Macro Analysis /

African FX volatility muted, SA seen hiking rates by 25bps next week

  • Forex: African FX volatility remains muted, but risks loom

  • Fixed Income: IMF approves $748mn in support for Angola, fiscal outlook has improved

  • Macroeconomic: South African Reserve Bank seen hiking key interest rate by 25bps next week

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
20 January 2022
Published byETM Analytics


In the commodity market, gold bears were put to the sword overnight as a weaker dollar and geopolitical tensions around Ukraine boosted the metals safe haven appeal. The yellow metal experienced its best session in three months yesterday and has consolidated those gains in the Asian session this morning.   The spot price of gold is trading a whisker below the $1840.00/oz mark as we head into the EU session however a repeat of yesterday’s $30.00/oz gains is not expected given the caution building around developments at the FOMC meeting next week. As mentioned before, although bullion is a hedge against inflation, it is highly sensitive to rising US rates at a tactical level this increases the opportunity cost of holding non-interest bearing gold.

Shifting the focus to energy, oil prices have steadied this morning, with the front-month Brent contract trading near $88.50 per barrel while WTI is just over $87. The upside momentum for the commodity seems to be slowing following a strong rally this week so far, with data out yesterday that showed a minor build in US stockpiles helping to ease some of the topside pressure. The API reported yesterday that crude inventories increased by some 1.4mn barrels last week, which if confirmed by the official data today, would be the first gain in eight weeks. Meanwhile, the Biden administration has been suggesting that it could implement new measures to try and cool prices, although it has failed to give any specifics on how it may do this.


Ghana: In a bid to drive credit growth and economic activity, the Bank of Ghana has permitted the country's banks to accept overseas bonds as collateral. According to the BoG, investments in offshore debt securities sold by foreign governments, companies, and multilateral development banks can be used as collateral for loans. The securities must be denominated in dollar, pound, euro, or yen and need to be rated AA or above. The move by the BoG may be attractive for overseas companies seeking to expand in the $68.5bn economy, which accelerated 6.6% in Q3 of 2021. Credit growth in Ghana has been curtailed by subdued demand due to the coronavirus pandemic.

Ghana: Producer price inflation in Ghana slowed in December, coming in at 12.80% y/y from 13.60% y/y in the month prior. On a month-to-month basis, prices declined 0.2%. A report from the Ghana Statistical Service showed that producer inflation in the mining and quarrying sub-sector decreased by 1.7ppts to 0.1% in December, while the utility sub-sector recorded a 0.2% inflation rate. Producer price inflation for the manufacturing sub-sector, which constitutes more than two-thirds of the total industry, decreased by 0.8ppts to 19.2%. While producer price inflation eased in December, it remains elevated, underpinned by high commodity prices, higher freight costs, supply bottlenecks, and a weaker Ghanaian Cedi

Egypt: The Egyptian Cabinet on Wednesday gave the Finance Ministry the green light to take measures aimed at issuing sovereign Sukuk on the international markets. Recall earlier, Finance Minister Mohamed Maait had said that Egypt is preparing to issue the first sovereign Sukuk offering during the second half of the current fiscal year. The issue aims to provide the necessary funding for investment projects included in the state's general budget's economic and social development plan. Maait added that the timing, size, and type of offering will be determined at a later stage. The Egyptian government is seeking to develop new mechanisms and means to finance the state's general budget deficit and diversify the funding sources.

Kenya: The Ministry of Tourism and Wildlife yesterday reported that earnings from tourism jumped by 65% from KES 88.6bn last year. Meanwhile, international visitor arrivals rose by 53%, with roughly a third coming to the country for holiday and a quarter for business or conferences. The US was the biggest source market, followed by Uganda, Tanzania, and India. The Ministry also forecast tourism earnings to rise by 18% this year to KES 146.5bn. Rising tourism earnings could provide some much-needed hard currency to support the Kenyan Shilling, which has continued to struggle at the start of the year.

Nigeria: Nigeria's Senate yesterday back a new law that will allow for election reform. The chamber passed the Electoral Reform Amendment Bill in the capital Abuja. It was approved after the removal of a contentious provision, opposed by President Muhammadu Buhari, that compelled political parties to conduct direct primary elections when selecting candidates for elections. Lawmakers have now approved three options, including "direct, indirect primaries and consensus as procedure for the nomination of candidates by political parties for various elective positions." The approval is seen as a progressive step toward addressing the latent shortcomings with the nation's electoral process.

