GDP growth– economic rebalancing implies still slower growth
We retain our GDP growth forecast of 8.0% for FY2018/19, thereafter seeing growth slowing to 7.8% y/y in FY2019/20. The rebalancing within this economy will likely see GDP growth moderating over the coming years, relative to the average of the past 5-y, as reforms will take time to stimulate economic activity and increase output. However, GDP growth in FY2018/19 could still be slightly higher than the previous year thanks to base effects.
Balance of payments – exports still weak
We still expect the C/A deficit to widen to 6.8% of GDP in 2019 and thereafter narrow to 6.5% by Dec 20. A faster than expected drop in imports of goods in 2018 resulted in a lower C/A deficit of 6.3% in FY2017/18, lower than our 7.1% estimate. Exports of goods remained broadly unchanged in 2018. However, despite both fuel and cereal imports growing by 31.5% y/y and 38.5% y/y/ respectively during this period.
Monetary policy- hawkish bias to persist
We continue to expect the MPC to maintain a tighter policy stance in 2019, although they could look to ease liquidity conditions in H2:20. we still see headline inflation remaining sticky around double digits for the most part of 2019. Thereafter, in 2020 we see headline inflation averaging 4.7% y/y, which is why we suspect the MPC could be tempted to ease its policy stance to boost the economy.
FX outlook – gradual weakness
We expect the USD/ETB to trade in a range between 29.5-30.0 by the end of 2019. Notably, the NBE never devalued the ETB by the customary 5.0% in 2018, perhaps due to the sharp devaluation that was already done towards the back end of 2017. The IMF continues to note with concern that the ETB remains overvalued on a real effective basis. Moreover, the fund surprisingly continues to promote the idea that a further devaluation could improve the competitiveness of exports. Pressure to devalue the ETB could arise again in 2020, if exports remain sluggish.
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