Macro Analysis /

African bond rout deepens, Angola bucks trend and cuts rates

  • Forex: Egyptian pound is flirting with a break above 20.0000 to the USD

  • Fixed Income: Sell-off in African bonds deepens as market conditions worsen

  • Macroeconomic: While most African central banks are hiking, the Bank of Angola decided to cut rates yesterday

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
27 September 2022
Published byETM Analytics


Global bond yields continued to rally yesterday when looking at the core markets, with 2yr UST yields breaching the 4.3000% level while 10yr yields climbed above 3.8500%. Gilt yields also kept up the topside momentum, surging by more than 40bp across the curve once again as investors continued to digest the new spending plans and sold off UK assets in the process. Bund yields were also higher across the board, tracking their peers. The driver for the general sell-off in bonds remains the same, with tighter monetary policy still expected, as was flagged by several Fed members yesterday. Adding to the pressure was a poor auction for 2yr notes, while inflation-linked bond yields also increased to highs not seen since 2010, further tightening financial conditions.

These three bond curves are now screaming recession risk, with the US and UK yield curves at their most inverted in decades, while the bund yield curve continues to flatten and appears to be heading for inversion in the very near future. This will continue to keep investors short risk, given the uncertainty over the future growth outlook for these major economies.


Nigeria: The Central Bank of Nigeria is set to decide on its policy rate today. The consensus of economists polled by Bloomberg is for the CBN to hike rates 50bps today as inflation continues to surge and inflation expectations remain unanchored amid currency weakness, floods in food-producing regions, and rising diesel costs. Headline inflation in Nigeria reached a 17-year high of 20.52% y/y in August. At the July meeting, Governor Godwin Emefiele said that policymakers will lean toward additional hikes if inflation continues to be “aggressive.” With inflation running hot and major central banks hiking rates aggressively, there is a risk that the CBK could deliver an outsized rate hike today.

Nigeria: Nigeria looks set to relaunch its state airline nearly two decades after its predecessor collapsed. Bloomberg reported that a consortium led by Ethiopian Airlines is the preferred bidder for shares in the new Nigerian airline. Ethiopian Airlines will reportedly take a 49% stake in the new airline, while the Nigerian Sovereign Fund will take 46% and the Nigerian government the remaining 5%. Aviation Minister, Hadi Sirika, said that Nigeria Air would have an initial capital of $300mn and plans to have 30 aircraft within 4 years. The Minister added that the airline aims to have planes in the air before the end of the year and will begin with flights between the capital Abuja and the commercial capital Lagos.

Kenya: While several African countries have embraced the adoption of crypto and digital currencies, the Central Bank of Kenya has taken a clear stance on the adoption of digital assets. CBK Governor Patrick Njoroge described the calls to convert the country’s reserves into the world’s leading cryptocurrency as outright “craziness.” Governor Njoroge added that there would be an absolutely dire need before he would agree to such a proposal. Njoroge said that digital assets are volatile, but apart from that, they simply do not solve any real-life issues. The central bank has issued numerous statements warning the residents against trading or investing in cryptocurrencies. Despite the warning, many Kenyans have invested in crypto or make use of digital assets. Peer-to-peer exchange Paxful revealed that users from Kenya had digital assets valued at $125 million during the first half of 2022.

Zimbabwe: The Reserves Bank of Zimbabwe said that remittance flows surged during the first eight months of the year. Specifically, remittances jumped by 20% from January to August, reaching $1.07bn, marginally higher than a total of $1bn received in 2020. March saw the biggest inflow of foreign funds, with the country receiving $142.3mn, followed by $141.5mn in May. Looking ahead, we expect remittance flows to continue to increase in the final months of 2022 as diasporans send money to their families for the festive period. This should, at the margin, provide a boost to dollar liquidity in the financial system. A separate data release showed that inflation continues to run hot, with CPI coming in at 280.4% y/y in September. With inflation this high, the county is staring down the barrel of stagflation.

Republic of Congo (DRC): The DRC’s central bank is optimistic about the country’s economic growth for this year, with solid growth estimated amid strong performances in the extractive, transport and telecommunications industries. Governor Malangu Kabedi-Mbuyi told the government that the economy is forecasted to expand by 7.1% in 2022, trouncing projections of the International Monetary Fund, which expects growth to come in at 6.4%. Meanwhile, the country’s inflation is expected to miss the central bank’s 11% target for this year and end the year at 11.3% as a result of the higher import prices due to the impact of the Ukrainian war. On the political front, President Denis Sassou Nguesso appointed Jean Baptiste Ondaye as Minister of Economy and Finance. The newly appointed Finance Minister Ondaye was previously secretary general of the presidency. Nguesso made a number of other changes to his government team.

