Renaissance Capital: Oil above $80 makes exporters look interesting again

Renaissance Capital, a leading investment bank, has released its outlook for the African region in 2022, highlighting key themes such as high oil prices, elections, and inflation. The bank notes that with oil prices soaring above $80, major oil-exporting countries in Africa are becoming increasingly attractive for investors. Yvonne Mhango, the Sub-Saharan African Economist and Head of Research at Renaissance Capital, joined CNBC Africa to delve into the details of their forecast for the year. Mhango emphasized the importance of the high oil prices, upcoming elections in countries like Kenya, Angola, and Nigeria, and the challenges posed by high inflation rates across the continent. These three prominent themes are expected to shape the economic landscape throughout 2022. In Nigeria, Mhango pointed out that the surge in oil prices is a positive development for the country's external sector. The bank anticipates a growth rate of 1.2 percent of GDP, up from 0.8 percent in the previous year. However, concerns arise from the reinstatement of fuel subsidies by the Nigerian government, leading to a budget deficit projection of around 4.5 percent of GDP. Despite the optimistic outlook for the external sector, stagnant production levels in both Nigeria and Ghana may hinder substantial GDP growth. Discussing the implications of the reintroduction of fuel subsidies in Nigeria, Mhango highlighted the strain on the country's revenue-to-GDP ratio, which is notably low on a global scale. The reliance on limited resources due to rising expenditures could divert funds from crucial areas such as infrastructure development, posing a significant challenge for Nigeria's fiscal management. The upcoming presidential elections in Nigeria also raise uncertainties for the economy, as a new administration and policy direction are expected post-election. Mhango noted that the absence of an incumbent candidate adds to the unpredictability of the electoral landscape, potentially stalling economic reforms as politicians focus on campaigning. The period leading up to and following the elections typically witnesses a slowdown in economic activity and reform initiatives. Regarding currency valuation, Renaissance Capital views Nigeria's currency as overvalued, estimating a fair value of around 480 nairas to the dollar. The bank anticipates a stable exchange rate policy to continue, supported by the favorable outlook driven by higher oil prices. As for monetary policy, the likelihood of a rate hike in Nigeria is on the cards, considering the need to address deeply negative real interest rates amid a global trend of increasing interest rates. With inflation looming as a significant concern, Renaissance Capital foresees a potential rate hike of one percentage point, bringing the rate to 12.5 percent. The bank believes that Nigeria's sustained economic recovery and the need to correct negative real interest rates could prompt monetary authorities to implement tightening measures. Overall, Renaissance Capital's comprehensive outlook for Africa in 2022 underscores the importance of monitoring high oil prices, upcoming elections, and inflation rates as key drivers of economic trends in the region.