Macro Analysis /
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Africa is pioneering the adoption of digital currencies

  • Forex: Africa is leading the way in the adoption of digital currencies

  • Fixed Income: Bear flattening bias in the Kenyan bond curve remains intact

  • Macroeconomic: G7 aiming to become another source of infrastructure funding for Africa

Kieran Siney
Kieran Siney

Head of African Markets

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Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

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ETM Analytics
28 June 2022
Published byETM Analytics

GLOBAL

Some caution is evident in the markets this morning through the Asian session, with US Treasuries climbing alongside JGBs as equities struggle for traction. Rallies in risk assets have proved to be relatively fleeting in recent months as growth concerns have manifested. This has now led to a repricing of rate hike risk globally, which has helped bond yields come off their recent peaks. 10yr Treasury yields, for instance, reached a high of 3.47% earlier this year, but have since retreated to around 3.175% at the moment.

However, gains are being capped by elevated inflation expectations, which are largely supported by crude prices. We have seen oil prices rise this week so far, keeping near-term inflation concerns entrenched and front-end bond yields supported as we still are in for a series of rate hikes from major central banks before they curtail demand growth and drive their respective economies into recessions to contain rampant price growth. Therefore, the bias for yield curves through the developed world is likely to remain one of flattening through the coming weeks.

Oil has kept up its bullish momentum seen of late this morning, with Brent rising above $115 per barrel as threats to global supply have come into focus, outweighing any economic growth concerns. The political crisis in Libya is worsening, and disruptions to its output and exports are intensifying. The African nation said yesterday that it may suspend exports from a key shipping terminal, the Gulf of Sirte, while the National Oil Corp said it would declare force majeure within the next 72 hours. Libya’s oil output had already halved since mid-April to around 600k barrels per day, with these latest developments likely to exacerbate that and pose a greater threat to global supply.

AFRICA

Kenya: Pressure on Kenya to find budget funding is set to heighten after the International Monetary Fund delayed issuing a loan of KES28bn ($238mn). The IMF said the board is only expected to meet in the "coming weeks" to give final approval. No reason was provided for the delay. The funding is part of a $2.34bn extended credit facility and extended fund facility agreed to by the IMF more than a year ago for budget support and requires board approval after a staff-level agreement was reached in April. The delay in the timing of the IMF funding is set to see Kenya consider other alternative sources of financing as it had included the loan in its net external financing requirements for the fiscal year ending this month. These sources could include concessional loans, multilateral loans, and potentially raising local currency debt issuance, given tightening financial conditions globally. Financial conditions have tightened as major DM central banks aggressively hike rates leading to a deterioration in lending conditions that have seen many African countries, including Kenya, cancel plans to tap into the Eurobond market to plug budget shortfalls.

Nigeria: Nigeria National Petroleum Corp (NNPC) published a report that shows that Nigeria's spending on gasoline subsidies surpassed $1bn in April for the second straight month as the war in Ukraine triggered a surge in the price of fuels. Specifically, the state-owned entity spent NGN507bn ($1.21bn) on subsidies in April, importing 1.85mn metric tons of fuel. Given that Nigeria has little refining capacity, the NNPC imports all of its gasoline which it then sells at a steep loss to retailers and wholesalers, making pump prices in Nigeria amongst the lowest globally. Losses absorbed in April were marginally less than when the NNPC spent NGN521bn in March. While lawmakers in Nigeria in April approved a revised annual budget that set aside NGN4trn for fuel subsidies, this amount may not be sufficient if oil prices remain high. This could force the government to borrow further and potentially pressure its finances amid an inability to benefit from higher oil prices due to sluggish production.

Botswana: According to Segolo Lekau, Commissioner of Botswana's Unified Revenue Service (BURS), the country's tax revenue increased by 36% in the first two months of the fiscal year as a result of a recovery in the minerals sector. In particular, revenue streams grew to 8.6 billion pula for April and May, exceeding the target by nearly 12% or by 7.7 billion pula for the period concerned.

Mozambique: Mozambique's economy has been forecast to expand by an average of 5.7% from 2022 to 2024 in the World Bank's latest economic update. According to the bank, the growth forecast is underpinned by benefits expected from liquefied natural gas (LNG) production and a post-pandemic recovery in demand. The anticipated growth in the country's economy is also likely to be driven by increased financial support to Mozambique after the International Monetary Fund provided $456mn to the country in May. However, downside risks to the growth outlook include rising import prices owing to the war in Ukraine, further coronavirus pandemic waves, and the insurgency.

Ivory Coast: As part of an effort to meet strong local demand and exports to neighbouring countries, Ivory Coast has added 180 megawatts (MW) of gas-fired power generation capacity to its electricity grid following the expansion of its Azito plant. Ivory Coast experienced a wave of power outages last year and was forced to ration electricity after a fall in generation capacity and delays in bringing Azito online due to the coronavirus pandemic. According to the country's energy minister, strong economic growth is boosting Ivory Coast's power demand by around 10% annually, while demand from neighbours is also growing. Meanwhile, a recent gas discovery by Italy's Eni offshore Ivory Coast is expected to see the country increase its electricity generation, mostly from gas, in the coming years.

