Macro Analysis /

African Eurobonds underperforming EM Eurobonds in 2023

  • Forex: Zambian kwacha underperforming the broader Africa FX basket

  • Fixed Income: African Eurobonds are significantly underperforming EM Eurobonds in 2023

  • Macroeconomic: ECB sticks to its guns and raises rates by 50bps despite a possible global banking crisis

Alexa Archibald
Alexa Archibald

Commodities Analyst

Takudzwa Ndawona
Kieran Siney
ETM Analytics
17 March 2023
Published byETM Analytics

Volatility across global fixed-income markets continues today

The big news overnight is that Wall Street heavyweights have come to the rescue, pledging $30bn in deposits for First Republic Bank in a show of confidence in the US banking sector. CNBC reported that Bank of America, Wells Fargo, Citigroup and JPMorgan Chase will contribute about $5 billion apiece, while Goldman Sachs and Morgan Stanley will deposit around $2.5 billion, the banks said in a news release. Truist, PNC, U.S. Bancorp, State Street and Bank of New York Mellon will deposit about $1 billion each. These deposits are to stay with First Republic Bank for a minimum of 120 days and will go some way to boosting confidence in the bank whose share price has been hammered in recent days. As early as the 8th of March the value of First Republic Bank stock was at $115 a share, the stock traded below $20 a share at one point yesterday.

This news has been welcomed by the equity markets with the Dow Jones, Nasdaq and S&P 500 all finishing in the green overnight. This positive tone has filtered through to Asian equity markets and there is a strong chance that the positive sentiment carries through to the African bourses today.

The volatility seen in global fixed-income markets continued yesterday. There was a lot to digest for investors as the day kicked off with some positive news regarding Credit Suisse, which helped to stabilise the market. This was followed by the ECB’s 50bp rate hike and then news out of the US that some of the country’s largest banks are looking to cooperate on a rescue plan for embattled First Republic Bank. Yields for core European bonds were up sharply on the session while the 2yr UST posted its sixth straight daily swing of more than 20bp as its yield climbed back towards 4.200%. The volatility is not surprising given how the market has swung between betting that the Fed will pause its rate hikes or continue to hike to help cool inflation. Currently, Fed Funds Futures are pricing in an 80% chance of a 25bp hike next week and a 68% chance of a follow-up hike in May.

Interestingly, the spread between the US 2yr and 10yr has narrowed in its inversion to around -63bp from more than -100bp last week. Market watchers will note that previous recessions in the US really kicked off once the deep inversion of this spread began to unwind.

Africa Talking Points

Ghana: Vice President Mahamudu Bawumia has forecast the gold for oil policy to result in saving of around $4.8bn annually. The policy introduced last year aims to alleviate the pressure on foreign exchange reserves and the exchange rate. It enables oil importing firms and bulk distribution companies (BDCs) to use gold rather than US dollars to buy petroleum products. Bawumia added that currently, between 50%-60% of the country’s oil imports were from the gold for oil program, and he expects it to reach 100% by year-end.

Ghana: Gold Fields GFIJ.J and AngloGold Ashanti on Thursday announced that they had agreed to merge their Tarkwa and Iduapriem mines in Ghana to create Africa’s biggest gold mine. In a joint statement, the two miners said the deal would see Gold Fields and AngloGold owing 67% and 33% of the joint operation, respectively, excluding the 10% stake the Ghanaian government holds in Tarkwa. The joint venture is forecast to produce an average of 900,000 ounces annually over the first five years and 600,000 ounces over its estimated 18-year life of the mine.

Cameroon: Finance Minister Louis Paul Motaze on Thursday told reporters that Cameroon is seeking more loans from the multi-lateral lender to finance projects under the National Development Strategy. The strategy is currently at the operational phase, dubbed Growth and Employment Strategy Plan, aimed at propelling Cameroon into an emerging economy by 2035. It is unclear how much more loans the country would ask for, but negotiations for this will form part of the upcoming disbursement under the Extended Credit Facility.

Kenya: The Nairobi Securities Exchange All Share Index plunged to a decade low on Thursday, with an exit of foreign investors contributing to the fall. Tightening global financial conditions have led to a rotation of emerging and frontier markets, and the Kenyan stock market has not been spared. A shortage of hard currency raising concerns about the ability to repatriate dividends has also dented the appetite for Kenyan stocks. Meanwhile, local investors have moved into bonds given the attractive interest on offer.

