Macro Analysis /

African bonds are proving to be more resilient than EM bonds

  • Forex: Currency devaluation is adding to inflationary pressures in Egypt

  • Fixed Income: African bonds markets are vulnerable to the deterioration in global risk appetite

  • Macroeconomic: South African market is seen as overly hawkish in its interest rate pricing

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
11 May 2022
Published byETM Analytics


Gold has slipped further this morning as a rampant dollar and higher US Treasury yields made trading conditions difficult for tactical bulls. As mentioned yesterday, the dollar is relentless at the moment driven by a Fed that is steadfast in attacking the inflation monster with a more aggressive monetary stance. This underpins the dollar and yields, making gold a less attractive proposition seeing as it is priced in USDs and is non-interest bearing. That said, longer-term strategic buyers look at any dips as good entry points to build gold positions as a hedge against structural inflation. Base metals continued to struggle yesterday as the world priced for lower demand amid the COVID-19 induced lockdowns in China and a more aggressive Fed which has the potential to curtail economic dynamism in the US. This morning we have the price of copper and aluminium up in the Asian session as short term specs bet on a softer inflation number which would filter through to rate hike expectations. Analysts are expecting a sharp pullback in the April reading of inflation. The expectation is that inflation cools to 0.2% in April from 1.2% in March month on month.


Ethiopia: Ethiopia revised its growth forecast for 2021-22 lower on Tuesday. The economy is expected to expand by 6.6% for the year through July, buoyed by agricultural output, especially wheat, as well as mineral exports. This compares with a June forecast of 8.7%. Meanwhile, export earnings in the nine months through April 7 are forecast to be $2.95bn, with $2.05bn in revenue from farming. Ethiopia recorded $2.43bn worth of foreign direct investment in the first nine months of the current fiscal year 2021/2022. The FDI inflow exceeded that of the same period last year by 18.3%. That said, the Chief Commissioner of the Ethiopian Investment Commission said that it was well short of the $3.63bn target. The EIC chief also reported that Ethiopia earned $156.7mn in export revenues from industrial park products exceeding last year's revenue by $27mn. Note that in recent years, Ethiopia has embarked on an industrial parks' construction and commissioning activities as part of a broad economic strategy to make the country a light manufacturing hub in Africa by 2025.

Mauritius: The International Monetary Funds said in its Article IV report that the Mauritian central bank should relinquish the covid unit. According to the IMF, the bank's ownership of the Mauritius Investment Corp, a unit set up to help the country manage the pandemic, weighs on its independence and blurs the separation of monetary and fiscal policy. Moreover, the MIC competes with the financial sector for some profitable projects. The IMF recommended that the MIC be either taken over by the government or folded into the Development Bank of Mauritius. It added that the MIC should return undisbursed financing to the central bank and avoid quasi-fiscal financing.

Nigeria: The Nigerian National Petroleum Company yesterday agreed to cap fuel prices for airlines for three months until August. The state energy company will sell aviation fuel to airlines for NGN 480 ($1.15) a liter until carriers are given the approval to import. The NNPC has around 6mn liters of fuel available at the price, which will be made available to the carriers. The announcement is likely to provide some relief to Nigerian airlines who had this week considered grounding flights over the high cost of aviation fuel that is crippling their businesses and making operations unprofitable.

Uganda: Data from the Uganda Revenue Authority showed that revenue collection from July through to March rose to UGX 15.5trn (10.7%y/y) as the economy recovered from the impact of the coronavirus pandemic. That said, the amount is below the target of UGX 16.5trn for the nine months. For the full fiscal year, Uganda aims to collect UGX 22.4trn. Note that Uganda fully reopened its economy in January after almost two years of partial lockdown to contain the spread of the virus.

Uganda: In a bid to expand its electricity generation capacity multi-fold, Uganda has acquired land for the construction of East Africa's first nuclear plant. The Minister of State for Energy Okasai Sidronius Opolot made the announcement in a statement without identifying the site. According to the Electricity Regulatory Authority, Uganda, which largely depends on hydroelectric power, plans to boost electricity generation capacity by almost 12-fold to 17,000 megawatts in the medium term.

Tanzania: While announcing a $34mn fuel subsidy that it will launch in June, Tanzania's Energy Minister also indicated that the country was in the final stages of securing loans from the World Bank and the IMF. The loans are meant to help cushion the rising cost of living, according to the Minister. The approval of the IMF loans should provide a boost to investor sentiment in the country.

Zimbabwe: Central bank Governor John Mangudya yesterday said that the ban on lending by banks in Zimbabwe to stem a currency collapse is a temporary measure. The Governor was quoted as saying, "this not a long term. It's a short-term measure to ensure that they deal with economic stability. It's a policy measure. It's a temporary measure to ensure that there is sanity."

Forex: Currency devaluation is adding to inflationary pressures in Egypt

Yesterday’s CPI report confirmed that inflationary pressures in Egypt are acute. Specifically, urban inflation surged to its highest level in almost three years, coming in at 13.1% y/y in April from 10.5% y/y in March on the back of soaring global commodity prices and recent currency weakness. On a month-on-month basis, consumer prices climbed by 3.3%. A breakdown of the data showed that food and beverage prices, the largest single component of the CPI basket, led the acceleration in April. They climbed 26% on an annual basis and 7.6% on a monthly one, highlighting the impact of the war in Ukraine, which has seen Egypt battle with higher import bills as the conflict causes a surge in grain and energy prices.

