Macro Analysis /

African Eurobond yields are above peak-2020 levels

  • Forex: Bank of Uganda intervening in the foreign exchange market to avoid "volatile fluctuations"

  • Fixed Income: Fed policy path to present some great buying opportunities

  • Macroeconomic: Proprietary models suggest there is scope for a meaningful rebound in the South African Rand

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
16 June 2022
Published by


The USD has continued to edge lower this morning as markets digest the Fed’s 75bps rate hike and the forward guidance provided by Powell in the press conference accompanying the rate decision. The correction lower in the USD clearly indicates that the market was fully priced for a 75bps hike. While the USD has pulled back from its recent peak, the broader bullish bias in the greenback remains intact. Monetary differentials between the US and other major economies are expected to remain wide in the remaining months. Although this suggests that the USD will remain lofty in the near term, the USD is significantly undervalued. Moreover, the US continues to run massive twin deficits. All of which suggests that there is scope for a meaningful correction lower in the USD should the Fed turn less hawkish in the months ahead as recession risks intensify. Expect volatility across currency markets to remain elevated, particularly in emerging and crypto markets.


Botswana: As with many other countries around the world, Botswana is experiencing inflationary pressures from the supply side. The May year-on-year reading came in at 11.9% compared to 9.6% in April, with the usual suspects at play. The largest upward contributions came from transport at 7.2%, which was undoubtedly driven by higher fuel prices. As it stands, we have yet to see any pullback in the price of energy products, so we expect pressure in this component to remain strong in the June measurement period at the very least. This sets the backdrop for the Bank of Botswana’s decision on rates today. It is worth mentioning that Namibia hiked by 50bps yesterday while the US Fed hiked by 75bps. At the last meeting, the BoB hiked the Monetary Policy Rate by 51bps from the prevailing 1.14% yield on the 7-Day BoB Certificates to 1.65%. At the last meeting, Inflation declined from 10.6% in February 2022 to 10% in March 2022, remaining above the Bank’s medium-term objective range of 3 – 6%. We are not in a declining scenario now, and this suggests that the risks for the decision are certainly skewed towards tighter monetary policy from today’s sitting.

Kenya: Treasury secretary Ukur Yatani yesterday indicated that Kenya might halt paying fuel subsidies in the next financial year, which starts in July. According to Yatani, the subsidy's cost could surpass the budget allocation and disrupt plans to reduce debt accumulation. Therefore, a gradual adjustment in domestic fuel prices will be necessary to "progressively eliminate the need for the fuel subsidy, possibly within the next financial year." The subsidy has prevented bigger rises in fuel costs, and Tuesday's 6% increase in the retail price of gasoline could have pushed prices to an even higher record without the subsidy. An end to the subsidy next month could rapidly increase the cost of gasoline and cause inflation to breach the central's bank target range.

Namibia: The Bank of Namibia (BoN) raised its key interest rate by 50bps to 4.75% to combat inflation and safeguard the one-to-one link between the Namibian Dollar and the South African Rand and to narrow the negative real policy interest rate that is conducive to long-term economic growth. The BoN, in its statement, added that the policy direction is consistent with developments elsewhere in the world and in the region, with policymakers acting with resolve to prevent the current acceleration in inflation from becoming a perpetual inflation spiral.

Nigeria: Prices pressures remained entrenched in the Nigerian economy, with inflation accelerating to an 11-month high of 17.7% in May from 16.8% in the month prior. The May reading surpassed consensus expectations of a rise to 17.5%, with food and gas prices the largest contributors to overall inflation. Annual food-price growth accelerated to 19.5% from 18.4% in April. Supply chain disruptions due to the war in Ukraine, extreme weather and security challenges in Nigeria's food-producing regions are some of the factors that have placed upward pressure on food prices. Inflation in Nigeria has remained stubbornly above the 9% ceiling of the central bank's target range for almost seven years, and a continued acceleration could see policymakers consider tightening monetary policy again at the next meeting in July.

Nigeria: Upon completing its staff visit to Nigeria, the IMF has forecast Nigeria’s budget deficit to remain high at 6.1% of GDP amid costly petrol subsidies and limited tax revenue collections. Meanwhile, GDP growth is projected to be 3.4% this year, while inflation is expected to remain elevated. According to the IMF, the upside to economic growth includes a steady private sector recovery and further broadening of growth, the start of operations at the Dangote refinery, and decisive steps to mobilize revenues.

Zambia: Expectations are that Zambia will secure approval from the IMF for a $1.4bn loan and associated economic program by August or September, according to FinMin Musokotwane. At a briefing yesterday, Musokotwane added that he does not see talks with official creditors to provide Zambia with the financing assurances it needs to get IMF approval taking longer than a month. At the same briefing Antoinette Sayeh, deputy managing director at the IMF, was optimistic a board discussion in early September would be possible. Distributing program documentation to the IMF board will be the next big step forward and could happen at the end of July or early August.

