Macro Analysis /

African bond yields surge as central banks turn more hawkish

  • Forex: Currency weakness drives Ghana’s debt to GDP ratio to 78% of GDP at the end of Q1

  • Fixed Income: African bonds sell off as central banks turn hawkish

  • Macroeconomic: Tightening global monetary conditions is amplifying the shortage of dollar liquidity across Africa

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
25 May 2022
Published by


The escalating squeeze on food supplies and rising prices has got a lot of countries considering restricting exports. A government source told Reuters that India could restrict sugar exports for the first time in six years to prevent a surge in domestic prices. Meanwhile, Indonesia, the world's biggest palm oil exporter, will remove a subsidy on bulk cooking oil and replace it with a price cap on the raw materials for local refiners. Protectionism is looming large at Davos, prompting calls for urgent negotiations to avoid a full-blown trade war.


Nigeria: The Central Bank of Nigeria (CBN) delivered its first rate hike since July 2016 yesterday, joining a host of central banks on the continent that have hiked their policy rates to curb inflationary pressures. The CBN hiked its benchmark interest rate by 150bps to 13.00% in a unanimous vote. The Naira’s depreciation has added to inflation risks exacerbated by Russia’s war with Ukraine, extreme weather, and pandemic-related supply-chain disruptions. While the decision may support the Naira and help cool inflation, it may draw some criticism from politicians as the country prepares to go to the polls next year. Note that around 40% of Nigerians live below the poverty line.

Angola: Angola’s top court has barred a coalition of three main opposition parties from contesting the August elections as it is not “registered”. According to an official at the constitutional court, the United Patriotic Front or FPU is not authorized to conduct political activities, use acronyms, or own symbols. The decision is a blow to the chances of an opposition party winning the August elections as they will now have to contest individually. Note that the coalition formed in October last year planned to field a single presidential candidate to challenge President Lourenco in the vote in the hope of unseating the ruling Popular Movement for the Liberation of Angola, which has been in power for 47 years.

Egypt: Supply Minister Aly El-Moselhy has indicated that a $3bn increase in funding from the International Islamic Trade Finance Corporation is helping the country deal with soaring wheat prices as a result of the war in Ukraine. This brings the total funding to Egypt to $6bn under the agreement, which also helps cover oil imports. According to El-Mosehly, it means the IITF “is the one that pays and covers Egypt’s wheat imports. Therefore, wheat purchases from abroad do not represent any pressure on the central bank.” The support will ease some pressure on Egypt, which is one of the biggest buyers of the grain and employs it as the cornerstone of a bread subsidy program used by about 70% of its population.

Central African Republic:  Following the announcement last month that CAR was adopting bitcoin as an official currency, the presidency has said that the country will launch the continent’s first legal cryptocurrency investment hub. While the government has so far provided little detail on the logistics of its bitcoin vision, the soon-to-be-launched “SANGO” crypto initiative has a website on which interested investors can sign up to a waiting list. The was also no indication when the investment hub would be open or how it would operate. The adoption of bitcoin in a country where internet use is low and electricity unreliable has raised concerns among lawmakers and residents of the country, as well as drawn criticism from the International Monetary Fund.

Nigeria: Federal Inland Revenue Service Muhammad Nami revealed that Nigeria did not join the international tax agreement brokered by the Organisation for Economic Cooperation and Development because it would result in revenue losses. According to Nami, the condition that signatories could only tax digital sales of multinational companies with an annual global turnover of 10% was of a “concern” because most firms that “operate in the country do not meet the criteria.” Nami added that the rule “will take-off so may multinational enterprises from the scope of those that are currently paying taxes to Nigeria. This explains our cautious approach to the endorsement.” While the OECD agreement is not favourable to Nigeria, Nami noted that they had developed internal solutions to collect more taxes in the digital economy. This includes introducing digital services in tax and adopting blockchain technology to develop a platform that will give “seamless view and access to all economic activities” of companies and individuals, in a bid to maximize collection.” Note Nigeria has one of the lowest tax collection rates globally.

Uganda: Uganda’s secretary to the Treasury in the Ministry of Finance has dampened prospects of a potential Eurobond issuance. Ramathan Ggoobi yesterday said that Eurobonds and sovereign guarantees have “inherent kinds of challenges,” and the country continues to prefer concessional borrowing. Ggoobi added that the finance ministry has aligned itself to get concessional loans as much as possible and considers commercial loans when it is unavoidable. Furthermore, the government prefers to borrow long-term at concessional rates, and the ministry wants to cut back on receiving budget support because loans are offered at commercial rates.

Forex: Currency weakness drives Ghana’s debt to GDP ratio to 78% of GDP at the end of Q1

Fiscal measures and strategies adopted by Ghana’s Finance Ministry and the Central Bank of Ghana have yet to meaningfully support the Ghanaian Cedi. For context, the GHS remains Africa’s worst-performing currency on a year-to-date basis, down by more than 20%. A bleak fiscal outlook which has led to capital outflows, tightening global financial conditions, and a current account deficit, are some of the factors that have weighed on the Cedi. Therefore, a weaker Cedi has not only compounded inflationary pressures in the economy but also driven up debt costs.

