

African countries remains at high levels (Zambia, Ghana) and well above the averages for the

world and Africa, reflecting weak market confidence (Figure 5).

20 http://www.bloomberg.com/news/articles/2016-06-24/u-k-referendum-roils-global-currencies-from-australia-

to-mexico.

13

Figure 5: Sovereign Bond Spreads

Source: Bloomberg

At its meeting in June, the US Federal Reserve Bank kept the target range for its benchmark

interest rate unchanged at the 0.25 percent to 0.50 percent range. The Bank of England has also

maintained interest rates at historic lows of 0.5 percent, but may be forced to cut interest rates

to support the economy in the case of further economic slowdown following the Brexit

outcome. Several high income central banks (e.g. Denmark, Sweden, Switzerland, the ECB

and Japan) have continued to maintained negative interest rate policies. The ECB has kept

interest rates unchanged since the -0.05 percent easing in March, aimed at stimulating demand

and dealing with deflation. Elsewhere in some emerging markets, central banks in Brazil, Chile

and Argentina have kept their policy rates unchanged since the last increases July 2015,

December 2015 and August 2014 respectively. Facing inflationary pressures, Colombia,

Namibia, Egypt and Mozambique have raised their policy interest rates. However, India,

Russia, Hungary, Kenya, and Uganda have cut their interest rates in May/June to stimulate

economic activity, as inflation expectations ease21. Several central banks have announced that

they are ready to act if their countries’ economic conditions deteriorate following Brexit.

The outlook for global financial markets remains uncertain as investors are nervous about the

sluggish global economy. In the context of low commodity prices and China’s slowdown, high

levels of sovereign, corporate and household debt in many countries continue to cast a shadow

on the outlook. However, policy responses to the Brexit will largely determine the outlook for

global financial markets in the short to medium term.

21 http://www.cbrates.com/

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Global Africa Ghana Namibia Nigeria South Africa Zambia

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Key risks to monitor

The outlook is subject to downside risks. On the external front, key risks relate to uncertainty

on the path of withdrawal of the UK from the EU, the rebalancing of the Chinese economy,

lower commodity prices and prospects of financial tightening and weaker than expected growth

in advanced markets. African countries are also facing risks emanating from political

uncertainties and security issues, El-Nino-induced drought and policy uncertainties.

The rebalancing of the Chinese economy is still an important downside risk to the outlook.

While the rebalancing of the Chinese economy could be good for China in the long run, the

sharper than expected slowdown could keep commodity prices low and further reduce exports

and investment, especially in African economies.

Although oil and other commodity prices have improved towards the end of the first quarter,

such increases may not be sustained for a long time due to a number of dampening factors:

continued slowdown in China, sluggish growth in Europe following the Brexit and continued

oil supply glut. This will dampen growth prospects for many commodity exporting countries

and widen fiscal and current account deficits and further weaken their currencies. While the

persistent decline in commodity prices has strong effects on commodity exporters, the effects

can easily spread to non-commodity countries and other sectors through trade and financial

channels.

The Brexit negotiations following the “leave” vote is an important risk factor to monitor. The

outcome will likely have a significant influence on market stability, recovery of global trade

and global economic prospects and commodity prices. Increased market volatility could tighten

global financing conditions, resulting in higher borrowing costs and reduced sovereign bond

access for many frontier economies. Weaker-than expected growth in the Euro Area and the

UK following Brexit could further weaken external demand for developing countries’ exports,

especially in Sub-Saharan Africa, and reduce investment and development aid. Investors need

to continue to monitor UK/Europe links with the world economy, especially financial and trade

contagion effects.

Political and security uncertainties and drought will continue to put a drag on economic activity

in a number of African countries in 2016. Planned elections to monitor in Africa in 2016 are in

Cape Verde, DRC, Gabon, Gambia, Ghana, and Zambia.22 Elections in Uganda were disputed,

and there is a risk of contested elections in DRC amid tensions surrounding the extension of

the third presidential term. Political and security uncertainties in Burundi, Burkina Faso, Mali

and Egypt could also hold back economic activity. In Nigeria, while the fight of the Boko

Haram insurgency is continuing, the recent attacks on the oil installations by the Niger Delta

Avengers group is threatening oil production. On the global scene, an escalation of ongoing

geopolitical tensions in Syria, Russia, Iraq and parts of Africa and terrorist attacks in Florida

and Turkey in June, and Brussels in March, continues to raise concerns. These risks could stifle

economic activity, disrupt trade and dampen investor confidence.

