We see GDP growth of 4.1% y/y and 4.3% y/y for 2020 and 2021. We expect the C/A deficit to inch lower to 4.6% of GDP in 2020 and thereafter to 4.4% in 2021. We see USD/ETB increasing to 34.0-36.7 by year-end.
Medium-term outlook– tepid GDP growth
We now see GDP growth of 4.1% y/y and 4.3% y/y for 2020 and 2021. Our base case sees GDP growth recovering slightly in 2021, and thereafter to over 7.0% y/y in 2022. Despite the pandemic, the government is looking to complete its projects, with more emphasis on the ongoing construction of the Grand Renaissance Dam hydropower project. Thus, public investment in infrastructure is likely to be the main driver of economic growth over the medium term. The foreign currency shortages remain a downside risk to GDP growth, continuing to dampen growth in some sectors of the economy.
Balance of payments – C/A deficit inching lower
We expect the C/A deficit to inch lower to 4.6% of GDP in 2020 and thereafter to 4.4% in 2021, from an estimated 4.7% of GDP in 2019. Global travel restrictions will suppress travel and transport service imports in 2020. We also expect the import bill to decline due to very subdued international oil prices. But, the ongoing infestation of desert locusts poses a profound risk to food security, which could potentially increase the governments’ food importation requirements. Waning luxury spending globally could also hamper flower exports. Still, the balance of the risk is slanted to imports decreasing in larger volume than exports. After all, imports are nearly 3.0 times larger than the value of exports.
Monetary policy- easing bias for now
We expect headline inflation to average 16.1% y/y in 2020 and 12.2% y/y in 2021, from 15.7% y/y in 2019. Despite upside pressure on inflation, we expect the NBE to adopt an accommodative monetary policy stance in 2020 in response to the pandemic. Thereafter, the NBE is likely to resume a tight stance, especially if inflation expectations hadn’t abated. the monetization of the fiscal deficit may continue to make it challenging for the NBE to lower inflation.
FX outlook – further USD/ETB upside
We see USD/ETB increasing to 34.0-36.7 by year-end. According to the IMF, the government has made progress in narrowing the gap between the official and parallel market rate from 27.5% in mid-Nov, to 22% in Apr. It seems the authorities have approved the roadmap guiding the plans to shift to a market-based exchange rate, as stated on the IMF staff report. The IMF expects the government to transition to a flexible exchange rate regime as part of the Extended Credit Facility (ECF) and Extended Financing Facility (EFF) programme.