The sorry state of South African governance may be dominating headlines, but a closer inspection of Africa’s financial news reveals a heartening trend in the continent’s frontier economies.
Central banks are cutting interest rates. And a combination of moderate inflation rates and healthy foreign exchange reserves suggests that we could see rate-cutting continue for the remainder of the year.
The table below summarizes benchmark interest rates in countries that are home to sub-Saharan Africa’s most vibrant frontier stock markets.
As you can see, ten out of the 13 countries listed above have cut their benchmark interest rate at least once since April of last year. And four of them have cut it multiple times. Uganda slashed its rate by 600 basis points.
Granted, interest rates in many of the markets remain very high, but the cuts mean that the cost of building, running, and growing a business looks to be getting cheaper across much of the continent.
Encouragingly, mild inflation in several countries suggests more reductions could be on the way. Ghana’s rate of inflation fell from 18.7% to 12.8% over the past year. In Zambia, it plunged from 21.8% to 6.7%. Inflation is in the single digits in Namibia (7.0%), Tanzania (6.4%), and Uganda (6.4%). And, it’s negligible in Cote d’Ivoire (0.4%) and Mauritius (1.3%).
What’s more, many of the region’s central banks enjoy large reserves of foreign exchange, giving them ample cushion to absorb unforeseen shocks. At $6.4 billion, Ghana’s forex reserve is at an all-time high. The same is true in Kenya, where its record $8.3 billion reserve is sufficient to cover nearly six months’ worth of imports. Even beleaguered Nigeria seems to be turning a corner. Rising oil prices and its latest Eurobond have powered reserves there to a 19-month high, while loosening foreign currency controls are helping to reduce investment risk.
The impact of lower interest rates will take some time to filter down into financial results of individual companies, but viewed in the context of historically low valuation multiples, Africa’s frontier stocks appear primed for standout performance.
Africa Capital Group LLC
1330 Orange Avenue, Suite 302
Coronado, CA 92118