Forex: African FX volatility remains muted, but risks loom

For the most part, African currencies have shown a degree of resilience at the start of the year. Regional volatility has been broadly stable, while in some instances, volatility for the likes of the South African Rand (ZAR) and Zambian Kwacha (ZMW) has even moderated when looking at ETM's 30-day realised volatility chart. Notably, the ZAR volatility has moderated from levels north of 17% in November to around to just south of 12% at present. Note, the ZAR has had a strong start to the year and is currently ranked the second-best performing African currency against the USD among those tracked by Bloomberg on a year-to-date basis. Much of the ZAR's resilience has been attributed to the MTBPS, which revised down the depth of SA's fiscal troubles, buoyant commodity prices that have bolstered SA's trade and current accounts, SA's mild 4th wave of the Omicron variant and the ZAR's undervaluation.          

While the ZMW volatility has moderated, it is worth highlighting that it still remains the highest among the African countries under review. Meanwhile, in countries such as Egypt and Tanzania, volatility remains benign. Although volatility levels are somewhat muted, risks appear to be tilted to the upside in the near term. While growth concerns have resurfaced, it is clear that major central banks, including the Federal Reserve and the Bank of England, are committed to tightening monetary policy. Although the global financial system is flush with cash at the moment, the tide has turned, and growth in global dollar liquidity has begun to decelerate as stimulus is gradually removed from the financial system.

The upswing in the dollar liquidity cycle has now peaked and global dollar liquidity has begun to moderate. As the supply of dollars to the global financial system slows, there is less hot money to be diverted to riskier emerging and frontier market assets, and they can experience volatility. In the African continent, countries without sound fundamentals are at risk of heightened volatility in the coming months.

Fixed Income: IMF approves $748mn in support for Angola, fiscal outlook has improved

The IMF published its Article IV Consultation report for Angola on Wednesday. The international lender said in the report that it had approved an immediate disbursement of SDR 535.1mn or around $748mn, bringing total disbursements under the arrangement to SDR 3.21bn or about $4.5bn. Recall that the Angolan government secured a 3-year extended arrangement in December 2018 with the IMF to restore the country’s external and fiscal sustainability, improve governance, and diversify the economy to promote sustainable, private sector-led economic growth.

Encouragingly, the IMF said in the report that the impact of the COVID-19 pandemic on the Angolan economy has begun to abate amid higher oil prices and less disruptive containment measures. Non-oil growth has started to recover and is expected to contribute to a broad stabilisation of overall output in 2021. Inflation has reached over 2%, driven by supply-side factors. On the fiscal front, the international lender said that continued fiscal restraint should deliver a substantial overall surplus in 2021, while higher oil prices are supporting a high current account surplus.

Looking ahead, the IMF said that Angola’s overall growth is projected to turn positive in 2022 and reach around 4% in the medium term, bolstered by the implementation of planned growth-enhancing structural reforms. Inflation should gradually ease starting in 2022 as global food inflation moderates and the central bank maintains a tight policy stance. A continued prudent fiscal stance embedded in the 2022 budget plans will support a rapid decline in the public debt-to-GDP ratio while protecting key health and social spending. In house fiscal risk models show that while fiscal risks in Angola remain elevated, the prudent shift in policy from the government is having a positive impact on the country’s fiscal outlook. Moreover, while output has dwindled, higher international oil prices are also supporting the country’s fiscal outlook.

Macroeconomic: South African Reserve Bank seen hiking key interest rate by 25bps next week

If there was any debate about whether the SARB should be hiking, yesterday's inflation data put that to bed. With inflation surprising to the topside and almost at the top of the inflation target range, the SARB will be forced into hiking. In a world that rewards more conservative monetary policy, that is good news for SA's ZAR, and the appreciative reaction that followed indicates that. Add to that a modest retreat on the USD, which gave up some ground and a third consecutive week of appreciation, especially if the pair can crack and sustain a break below the 15.3000 level.

Even though the main headline figure has been driven higher by factors outside SA's control, the concern is that it will manifest in higher inflation expectations. The weakness of SA's credit cycle will naturally limit the degree to which inflation can take hold, which would explain why the ZAR has outperformed most other emerging markets for the month to date. However, that does not preclude inflation from experiencing a short-term spike, and that spike will undermine the stability and strength of SA's economic recovery.

The risk of more hawkish comments from the SARB next week should not be underestimated. For the ZAR, the probability is higher the SARB indicates that the risks to inflation remain tilted to the topside and that further action is needed. It could prove to be the catalyst for further ZAR appreciation through the course of the month.