Zimbabwe: The Reserve Bank of Zimbabwe (RBZ) raised its benchmark interest rate by 120 percentage points to a record 200% as part of its effort to rein in inflation and stabilise the exchange rate. The decision for such an aggressive rate hike comes after inflation quickened to 191.6% in June, and the local currency lost about 69% against the dollar so far this year.

Forex: Africa is leading the way in the adoption of digital currencies

Several structural and systematic challenges plague African currency markets. Challenges such as currency illiquidity and excessive levels of volatility have significantly impacted economies, trade, and the ease of doing business for decades. Unsurprisingly, central bank digital currencies (CBDCs) have become an increasingly pressing issue of policy exploration by central banks across the continent. CBDCs are defined as digital versions of cash that are more secure and less volatile than crypto assets as they are issued and regulated by central banks. While reasons for issuing CBDCs may differ amongst countries, they carry significant benefits that can help lessen some of the structural challenges that have long plagued currency markets on the continent.

Several Sub-Saharan African countries are, therefore, exploring CBDCs. The latest report by the International Monetary Fund (IMF) shows that Nigeria has launched its digital currency, the e-naira, while Ghana and South Africa are in the pilot phase, and nine countries are in the research phase. Aside from financial inclusion, the facilitation of cross-border transfers and payments, and fast transaction times, CBDCs could drop remittances costs, which are currently the highest in sub-Saharan Africa. A report from the International Fund for Agricultural Development’s Financing Facility for Remittances showed that costs of sending money to Africa are the highest averaging 7.83%, compared with the global average of 6%.

While there are a number of benefits of CBDCs, there are some challenges to their broad adoption. Access to reliable and affordable digital infrastructure remains a challenge for many countries despite significant strides in investment. Meanwhile, the IMF suggests that central banks will need to develop the expertise and technical capacity to manage the risks to data privacy from potential cyber-attacks and to financial integrity. Moreover, risks exist that too much money is withdrawn to purchase CBCs curtailing the banks’ ability to lend, especially for countries with unstable financial systems.

Although several risks need to be worked out, central banks and economies stand to benefit from the adoption of CBDCs. While we expect the rolling out to be measured, we are of the view that this is the direction in which the countries not only on the African continent but globally are shifting.

Fixed Income: Bear flattening bias in the Kenyan bond curve remains intact

Tracking the sell-off in core bonds, Kenyan bond yields have risen sharply this year as central banks across the globe ramp up interest rates to rein in soaring inflation and inflation expectations. Adding to the headwinds has been the adverse impact of rising interest rates on debt servicing costs, the sustained depreciation in the shilling and increased political uncertainty ahead of the presidential elections on August 9.

The most notable moves have been on the front-end of the curve, with the 2yr and 3yr local currency bond yields climbing almost 120bps since the start of the year to both sit above the 11% mark. While still significant, movements on the long-end of the curve have been less pronounced, with the 20yr and 30yr yields rising by 50 and 30bps, respectively, with both yields trading just above 14%. 

While the bear flattening in the curve suggests that much of the bearish bias is being driven by mounting inflation pressures, which are bolstering bets that the Central Bank of Kenya will have to raise interest rates further in the coming months, mounting fiscal and political risks are adding to the headwinds. This is reflected by the marked increase in Kenya’s 5yr USD credit default swap, which has risen from around 400bps at the start of the year to north of a 1000bps on Monday.

 

With political uncertainty expected to intensify in the weeks leading up to the August 9 elections against the backdrop of tightening global financial conditions, rising inflation pressures and expectations for more rate hikes from the Central Bank of Kenya, we expect the bearish bias in Kenyan bonds to persist in the months ahead. We could see rates on the front-end and belly of the curve rise by as much as 100bps in the months ahead. Should this play out, the 2yr and 3yr bond yields could rise above the 13% mark.  

Macroeconomic: G7 aiming to become another source of infrastructure funding for Africa

China has dominated investment in Africa over the past two decades, creating 25 economic and trade cooperation zones in 16 African countries. China has continued to pump large sums of investment into Africa during the pandemic era, with the bulk of the investments in the services sector. While appetite for infrastructure in Africa remains robust, several African countries are rethinking their relationship with China, and some are suspending or scrutinizing contracts with Chinese firms amid transparency concerns.

China's road and belt project has financed ports, roads, bridges and more in more than 100 emerging countries. While it has developed many trade links, it has been criticized for luring African countries into debt traps, as these countries do not have any other options and are in desperate need of infrastructure developments. The argument is that these investments often benefit China more than their hosts, and therefore, having another infrastructure funding source could really benefit Africa.

This has opened the door for the West to bolster its footprint in Africa. Reports surfaced on Monday that the G7 is planning to roll out a program to boost infrastructure spending in Africa. The aim of the fund is to raise $600 billion over the next five years. The funds will be used to launch infrastructure projects in middle and low-income countries, primarily in Africa. The initiative will help tackle climate change as well as improve global health, gender equality and digital infrastructure. Some of the major projects that these funds will be used for are a solar farm project in Angola, a 1,609km submarine telecommunications cable connecting Singapore to France via Egypt and the Horn of Africa, and hospital construction in Cote d'Ivoire.

Investments from the western world into Africa would help improve infrastructure on the continent and therefore increase economic growth. We see these as an extremely positive development for Africa, which would benefit massively from new and improved infrastructure.