Trend
- Nigeria’s underlying growth trajectory continues to be strong, with 6.6% GDP growth forecast for 2012
- A recent uptick in inflation is likely to accelerate, with inflation forecasts increasing from 10% to 14-15%
- Core inflation (which excludes volatile components food and energy) has remained steady at 10.8%
Drivers
- Fiscal Policy Expansion Continues Unabated: The new government’s 140% increase in the minimum wage and partial removal of the fuel subsidy will cause a significant increase in prices in Q1
- Limited Monetary Policy Options: The Central Bank instituted a number of anti-inflationary measures in Q4 2011: devaluing the naira to ₦155/USD, increasing the benchmark interest rate to 12%, and eroding its foreign reserves to 6 months of imports from 17 months. Though foreign reserves have since recovered, the Central Bank has few tools available to aggressively stem inflation
Frontier Strategy Group View
- Inflation is likely to rise significantly in the next two months. Operating costs, particularly transportation and input prices, are likely to increase through summer 2012
- Ongoing fiscal outlays to support the fuel subsidy regime will also weigh on local prices
- With few monetary policy tools available to support the naira, currency volatility will be a concern. The naira will remain stable if oil prices remain moderate (US$100-120/bbl) and the partial fuel subsidy removal is not reversed. Otherwise, the Central Bank will be under significant pressure to further devalue
Trend
Recent policy choices indicate that political considerations are being placed ahead of sound economic management
The central bank’s decision to cut interest rates, despite high inflation and employment, and subsequent intervention to arrest the depreciation of the real has created a tremendous amount of volatility
Industrial policy has become paramount as protectionism leaps into the fore, jeopardizing long-term competitiveness
Import taxes and foreign ownership laws are worsening regulatory uncertainty, leading some companies to rethink investment decisions
By choosing to shelter local producers rather than cut red tape and invest in infrastructure and human capital, the government is further distorting market incentives
Drivers
The government is betting that inflation will decrease as the global economy cools, making growth a higher priority
Financial markets are pricing in an additional 100 basis points worth of cuts to the SELIC rate by the end of the year
Political pressure to address the currency has been building ever since the Dilma administration took office
Dilma is hemmed in by a governing coalition and constitution that makes it difficult to enact long-term reforms to boost competitiveness
Frontier Strategy Group View
The recent spate of pro-inflationary policies poses serious risks to the Brazilian economy, especially given recent demands by workers to raise wages in 2012. If the global economy fails to deteriorate as much as Brazilian officials are expecting, a scenario that is not currently FSG’s base case, inflation could become a major problem
B2C companies selling to low and lower-middle income consumer segments should be wary as inflation reduces the purchasing power of these demographics the most
While the impact of Western volatility on Asian markets is cause for concern, this is just one force buffeting the Indian economy. Other risks to watch in Q4 and first half of 2012 are currency volatility, inflation, policy paralysis and farm output:
1) Western Recession
- While India’s exports have withstood the global gloom so far, prolonged insecurity in Western markets could have a large impact on exports
2) Currency Volatility
- The weak rupee may provide a short-term boost to exporters, but uncertainty around currency volatility will negate the benefits
3) Inflation
- Inflation remains a consistent threat to business input costs, wage levels, and household consumption, as FSG observed in Q3
4) Policy Paralysis
- This summer’s scandals halted business as usual in Parliament, and may continue to stall crucial policymaking on social and business issues
5) Poor Farm Output
- Agriculture accounts for 17% of GDP and employs over 50% of the populace. A weak monsoon will hurt rural markets and heighten inflation
Inflation across Central and Eastern Europe (CEE) eases on food prices, improving the outlook for increasing consumer demand in a number of countries in the region. Despite concerns about the impact of the euro zone crisis, investors’ confidence in CEE remains relatively strong, with the notable exception of Turkey where concerns about the country’s growing current account deficit weigh on investor perceptions.
- Bulgaria: The economy is gradually recovering but inflation, low investment, and the euro zone crisis will continue to weigh on growth
- Croatia: Despite welcome news on its EU membership, Croatia continues to struggle with serious economic problems
- Czech Republic: The expected government spending cuts and slowdown in exports to Germany will negatively affect consumer demand
- Hungary: As inflation eases and Hungary’s economy picks up, we expect a gradual but steady recovery in domestic demand in H2 2011
- Kazakhstan: An increase in government spending meant to buy popular support for the government will boost consumer demand
- Lithuania: With inflation stabilizing and the economic recovery on track, consumer demand will support growth more actively in H2 2011
- Poland: Polish consumers are a key driver of growth and investor interest in the country’s strong domestic
- Romania: The economy is slowly recovering and the government is seeking more aggressive reform measures
- Russia: The question of who will run for Russia’s presidency continues to weigh on investor perceptions of the country
- Serbia: Plagued by high unemployment and rising inflation, Serbia is seeking investors to help boost its economy
- Slovakia: Expected increases in car production will boost Slovak exports and drive growth for the rest of 2011
- Turkey: After winning the parliamentary elections, the AK Party will need to address rising consumer spending and inflation aggressively
- Ukraine: The Ukrainian government is increasingly focusing on cooperation with the EU as a key economic and foreign policy goal
