Macro Analysis /

African central banks likely to keep rates on hold amid growth concerns

  • Forex: Botswana’s real interest rate swings into negative territory, weighing on the BWP’s resilience

  • Fixed Income: Fiscal stimulus exacerbates Ghana’s pre-existing fiscal rigidities and public debt vulnerabilities - IMF

  • Macroeconomic: African central banks expected to keep rates on hold amid persistent growth concerns

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
17 May 2021
Published byETM Analytics


The resumption of risk appetite at the end of last week has failed to spill over into early morning Asian trade with mixed sentiment caused by softer Chinese retail sales and industrial production figures. As for the dollar, the greenback may yet face more near-term pressures. With Fed comments last week able to ease dollar bullishness, clues behind the Fed’s thinking in the form of the last FOMC meeting minutes due Wednesday may have some further sway on the greenback. For the time being, however, the possibility of renewed restrictions in Asia is keeping optimism in check, while the USD has resultantly received support this morning at the expense of riskier currencies.

After its fall on Friday on some disappointing retail sales figures, the USD has found a slightly firmer footing this morning as concerns over the virus in Asia raised overall levels of risk aversion. For now though, any rebound in the USD will likely be tepid, with investors positioned for an ultra-accommodative Fed and a Biden administration that looks fully committed to pressing ahead with more fiscal stimulus, the anticipated recovery notwithstanding. Technically, the USD is still trading heavy and appears to be struggling to gain much traction in its recovery.

The Chinese National Bureau of Statistics data showed that crude steel output hit an all-time high in April, this despite Beijing’s pledge to curb annual production as part of a drive to reduce pollution and increasing costs of raw materials. Producers pumped out 97.85 million tonnes versus 85.03 million tonnes in April 2020.  Improving profit margins have kept the mills appetite for production robust for now.

The price of copper rebounded this morning following its first weekly loss in six weeks driven by supply concerns as strike action looms at Chile. Reuters reported that a union representing workers at BHP's Escondida and Spence mines in Chile rejected the company's contract offer, raising the risk of a strike at the two sprawling copper deposits.

Oil markets are holding onto their gains from Friday this morning, following a rebound from Thursday’s dip. The demand outlook from major consumers China and the US is improving, while Europe’s late progress in its vaccination drive adds further support. There are still concerns over rising cases in Asia, but for now the prospect of stronger demand from the US and China is more than enough to offset this and keep prices elevated.


Ethiopia: The Ethiopian electoral board announced the postponing of next month’s elections by three weeks to allow time to prepare adequately. The delay comes off the back of some opposition parties who said they wouldn’t take part and as the conflict in the Tigray region means no vote is being held there. This will mark the second delay in less than a year after the government delayed a ballot planned for August because of the coronavirus pandemic. Further delays in the country’s elections will complicate Prime Minister Abiy Ahmed’s efforts to try and centralise power.

Namibia: Headline inflation in Namibia quickened for the fifth consecutive month in April, rising from 3.13% y/y in March to 3.86% y/y, its fastest pace of growth since June 2019. A breakdown of the inflation report showed that much of the topside pressure stemmed from the transport, miscellaneous goods and services, furnishing and alcohol beverages and tobacco sectors. Partially offsetting this increase in annual inflation was a decline in the cost of food. Although inflation has trended higher in the past few months, it remains anchored within the Bank of Namibia’s 3% to 6% inflation target band. This suggests that there is room for the Bank of Namibia to stay accommodative to support the economy.

Mozambique: South African oil and gas giant Sasol Ltd has agreed to sell its 30% stake in a natural gas pipeline running from Mozambique to South Africa for R5.1bn. The selling of the gas pipeline was done to pay down debt. According to Bloomberg, the deal rounds out an accelerated assets-sale program that is helping reduce borrowings that ballooned amid costs overruns at a giant US chemicals project. It is worth pointing out that Sasol is also planning to sell part of its stake in the Rompco pipeline.

Ghana: Ghana’s Development Bank will receive €160mn from the European Investment Bank (EIB) to establish the bank. Ghana and the EIB will sign the agreement during President Nana Akufo-Addo’s nine-day visit to France, Belgium and South Africa. Recall that the country’s development bank was promised a $250mn credit facility from the World Bank last year as seed capital to start the bank. The establishment of the Ghana Development Bank is to provide long-term wholesale financing to other financial institutions.

Nigeria: The Nigerian government is facing a new arbitration claim of $400mn over a power deal. Sunrise Power and Transmission Co. is accusing the government of reneging on a settlement accord agreed last March that was supposed to resolve a long-running dispute over the rights to construct the Mambilla facility. This latest claim is hampering Nigeria’s plans to access financing from the Export-Import Bank of China for the project until the legal standoff ends. This could delay the starting of the project.

South Africa: According to a poll conducted by Reuters, economists expect that the South African Reserve Bank (SARB) will likely keep its repo rate unchanged this week as inflation remains within the bank’s tolerance range despite showing signs of quickening in recent months. All 25 economists surveyed said that the bank would keep its repo rate at a record low of 3.5%. Meanwhile, the survey median suggests the bank will hike rates by 25bps in either January or March next year, followed by another 25bps rise either in July or September 2022 to 4%.

