Economic activity improved in August as the National fuel pass system was rolled out to manage supply. This was reflected in mobility data, where footfall into retail and grocery spaces improved sharply. We expect this momentum to continue into September, assuming continued supply of fuel. This momentum was also supported by the interim budget, where the Government focused mainly on supporting the lower income households impacted by the economic crisis. While VAT was increased to 15%, no other significant tax increases were announced. Against this backdrop, inflationary pressure continued, with headline inflation reaching 60.8% YoY in July. Notably on a MoM basis, price levels grew at a slower pace. Meanwhile, the IMF Staff delegation will conclude their visit today, following positive discussions with the Government. As such, we expect the Staff Level Agreement (SLA) to be announced in the coming days, which will be a clear positive to investor sentiment. We continue to factor in a disbursement of funds from an EFF to materialise in 5-6 months time. Following the SLA, we expect discussions with creditors to commence. At this point, we maintain our 2022 GDP expectations of a 7.5% - 9.0% YoY contraction. We expect a sharp contraction in 2Q and 3Q 2022. We emphasise that a strong reform plan and a stronger political backdrop is key to mitigating the economic impact.
IMF talks for a Staff Level Agreement continue; reforms and SoE debt restructure a crucial factor
An IMF staff level visit commenced earlier this month and is expected to conclude today. Following this, we expect the announcement of a Staff Level Agreement (SLA) by within the next few days. This, in our view, will bring in a much-needed improvement in investor sentiment despite a material inflow of funds from an Extended Fund Facility likely taking place in 5-6 months time. While concerns of a potential local debt restructure heightened following the President’s remarks during the month, we note that the probability of a local debt restructure remains low, albeit not completely off the table. We expect the government to prioritise SoE restructuring in the near term.
Government focuses on supporting economic recovery; focus on SoE reforms
The interim budget for the rest of 2022 was announced yesterday by the President, where revenue generating policies came in below our expectations. The key positive was that the budget aimed at supporting the lower income households who are affected the most given the current economic backdrop. While VAT was increased to 15% effective 1st September, in-line with our expectations, no other major revenue generating policies were announced. This comes in addition to the tax proposals announced in May 2022, which will come into effect from the 1st of October.
Primary data indicated a pickup in activity; continuous fuel supply a key factor
After witnessing a sharp decline in July due to acute fuel shortage and subsequent social unrest, footfall around retail stores and workplaces improved sharply throughout August. This came as the National Fuel Pass System (QR) was rolled out by the Government. Looking ahead, assuming continuous fuel supply, we expect mobility levels, especially movement around retail stores and workplaces to continue. However, we note that any disruption in the domestic fuel supply system and distribution will negatively impact this momentum.