The increase in local fuel prices, in addition to a currency devaluation in March, also added to inflationary pressure. Regarding the latter, recall the Central Bank of Egypt on March 21 allowed the Egyptian Pound, which had been stable against the USD for around two years, to weaken by more than 15%. The move came after Russia’s invasion of Ukraine prompted foreign investors to pull billions of dollars out of Egyptian Treasury markets, putting pressure on the currency. Since then, the EGP has been the second-worst performing currency against the USD among those tracked by Bloomberg. The EGP has lost over 15% on a year-to-date basis, with the Ghanaian cedi (-18.35%) ranked dead last. While the EGP has since stabilised, April and May are likely to see a significant portion of the pass-through from the devaluation.

With risks to the inflation outlook tilted to the upside, we expect policymakers to hike rates at the meeting next week. Moreover, Egypt’s real rate (Policy -CPI) has turned negative for the first time since 2018. Egypt, up until now, had maintained one of the highest real rates in the world, which had made it an attractive investment destination for investors looking for high returns.

Fixed Income: African bonds markets are vulnerable to the deterioration in global risk appetite  

While African bonds have been more resilient to the deterioration in global risk appetite than emerging market bonds, given that investors often buy and hold African bonds through to maturity due to thin liquidity in the secondary market, African bonds are still vulnerable to the global risk-off conditions. This is reflected by the year-to-date performance of the AFMI Bloomberg African Bond Index, which has lost just over 5% in 2022. This compares to losses of more than 16% in emerging market bonds.

The vulnerabilities of African fixed income markets to the worsening global conditions were highlighted in a report published by S&P on Tuesday. The global rating agency said that declining global growth on the back of the Russia-Ukraine conflict and a slowdown in China is weighing on the domestic debt-carrying capacity of frontier markets in Africa. S&P added that sizable nonresident positions in some local bond markets such as Egypt, Ghana, and South Africa, boost liquidity, but often at the expense of increased sensitivity to current shifts in global monetary policy.

S&P noted in its report that many African sovereigns enter this challenging post-pandemic period with high existing domestic debt stocks and large refinancing requirements. Country’s with more fragile debt and macroeconomic fundamentals are the most exposed to the deterioration in lending conditions amid the persistent risk-off conditions and hawkish pivot from central banks across the world.

The effects of this are evident when looking at country’s such as Ghana. The risk premium demanded by investors for holding Ghanaian bonds has skyrocketed in recent months as the combination of surging supply-side cost pressures and deterioration in global risk appetite compound the country’s already elevated fiscal risks. Recall that the combination of tightening global financial conditions, the lack of commitment from the government to rein in its spending and lower than expected revenue collections prompted the start of a sharp sell-off in Ghanaian bonds in September last year.

Since the sell-off began in September, Ghana’s 2026 Eurobond yield has surged more than 1000bps to reach levels close to 18%, placing it among the world's worst-performing bonds over the past six months. Investors fear that Ghana’s massive debt pile and narrow tax base will jeopardise its access to international capital markets, where the country has been refunding itself in recent years. Embedded rigidities in the nation’s fiscal framework remain an area of concern for market participants, rating agencies and investors. It is clear that Ghana faces substantial default risks. This is driving offshore investors to reduce their exposure to Ghanaian assets.

Macroeconomic: South African market is seen as overly hawkish in its interest rate pricing

With the May Fed and BoE rate decisions now out of the way, the focus shifts to the SARB’s May MPC meeting. Notwithstanding the recent weakness in the ZAR, we expect the SARB to deliver another 25bps rate hike next week as policymakers play a delicate balancing act of reining in inflation expectations while at the same time trying not to throttle the economy. That said, there is notable risk of an outsize rate hike next week, given that inflation risks remain skewed firmly to the upside.

While we expect the SARB to hike by 25bps, the professional market is pricing in roughly 50bps worth of rate hike risk per a meeting for the remaining four MPC meetings this year. This is followed up by around 30bps of rate hike risk per meeting in 2023. In our view, this is excessive given SA’s weak macroeconomic conditions and relatively tight credit dynamics. The SARB has thus far been prudent in its monetary policy, raising rates by a cumulative 75bps since the tightening cycle commenced in November 2021, demonstrating its commitment to restoring medium-term inflation expectations. We expect the SARB to continue with its gradual policy tightening in the months ahead, even as major central banks such as the Fed front-load their rate hiking cycles.

Heading into the May 19 SARB MPC meeting, we expect the SARB to deliver a fourth consecutive 25bps rate hike as policymakers look to rein in inflation expectations, which have surged on the back of soaring commodity prices, particularly food and oil. ETM's proprietary indicators suggest that while headline inflation could threaten the upper limit of the SARB's 3-6% inflation target range in the near term, inflation will moderate later this year as supply chain pressures ease and high base effects kick in. Given SA's relatively contained inflation outlook, the market is still pricing in too much rate hike risk, with traders pricing in substantial risk for outsized rate hikes for the upcoming five MPC meetings. The economy is weak, the credit cycle soft, and the ZAR is still somewhat resilient. It is not the kind of environment that would result in runaway inflation.