Macro Analysis /

African central banks turn more aggressive in their fight against inflation

  • Forex: Zambian Kwacha rebounds in Q2 to outperform peers

  • Fixed Income: Outsized rate hike provides a massive boost to the allure of Egyptian assets

  • Macroeconomic: South African Reserve Bank front-loads its hiking cycle, policymakers highlight growth risks

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
20 May 2022
Published byETM Analytics


Brent crude contract continues to pivot along the $110 per barrel level, finding support from China’s rate cut this morning which has bolstered sentiment across the markets. However, the gains are being capped now as reports have confirmed that China has found a new COVID case outside of its quarantine area, suggesting that we could see some form of lockdown measures return. Nevertheless, the outlook for the oil market remains relatively bullish at the moment. Demand has remained robust despite global market volatility and the tightening of monetary policy. We are also nearing the start of the US driving season, which brings with it a seasonal boost to demand. This is keeping fuel product prices elevated and cracking spreads near their widest levels in years. With these spreads so high and refining capacity still relatively compressed compared to pre-pandemic days, oil prices will remain supported.


Africa: The African Union has proposed a fund to cover a $110bn infrastructure gap. The AU called for the establishment of an infrastructure fund to help finance the construction of roads, dams, and other infrastructure on the continent. According to Raila Odinga, the AU’s infrastructure representative, the continent has an annual funding deficit of around $110bn. Odinga further said that “Africa has idle capital such as sovereign wealth funds, pension funds, and insurance funds. We can work with several institutions to establish this fund.” Note, that a rapid migration to urban areas has resulted in a significant percentage of the continent's population living in towns and cities, placing pressure on the existing water and sanitation facilities, roads, bridges, and railways.

Egypt: Ratings agency Fitch yesterday said that it expects Egyptian banks’ net foreign assets to continue to recover following the devaluation of the Egyptian Pound. This will be due to an improvement in foreign investor confidence from a more flexible exchange rate regime and a new International Monetary Fund programme. The agency also said that higher interest rates will support the banks’ profitability but along with high inflation could put pressure on asset quality. Moreover, Fitch noted that the current devaluation should not affect the banks’ capital ratios significantly and they do not expect banks to need fresh capital given their comfortable capital buffers.

Ethiopia: In a joint statement, the Finance Ministry, Ethiopian Investment Holdings, and FSD Africa announced that they had signed a cooperation agreement to establish the Ethiopian Securities Exchange. According to the statement, “through the exchange, the government of Ethiopia will be able to finance its budget deficits by issuing long-term bonds in local currency, thereby reducing reliance on inflationary and foreign sources of budget financing.” Furthermore, “the exchange will offer a platform for the privatization of Ethiopia’s state-owned enterprises.” FSD Africa is set to fund technical support, legal advice and other costs required to establish the exchange. Meanwhile, at least 50 companies, including banks and insurers are expected to list at the launch of the exchange.

Mozambique: Th Bank of Mozambique yesterday opted to keep its benchmark MIMO unchanged at 15.25% following a 200bps hike in March. While policymakers noted that inflation is set to remain elevated in the short term and risks are tilted to the upside, it is seen as remaining in single-digit territory in the medium term. While the BoM opted to leave rates on hold yesterday, Mozambique has one of the highest real interest rates in the world, which will continue to provide a layer of support for the Mozambican Metical.

Rwanda: Prime Minister Edouard Nigerente has announced the launch of a $250m fund to further support economic recovery through increased access to finance for businesses affected by the coronavirus pandemic. The fund will provide loans to businesses that experienced the negative impact of the pandemic on their operations, as proven by at least a 20% reduction in the last 12 months. Furthermore, the fund will support Made in Rwanda priority sectors in manufacturing, construction material, agro-processing, textiles, and light manufacturing.

Uganda: A Ugandan parliamentary report showed that lawmakers have unanimously called for an end to an agreement that would allow the Uganda Vinci Coffee company monopoly control over the country’s coffee sector. The report from the parliamentary committee on trade and tourism determined that the agreement contravenes the country’s constitution and tax laws. Recall the government deal would give a single company exclusive rights to buy the country’s coffee and is seen as being unfair to local exporters. The report recommended that the government provide incentives to the existing 47 local companies adding value in the sector. The government should report back to parliament within 6 months of the adoption of the report.

Forex: Zambian Kwacha rebounds in Q2 to outperform peers

The Zambian Kwacha has staged a notable rebound in Q2, with the currency ranked as the best performing African currency against the USD. For context, the ZMW has racked up gains of almost 6% on a quarter-to-date basis. That is double that of the second-best performing currency the Mauritian Rupee (+2.85%) and has seen the ZMW almost pare all of Q1’s losses of 7.84%. Note that in Q1 the ZMW was the third worst-performer only bettering losses of the Egyptian Pound and Ghanaian Cedi as a dollar liquidity shortage weighed.

