Lower copper prices since Mar, combined with the lockdown, will restrain DRC copper production. GDP should contract by -4.5% y/y in 2020 and expand by 2.5% y/y in 2021. The C/A balance is forecast at -5.5% of GDP and -3.6% at the end of 2020 and 2021 respectively. We expect USD/CDF pair to close the year at 1 942.
GDP growth – pandemic disruptions create uncertainty
The COVID-19 pandemic will have a significant impact on the DRC economy. The number of new infections in DRC is rising and a peak is unknown. Lower mineral production is expected to spill over to the wider economy, affecting the fuels, chemicals, machinery, and transportation sub-sectors.
Balance of payments – extreme pressures
The balance of payments position seems set to deteriorate further in the near term. Particularly the trajectory of mineral exports, accounting for over 90% of exports, will fall sharply due to disruptions to the supply chain, reduced global demand, and declining commodity prices against the pandemic backdrop.
Near term, insufficient financial inflows could exacerbate the funding gap. FDI tends to be concentrated in the extractive sector. However, lower base metals prices, combined with an increasingly uncertain global outlook, may disrupt investment in this sector.
Monetary policy- upside risks to inflation
The BCC will likely leave the policy stance unchanged at 7.5% over the next 4-m. In fact, the committee may well leave the policy rate unchanged for the year. At the end of Mar, in response to the Covid-19 pandemic, the BCC’s MPC reduced its benchmark interest rate to 7.5% from 9.0% and reduced the reserve requirement ratio on CDF deposits to 0% from 2%. The MPC could supplement the Mar’s rate cut with open-market operations.
FX outlook – upward bias
We expect USD/CDF to end Q2:20 at 1780 and Q3:20 at 1860. While CDF depreciation seems inevitable this year, the magnitude is uncertain. The government’s continued reliance on the central bank to finance the budget could precipitate a series of devaluations, which poses meaningful upside risk to the outlook. In our bear scenario, we see the USD/CDF ending 2020 at 2071 and 2021 at 2516.