Ivory Coast: Following a staff visit, the International Monetary Fund expects to reach a staff-level agreement “in the coming days” for a financial package to support Ivory Coast’s economic program. According to the lender, “discussions on a new blended financial arrangement under the Extended Fund Facility/ Extended Credit Facility have been productive. The level of access to IMF resources of at least 300% of quota, equivalent to about $2.6bn, is to be finalized in the coming days. The final program arrangement would then be subject to approval by the IMF’s Executive Board.

Rwanda: Economic growth in Rwanda decelerated to 7.24% y/y in Q4 from 10.03% y/y in Q3. The Q4 reading was the slowest pace of growth since March 2021. A breakdown of the GDP report showed that Agricultural activities grew by 2% and contributed 0.5ppts to overall GDP. Industry activities grew by 5% and contributed 1ppts to GDP growth. Meanwhile, service activities grew by 9% and contributed 4.6ppts to overall GDP. The World Bank expects Rwanda’s GDP to slow to around 6.2% this year from an estimated 8.2%. That would be well below the average of 7.4% in the five years before the pandemic. While tourism is likely to continue to recover, external demand is likely to weaken due to policy tightening by the central bank to combat inflation.

Zambian kwacha underperforming the broader Africa FX basket

Selling pressure on the Zambian kwacha has shown no signs of easing in March, with the currency extending its decline. For context, the kwacha is down by more than 3.0% MTD against the USD. Those losses have seen it rank as the second-worst performing African currency during the period and come on the back of losses totalling almost 10% in the first two months of the year.

The pressure on the kwacha has emanated from strong dollar demand amid limited supply. Supply has been thin in part due to negative sentiment associated with the protracted debt restructuring negotiations and uncertainty around the treatment of non-resident holders of government securities. Earlier this week, Finance Minister Situmbeko Musokotwane said that delays in Zambia’s debt restructuring process were putting pressure on the kwacha as foreign investors were scared to invest in Zambian bonds for fear of their investment being subject to restructuring.

The minister also noted that Zambia is working very hard with its creditors, including China so that a debt restructuring can be agreed upon by the end of March or shortly after that. While this is positive, it remains to be seen whether this will be achieved. For now, slow progress and hard currency demand that continues to outpace supply suggest that the kwacha will likely remain on the defensive in the near-term.

African Eurobonds are significantly underperforming EM Eurobonds in 2023

While emerging market and frontier bonds started the year on a positive footing, rallying on the back of an expected pivot in global monetary policy, the bullish momentum has faded in recent weeks. Emerging market Eurobonds, as proxied by JP Morgan’s EMBI TR Index, have unwound most of their gains from earlier in the year. That said, on a year-to-date basis, EM Eurobonds are still in the green, with the EM Eurobond Index up just under 1% since the start of 2022.

African Eurobonds meanwhile have been far more sensitive to the deterioration in global conditions, with the S&P Global Africa USD Sovereign Bond Index reversing its gains of as much as 6% in January to post losses of almost 5% year-to-date. It must however be noted that the decline in the Index will be skewed by the sharp losses in Ghanaian and Egyptian Eurobonds this year. Nevertheless, African Eurobonds are underperforming emerging market Eurobonds this year.

Given the prevailing risk-off conditions, it is not surprising that African Eurobonds are underperforming, considering that African bonds, for the most part, are deemed to be riskier than emerging market Eurobonds. The average sovereign credit rating of African countries vs emerging market countries reflects this.

ECB sticks to its guns and raises rates by 50bps despite a possible global banking crisis

Macroeconomic data out Africa was sparse on Thursday. As such, market focus was centred on the ECB’s rate decision. The ECB hiked its benchmark interest rates by 50bps, as the central bank remained firm on taming inflationary pressures amid the region’s persistently high core inflation. The latest rate hike, which was implemented despite concerns of another 2008-style financial crisis with the collapse of SVB and Signature Bank in the US, was likely a means to shore up the central bank’s inflation-fighting credentials.

The outsized rate hike may detract from future economic activity in the region as borrowing costs rise. Moreover, it may add to pressure on the banking sector, which has shown signs of rising stress recently. Therefore, this may continue to fuel the appetite for safety by investors, dampening the outlook for risk assets.

The ECB likely wanted to bolster its credibility as an inflation-fighting central bank in the face of systemic financial risk. However, it remains to be seen whether the central bank will maintain its hawkish stance should other commercial banks follow in SVB’s footsteps, with its silence on future moves in the policy statement noteworthy. The focus will now shift toward the Fed’s decision next week, which will hold significant market-moving potential.