The turnaround in the ZMW can be attributed to several factors such as central bank intervention in the market. The central bank in recent weeks has injected some liquidity to cover strategic pipelines. Governor Kalyalya on Wednesday said that the bank sold around $370mn on the market to address volatility with the funds mainly coming from foreign exchange purchases from the mining sector. More recently, positive sentiment amid rising investor confidence in the economy has supported the Kwacha. Ongoing credit talks, improved metal prices, and a promising mining sector outlook have provided a boost to sentiment. Zambia is becoming a more attractive investment proposition for mining companies since the election of President Hichilema and a subsequent mining tax reform while the finance minister has expressed confidence that debt talks should be concluded by June.

Looking to next week, the ZMW is expected to trade steady against the USD as demand for hard currency remains relatively met by current forex supply on the market. Beyond this we expect the Kwacha to remain resilient on the back of optimism that a deal with the IMF will be secured over the medium term and elevated copper prices, which are underpinning foreign currency inflows into the country.

Fixed Income: Outsized rate hike provides a massive boost to the allure of Egyptian assets  

The Central Bank of Egypt delivered an outsized rate hike yesterday, a move aimed at reining in inflation expectations and restoring the allure of local currency Egyptian bonds amid tightening global monetary policy conditions. Moreover, the aggressive rate hike boosted the carry appeal of the Egyptian Pound, which recent was devalued by more than 15% against the USD by the CBE in March, partly due to pressures relating to the impact of the war in Ukraine on Egypt.

The CBE’s Monetary Policy Committee voted in favour of increasing the Deposit and Lending Rates by 200bps each to 11.25% and 12.25%, respectively. While consensus expectations suggested that the CBE would hike rates, expectations were for a more modest hike of 100bps. The aggressive rate hike comes as consumer prices surged to a multi-year high as food prices sky-rocketed due to Russia’s invasion of Ukraine, the source of much of Egypt’s food imports. Adding to the spike in inflation was the devaluation in the EGP on March 21, when policymakers also hiked rates for the first time since 2017.

As mentioned above, the 200bps rate hike shows that the central bank is looking to reverse the decline in Egypt’s inflation-adjusted interest rate, which up until January this year was one of the highest in the world and one of the main factors underpinning the massive influx of foreign capital flows into Egypt’s local bond market in recent years. The decline in Egypt’s real rate in February through to April in conjunction with the global risk-off conditions and sensitivity of Egypt to the situation in Ukraine saw more than $20bn in foreign capital outflows from Egyptian bonds this year.

While Egypt’s real interest rate remains negative, yesterday’s move shows investors that the central bank is committed to restoring Egypt’s bond attractiveness. Furthermore, although the bold rate hike will likely result in a significant jump in domestic bond yields, as the market prices in the steeper rate path, it should help allure foreign capital back into the domestic bond market.

As mentioned recently, while the attractiveness of Egyptian bonds has dwindled recently, we remain of the view that Egyptian bonds are an attractive bet and a great way to extract yield for international investors. The rate hike will however have a negative impact on Egypt’s fiscal position, which is already one of the most fragile in Africa and the Middle East, as it will push up debt servicing costs significantly.

Macroeconomic: South African Reserve Bank front-loads its hiking cycle, policymakers highlight growth risks

In its final decision, the SARB decided to hike 50bp. It is a bold move, given the state of the economy. It aims to accelerate the SARB's objective of unwinding negative interest rates, regardless of whether supply-side issues caused those negative interest rates or not. The SARB believes that the state of the economy is not a function of interest rates and that it can better support the long-term objectives of boosting growth by promoting price stability. There is much truth to that, and it is difficult to turn overly critical of the SARB, although what makes this particularly hiking phase different, is that it takes place amid a dearth of employment, consumption and investment.

Positive real interest rates will require the repo rate to adjust substantially higher. The SARB will need to raise rates by 50bp increments at the upcoming meetings, knowing full well that controlling inflation will be more a function of external factors than SARB policy. It might hike rates more aggressively, and impose a headwind that will slow down growth that barely exists, given high fuel prices, administered costs, load shedding and structural deficiencies. For context, SA GDP has not yet recovered to pre-covid levels like the economies of the US, UK, and others hiking more aggressively to slow demand.

Time will tell whether the central banks have judged the environment correctly and whether raising interest rates so aggressively is the correct approach. While rates need to rise, hiking them aggressively against such a weak growth backdrop when demand conditions are not strong enough to promote second-round inflation effects risks overreach and punishing an economy for price pressures it cannot control. At best, it may promote a more stable ZAR at the margin, which is constructive but will come at a cost.

The ZAR strengthened after the decision, which the SARB might feel vindicates its bold move. However, ZAR appreciation also coincided with a USD that retreated, so interestingly, not much of yesterday's move was a function of the rate hike. The SARB met market expectations and dissuaded some negative speculation at the margin. At the very least, the SARB has now removed one scenario that might've counted against the ZAR, which could now find support to recover further as we head into the weekend. In a world of correcting equity markets, rising volatility and risk aversion, perhaps the SARB's move has bought SA some insurance. Exporters may now look to take advantage of these levels while they still have them.