22 National Democratic Institute: https://www.ndi.org/electionscalendar

15

In Eastern and Southern Africa, drought is expected to intensify as the year progresses. As

agricultural production is dampened, a large part of the population will face food shortages.

Food imports could exert pressure on the budgets and external balances, while rising food prices

could accentuate inflationary pressures in the affected countries.

Policy implications

The above-mentioned risks and challenges call for prudent policy responses. In many oil and

commodity exporters, rapidly diminishing foreign reserves, weakening of currencies and the

resultant inflationary pressures have forced them to tighten monetary policies. However, it is

important for central banks to strike a balance between policy tightening when inflationary

pressures are persisting and promotion of economic activity. Oil importers with easing

constraints due to lower oil prices could cut interest rates to support economic activity.

Allowing for exchange rate flexibility could also help in facilitating smoother adjustments to

external shocks in emerging market and developing economies. To avoid distortions and

constraints to economic activity, administrative controls on foreign exchange may need to be

avoided. In light of the Brexit shock, policymakers may need to provide stimulus if global

financial system stresses affect their economies.

The commodity price shock has widened fiscal deficits in many developing countries. As such,

finding an appropriate fiscal response to economic shocks remains an important challenge for

many countries. Commodity exporting countries can reduce fiscal deficits through better

prioritization of spending initiatives coupled with stronger revenue mobilization. As oil and

commodity prices are expected to remain at low levels for some time, fiscal adjustment to the

‘new normal’ of low commodity prices may be necessary to safeguard macroeconomic stability,

especially in the region’s oil-exporting countries.

One of the biggest structural constraints to growth in Africa is infrastructure deficits. As such,

addressing such deficits, especially power supply and transport bottlenecks, should be a policy

priority. More focus could be given to investing in new power generation capacities, especially

providing incentives to private investors to invest in energy.

While macroeconomic policies can be deployed to the deal with the current challenges, it is

also important to advance the economic diversification agenda for the long term.

Conclusions

Despite the calming of conditions after a difficult start to 2016, global markets market faced

another wave of volatility sparked by the Brexit in June. Growth forecasts for the world

economy have been downgraded on slower than expected growth in both high-income countries

and emerging market economies. Financing conditions are tightening further, while capital

flows to emerging markets are weakening. The slowdown in China is continuing at a measured

pace, while the possible slowdown in Europe could dampen global trade and keep commodity

prices low. Given the Brexit outcome and inherent risks in emerging market economies, global

growth could remain subdued and well below the projected 2.4 percent in 2016. Although oil

16

prices have improved somewhat in the second quarter due supply disruptions in some oil

producing countries, they are expected to average about $43 per barrel in 2016, as global

demand remain tepid. Oil prices could edge up to average $52 per barrel in 2017 and other

commodity prices are expected to remain depressed. Growth in Sub-Saharan Africa will remain

less robust in 2016, as commodity prices remain subdued. The global economy could pick up

marginally in 2017 as some headwinds subside amid policy responses and as commodity prices

stabilise.

The outlook is subject to downside risks emanating from the continuing slowdown in the

Chinese economy, persistently lower oil and commodity prices, tightening financial conditions,

uncertainty about the Brexit negotiation process after the June referendum, and geopolitical

risks. For African countries, the outlook also depends on political uncertainties and security

risks related to militant/terror insurgencies and drought. Various short-term and long-term

policies will be needed to respond to the challenges. While most of the challenges could be

addressed by short term policies, many African countries need to consider policies that can

address the underlying structural issues in the long term, such economic diversification and

investment in infrastructure. This will help to insulate economies from recurring commodity

related shocks and lay the foundation for industrialization. Policy reforms that promote

investment and reduce constraints to business remain critical.