Mauritania: Mauritania’s Central Bank Governor Mohammed Dhehby signalled that more interest rate hikes are on the cards as policymakers seek to combat inflation that is showing no signs of abating. The hawkish comments come as inflation remains stickier above the official target range or 3%-5% after accelerating to 7.3% in August. While the central bank still sees room to hike interest rates, Governor Dhehby noted that any future hikes would have to weigh the potential impact on economic growth. He added that shock therapy consisting of a significant rate hike in the benchmark interest rate could have recession consequences. The governor said that a gradual approach would help better anchor inflation expectations.

Forex: Egyptian pound is flirting with a break above 20.0000 to the USD

Notwithstanding reports that Egypt could raise as much as $6bn before the middle of next year by selling stakes in state-owned businesses, the selling pressure on the Egyptian pound remained intact on Monday. Following the mass exodus of foreign capital from Egypt’s financial market in recent months, Egypt is looking to attract more foreign direct investment. Recall that Saudi Arabia and neighbouring Gulf states have pledged more than $10bn in foreign direct investment in Egypt. While this is encouraging, it is not enough to make up for the outflows of more than $20bn from the local debt market.

Data published on the Central Bank of Egypt’s website showed that the EGP’s exchange rate was quoted at 19.5383 against the USD yesterday, surpassing levels seen following the devaluation at the end of 2016. Bloomberg data meanwhile showed that the USD/EGP tested a break above the 20.0000 big figure during intraday trade. However, the move was not sustained, with the pair closing the session a whisker below 19.5000. While idiosyncratic factors are contributing to the managed slide in the EGP, a significant degree of the selling pressure is related to the adverse external conditions.

Against this backdrop and signs that the central bank is tilting toward a more flexible exchange rate, bearish bets on the currency in the derivatives market have intensified. Spreads between implied non-deliverable forward outrights and the spot price have continued to widen as markets price in the risk of another bold devaluation in the currency. For context, the 3-month implied NDF outright is trading 13.6% higher than the USD/EGP at 22.1500. While there is a considerable risk of a sharp devaluation in the EGP, we expect a managed depreciation in the currency to persist in the months ahead.

Fixed Income: Sell-off in African bonds deepens as market conditions worsen

Emerging markets are feeling the wrath of the turbulent market conditions and rotation towards US assets. Weekly data published by Bloomberg on Monday showed that US-listed emerging market ETFs suffered outflows of $1.73bn last week as investors pulled out of risky assets and flocked to haven assets. Note that this was the most significant outflow in over a year.

A breakdown of the data showed that investors pulled $1.31bn from stock ETFs, while bond funds fell by a less pronounced $422mn. The outflows saw the MSCI Emerging Market Index shed 4.1% to close the week at its lowest level since May. Note that no individual country recorded an inflow last week. Zooming in on US-listed ETFs that focus on Africa, the biggest outflows were from South Africa, Egypt and Nigeria. Kenya, Ghana and Morocco also recorded notable outflows last week.

Given the turmoil in the UK and rampant rise in the USD and US Treasury yields, the sell-off in African assets persisted at the start of the week. The Bloomberg Africa Bond Index (ex. SA), which we use as a proxy for the performance of local currency African sovereign bonds, fell to more than a two-year low on Monday, bringing the losses in the index since the start of the year to just under 13%. While there has been a shift from major international lenders in support of fiscally fragile African countries, near-term risks (3-months) remain skewed firmly to the downside. That said, the next few months will present a great buying opportunity for investors, with valuations and bond yields in the African bond market already looking extremely attractive. 

Macroeconomic: While most African central banks are hiking, the Bank of Angola decided to cut rates yesterday

While many African countries are hiking rates aggressively to curb soaring inflation and help shield their currencies from further depreciation, the Bank of Angola bucked the broader trend yesterday and cut interest rates. Angola’s decision to loosen monetary policy was made in an effort to support the economy, following the sharp deceleration in inflation and marked appreciation in the kwanza. The kwanza has appreciated by almost 30% against the USD since the start of the year, making it one of the best-performing currencies in the world.

Note that Angola implemented a very aggressive and quick tightening cycle. The central bank hiked interest rates from 15.5% to 20% in July of 2021. Therefore, the Bank of Angola was proactive in its fight against inflation rather than reactive, as has been the case with most central banks across the world. The prudent monetary policy stance has helped keep inflation under control and underpinned the resilience of the local currency.

Angola is among a handful of nations that have cut borrowing costs this year. Most countries are hiking rates aggressively to keep their monetary policy differentials with the US in check and prevent further inflationary pressures. Last week saw policymakers in Nigeria and South Africa hike interest rates. These are just two of many African countries that are in the midst of aggressive tightening cycles. African central banks remain cautious of the impact of further currency weakness as the Fed continues to jack up interest rates, driving the USD to record highs. The sustained currency weakness in African FX is amplifying external price pressures. Against this backdrop, we expect the broader hawkish trend in Africa to persist over the next 3-6 months.