Forex: Botswana’s real interest rate swings into negative territory, weighing on the BWP’s resilience

The global macro picture is becoming clearer as each passing reading of economic data sets the stage. The one underlying narrative that is currently being confirmed across the world is that we are currently experiencing a period of higher inflation. Major world economies have shown a rise in underlying inflation dynamics and this has certainly become evident in emerging and frontier markets.

Botswana has not escaped this fate. The inflation reading for April showed an increase to 5.6% y/y from 3.2% y/y in March. This major driver of the rise in inflation came from the Transport component which rose by 1.8% followed by Housing, Water, Electricity, Gas and other fuels at 1.1%. Food and non-alcoholic beverages rose by 0.9%. The Trimmed mean core inflation reading came in at 5.4% year on year for April.

Policymakers will be keeping a close eye on developments regarding inflation. Many Central Banks have adopted the view that any inflationary pressures are transitory and thus monetary policy need not adjust for now, others such as Brazil and Russia have taken a more proactive stance and tightened monetary policy already.

Notwithstanding the consolidative bias in the BWP-USD in the recent sessions, the increase in inflation could see the Botswana pula (BWP) come under pressure going forward. Note that the rise in inflation in April saw Botswana’s real interest rate swing into negative territory. For context, Botswana’s real interest rate currently sits at -1.85%.   

Fixed Income: Fiscal stimulus exacerbates Ghana’s pre-existing fiscal rigidities and public debt vulnerabilities - IMF

The International Monetary Fund (IMF) published its Article IV report on Ghana on Friday. The Article IV discussion covered several aspects of Ghana’s economy. The international lender said in its report that Ghana has managed the COVID-19 outbreak in the country very effectively and thus succeeded in protecting lives. The IMF said that the launch of the mass vaccine rollout has been a breakthrough, with the administration of approximately a million doses as of end-May.

The IMF noted, however, that the impact of the pandemic on Ghana’s economy has been severe. Real GDP growth plunged to 0.4% in 2020 from 6.5% in 2019 as virus containment measures and a collapse in international demand stifled activity in the extractive, hospitality and retail services industries. The international lender noted that policy interventions in 2020 were critical in safeguarding livelihoods and paved the way for a faster rebound of economic activity. Real GDP growth is forecast to come in at 4.8% in 2021, driven by a rebound in mining and services. The IMF noted that inflation in Ghana rose to double-digit territory amid a surge in food and fuel prices but has since fallen to 8.5% as of April. Looking ahead, the IMF sees inflation remaining around the central bank’s target of 8.0% at the end of 2021.

On the fiscal front, the IMF noted that government interventions in 2020, which drove up spending, exacerbated pre-existing fiscal rigidities and public debt vulnerabilities. According to the IMF, Ghana’s government deficit, including energy and financial sector costs, rose to 15.5% of GDP, while annual gross financing needs breached the 20.0% of GDP mark. Public debt rose to 78.0% of GDP in 2020, from 64.4% in 2019. Encouragingly, the IMF said that the 2021 budget’s pivot towards fiscal consolidation is an important step in the right direction and a difficult one in a pandemic. However, the international lender noted that the degree of fiscal consolidation should be deepened and anchored around debt and debt service reduction to create space for social, health, and development spending.

Going forward, while investors will find some comfort from the fact that the government is showing signs of returning to a path of fiscal consolidation, fiscal risks in Ghana remain tilted to the upside. As such, we expect investors to continue demanding a significant premium for holding Ghanaian sovereign debt, especially as the COVID-19 pandemic lingers on.

Macroeconomic: African central banks expected to keep rates on hold amid persistent growth concerns  

The spotlight in Africa is centred on monetary policy, with seven regional central banks slated to deliver their rate verdicts over the next two weeks. Specifically, monetary policy committees in Mozambique, Zambia, South Africa, Ghana, Nigeria, Kenya and Angola are scheduled to announce their respective interest rate decisions over the next two weeks. While inflation risks remain tilted to the upside, driven by soaring international commodity and food prices, the above-mentioned central banks are likely to keep their respective benchmark interest rates unchanged. Policymakers are expected to overlook inflation concerns and instead continue to direct their efforts towards economic growth.

Slow progress on the vaccine front against the backdrop of fears pertaining to a new wave of the virus on the continent has dampened economic prospects. With growth at the forefront for many African countries, inflation concerns are expected to be placed on the back burner for now until signs of a sustained economic recovery in Africa are evident. We expect that, similar to the Federal Reserve, African central banks will be more accepting of quickening inflation, especially as many central banks see the latest episode of inflation as being transitory.

Although the base case scenario is for the seven central banks to keep rates on hold, there is a risk that we could see some central banks hike their respective benchmark interest rates over the next two weeks. Nigeria and Angola are the two countries where policymakers will be feeling the most pressure to begin normalising monetary policy amid persistently high inflation driven by currency constraints and elevated supply-side inflationary pressures. Recall that policymakers in Mozambique, Zambia and Zimbabwe were the first central banks globally to hike rates this year.

On balance, although central banks will continue to monitor inflation closely to gauge whether the recent spike in inflation is likely to be sustained or whether it is transitory, we expect concerns about the fragility of economic recovery to outweigh inflation concerns. That said, once the third wave of the pandemic has passed and the vaccine rollout gains momentum, we expect policymakers in the region to normalise policy following the aggressive easing in 2020 in response to the COVID-19 pandemic.