Forex: Bank of Uganda intervening in the foreign exchange market to avoid "volatile fluctuations"

The Ugandan Shilling (UGX) closed among the worst-performing African currencies against the USD yesterday and extended its year-to-date drop to 5.54%. The UGX was ranked as the seventh-worst performing according to Bloomberg's basket of 23 African currencies as increased demand for dollars by importers weighed on the currency. Heightened dollar demand by importers weighing on the local currency has been a recurring theme for most of 2022. Additional pressure on the UGX has stemmed from capital outflows as foreign investors rotate out of risker assets amid the Ukraine war and as global monetary conditions tighten.

Given the considerable pressure on the UGX, the Bank of Uganda has had to intervene to slow the rate of depreciation. Finance Minister Matia Kasaija said that the BoU was "taking appropriate measures to avoid volatile fluctuations but not preventing exchange rate movements." In recent weeks the BoU has repeatedly tried to slow the UGX's depreciation by selling an undisclosed amount of dollars.

Although the recent policy tightening by the BoU, in addition to its intervention efforts, should help slow the rate of depreciation, further headwinds such as the war in Ukraine and tightening financial conditions remain as central banks globally continue to hike rates. Regarding the latter, it is worth noting that the Federal Reserve yesterday hiked by 75bps and signalled that more are to come as it is strongly committed to bringing inflation back to its target level. The continued aggressive tightening raises the risk of further capital outflows out of EM and frontier markets suggesting some currencies may remain under pressure in the near term.

Fixed Income: Fed policy path to present some great buying opportunities

It was an eventful night as the Federal Reserve turned even more hawkish, hiking by 75bp to take the Fed Funds range to 1.5% - 1.75%. This was the largest hike since 1994 and aligns with new wording in the statement that says that the Fed is ”strongly committed to returning inflation to its 2% objective.” There was one dissenting vote, coming from Kansas Fed President George, who voted for a 50bp hike.

The new dot plot projections released showed sharp increases from the March release, with the Fed Funds target rising to 3.4% by the end of the year and 3.8% by the end of 2023. The prior forecasts were for a rate of 1.9% for the end of this year and 2.8% for 2023. Powell’s press conference, meanwhile, saw some interesting developments. During the Q&A, the Fed Chair suggested that although another 75bp may be on the table for the next meeting, such moves will not become commonplace. Powell also noted that it was decided to do more “frontloading” of hikes now to contain inflation expectations.

Given how aggressively the markets were priced for tighter policy, the comments from Powell have actually supported risk sentiment, with the USD and US Treasury yields closing Wednesday’s session lower. While emerging market bond yields traded lower yesterday, the broader bearish bias remains intact. The confluence of a hawkish Fed, the post-pandemic surge in inflation, tightening financial conditions and mounting fiscal costs suggest that the pain for emerging market bonds is still far from over.

The turmoil in global financial markets has prompted a sharp sell-off in African Eurobonds in recent months. A widely used African bond index shows that African dollar-denominated bond yields have surged to levels last seen during the ’08 Great Financial Crisis, with the sell-off now exceeding that seen during the peak of the Covid pandemic. The aggregated African Eurobond Yield Index is trading at around 12.75%, almost 500bps higher than levels seen at the start of the year.

Given the fragility of financial markets, the risk is that current dynamics can trigger more bouts of panic amongst investors and sudden flights of capital from countries most vulnerable.

This includes countries such as Egypt, Ghana and countries in East Africa that are net importers of oil and food. While the pain for African Eurobonds is expected to endure in the months ahead, we expect the tide to turn in the latter part of 2023, with global monetary policy expected to do a 180. This should present some great buying opportunities for fund managers and fixed income traders in the months ahead.

Macroeconomic: Proprietary models suggest there is scope for a meaningful rebound in the South African Rand

It is often useful to find a tool that helps unpack value ranges quantitatively, preventing emotional decision-making when hedging. Traditionally, understanding value has been a somewhat nebulous concept that comes down to a range of factors, including what kind of tolerance a business has for unfavourable currency movements. The indicators that follow attempt to identify different periods that might offer relative value, either for importers or for exporters.


Amid the global risk-off conditions and surge in the USD, the ZAR has come under considerable selling pressure recently. The ZAR has moved from being overvalued back into undervalued territory, and the move was dramatic enough to raise some eyebrows. ETM's ZAR Sentiment indicator (ZSI) has remained firmly in positive territory and even rose to suggest an appreciative bias will manifest over the next 6-8 months. It suggests that any depreciation in the ZAR in the near term will not be sustained in the future, especially if the ZAR finds itself in undervalued territory. It is telling that the ZSI has remained in positive territory throughout the past month despite all the difficulties. It suggests that there is an underlying resilience to the ZAR which is bound to reflect in the months ahead.

The US dollar is overvalued against all of its major peers. This inherently skews the risk bias towards depreciation over the longer term. We will also very likely see a notable rebuild in USD net long positions in the next round of CFTC data. A bullish net position suggests that while the speculative market is currently bullish, the currency would be prone to a sell-off should sentiment shift and those positions be unwound. The shift in sentiment could come from today’s FOMC meeting if the central bank disappoints what is an excessively hawkish market. If not, then this shift may merely be pushed out further. The ZAR net position, meanwhile, turned slightly more bullish once again. However, as with the USD, this data does not cover the most recent market moves. As such, we could see an unwind of some stale long positions reported in the next round of CFTC data.