Data released by the Bank of Ghana showed that government borrowing stood at GHS 391.9bn ($55.1bn) at the end of March, compared with GHS 304.6bn a year earlier. The increase in government borrowing equated to 78% of GDP versus 66.3% a year earlier and marginally lower than the 80% recorded in December 2021. A breakdown of the data showed that external debt stood at $28.4bn (GHS 201.9bn) in March from $28.3bn in December 2021, suggesting there were no borrowings on the external front in the first three months of the year. Overall, the Cedi value of the total debt stock shot up by GHS 31.9bn in the first three months of the year, primarily due to the weakness in the Cedi. The Cedi recorded the worst depreciation of any currency besides the Russian Ruble in the first three months of 2022.

Going forward, it remains to be seen whether the recent measures adopted by the government and central bank will reverse the Cedi’s fortunes. We, however, see risks for the Cedi as tilted to the upside as concerns over the credibility of the country’s fiscal objectives remain, while an unfavourable external backdrop adds further headwinds. Persisting Cedi weakness will therefore continue to drive debt costs higher in the near term.

Fixed Income: African bonds sell off as central banks turn hawkish

While there are signs that the hawkish bias in the US could ease following the latest comments from the Fed’s Bullard and more soft economic data yesterday, African central banks have turned decisively more hawkish in recent weeks amid signs that inflation pressures across the continent are intensifying. Over the past couple of days, we have seen policymakers in South Africa, Ghana, Egypt and yesterday, Nigeria deliver bold rate hikes aimed at reining in inflation and restoring stability across their respective currency markets.

For context, the South African Reserve Bank raised its benchmark repo rate by 50bps at its May meeting, while central banks in Ghana, Egypt and Nigeria hiked their policy rates by 200bps, 100bps and 150bps, respectively. Nigeria’s rate hike came as a surprise to many with the central bank saying in recent commentary that it would leave rates on hold until the economy rebounded.

The shift in monetary policy in Africa comes as the US Federal Reserve and European Central Bank adopt increasingly hawkish stances that have reduced the appeal of African assets to offshore investors. This has been one of the main factors driving capital outflows and currency weakness across the continent this year. Although growth in Africa remains fragile, central banks are having to tighten policy to fight against soaring inflation.

While the hawkish pivot from African central banks will help provide some stability for currency markets, it has come as a headwind for bonds as traders price in higher interest rates. The hawkish pivot in regional monetary policy comes against the backdrop of rising rates across developed markets and dampened global risk appetite, all of which are weighing on the outlook for African bonds. Since the start of the year, the Standard Bank Africa ex SA Bond Yield Index has risen by more than 350bps to reach levels near the peaks seen during March 2020. Risks in the near term remain skewed to the upside. However, we do expect to see a notable correction towards the back end of this year or in early 2023.

Macroeconomic: Tightening global monetary conditions is amplifying the shortage of dollar liquidity across Africa

The hawkish shift in global monetary policy from major central banks, including the likes of the Federal Reserve and the Bank of England, has resulted in a receding tide of dollar liquidity in the global financial system. The changing of the tide in global liquidity has hit Africa hard as it has amplified dollar liquidity constraints across the continent. Many African businesses both big and small, are struggling to access hard currency to facilitate foreign transactions, such as the purchasing of imported goods and services.

Recall that the Central Bank of Kenya reportedly ordered commercial banks to ration dollars due to a shortage of US dollars in the country’s financial system. A number of currency traders and importers reported that they have had to impose a daily cap on dollar purchases as businesses struggle to obtain adequate hard currency to meet their obligations. While there were many reports of dollar constraints, it wasn’t officially confirmed that the Central Bank of Kenya had implemented the rationing of dollars for commercial banks.

Meanwhile in Nigeria, commercial banks reduced how much foreign spending their customers could make. The move is a clear indication of how Nigerian banks are struggling to meet the dollar demands of their clients as Africa’s dollar liquidity crisis intensifies. The hard currency liquidity constraints are evident in the significant sell-off in the Naira in the secondary market, which recently reached its weakest level on record against the USD.

These are just two examples of the growing dollar liquidity constraints in Africa. In a recently released report titled How Africa can Navigate Growing Monetary Policy Challenges, the International Monetary Fund said shallow markets (i.e., markets with limited liquidity) can amplify exchange rate movements and yield excessive volatility. Foreign exchange markets tend to be shallow in many countries in the region, as evidenced by the wide spread between bid and ask prices. The IMF added that the presence of many foreign-currency-denominated liabilities is also a major factor why many African countries are vulnerable to dollar illiquidity/scarcity.

Going forward, with major developed market banks expected to hike rates further as inflation continues to soar, the dollar liquidity crisis in Africa is expected to worsen. As such, we expect capital controls to intensify, making it increasingly harder for businesses operating in Africa to repatriate revenue/profits from one country to another. Moreover, as demand for dollars increases due to the rising cost of imported goods, currency pressures in Africa are expected to intensify.