Macro Analysis /

Are Kenya's debt consolidation efforts enough to sway investors?

  • Forex: Ugandan Shilling kicks off April on a stronger footing

  • Bond market likely to be unphased by Kenya’s debt consolidation efforts as fiscal risks remain acute

  • Macroeconomic: Surging container costs are forcing a shift in shipping dynamics

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
8 April 2022
Published byETM Analytics


Gold remains underpinned as we enter the final day of the trading week. The safe haven bid keeping the market anchored above the $1920.00/oz handle has yet to fade and given the current calls for increased sanctions against Russia, we do not see this fading anytime soon.

On a more macro level, there are investors that are losing faith rapidly surrounding the dollar as a reserve currency. Russia is demanding payment for energy products in roubles and the Chinese have spoken about payments in yuan, this upsets the petrodollar recycling system which has kept the dollar in power for as long as it has. Europe has also often drawn attention to the fact that over 90% of its energy requirements are paid for in dollars, why not euro’s. As this unfolds, we expect investors to find gold an even more attractive bet given its characteristics over time of holding value.

Concerns over Chinese demand given the COVID-19 lockdown’s and tighter monetary policy from the United States have placed a damper on base metals this week. News vendors are all reporting that the financial capital of China namely Shanghai has gone silent as the city imposed harsh restrictions on movements. This has so far not been the case in the major manufacturing sectors, but one needs to keep a close eye on developments here as Beijing is not known for compromise on certain topics.

Given this backdrop, we don’t expect runaway gains into the weekend, if anything there will be a period of consolidation, perhaps some squaring off of short positions to book profits but no fireworks to the topside.


Egypt: Egyptian international reserves fell for the first time since June 2020. Egypt’s reserves dropped to $37.08bn in March from $40.99bn in February. According to a statement by the central bank of Egypt, "in the wake of the Russia/Ukraine crisis and in line with the CBE's mandate to maintain price stability, the CBE decided to temporarily mobilize its excess foreign currency reserves to calm the markets during periods of exceptional stress caused by exogenous factors, similar to the actions that were taken during the emergence of the COVID pandemic." The bank's statement added, "such mobilization was aimed at covering substantial foreign investor outflows and partially covering local demand in order to ensure the availability of imported strategic goods and to repay external debt obligations in a timely manner."

East Africa: The United Nation's World Food Programme (WFP) has warned that a fourth failed rain in the Horn of Africa could further worsen hunger, threatening the lives of around 13mn people in Kenya, Ethiopia, and Somalia. According to an official for WFP in Eastern Africa, the drought has been particularly devastating for the pastoral communities who depend on animals for their livelihoods. The official added that the March to May rains have "failed to materialize," and the drought has exhausted the coping mechanism of people who now have to rely on humanitarian aid. Moreover, the reliance on imports from the Black Sea countries such as Ukraine is set to worsen the situation by inflating prices. The WFP needs around $327mn to support 4.5mn people. Note earlier this week, the US Agency for International Development announced $114mn in humanitarian aid to support efforts in the three countries.

Mozambique: Portugal's Galp Energia, a partner in an Exxon Mobil-led gas consortium in Mozambique, has indicated that it hopes to start building onshore plants in the country in 2024 but only if security is guaranteed first. Galp has 10% of the Exxon-Mobil consortium, whose estimated investment is worth $30 billion over several years. The other major partner is Italy's ENI. Mozambique has been grappling with militants linked to the Islamic State in its northern-most province of Cabo Delgado since 2017, near liquefied nature gas (LNG) projects worth over $50bn. Due to the escalation of the attacks last year, the French group Total suspended its $20bn LNG project in April 2021. Shortly after, the Exxon-Mobil consortium postponed a final decision on whether to invest or not. Mozambique has since accepted foreign troops from Rwanda and a bloc of southern African nations to help quell the insurgency. While these measures have helped Mozambique regain lost ground, clashes with insurgents and smaller attacks continue.

Zambia: Finance Minister Situmbeko Musokotwane yesterday forecast inflation to fall to single-digits by the end of 2022 and said that Zambia would reach a deal with the International Monetary Fund by 2022. Musokotwane also forecast Zambia to continue recording positive growth. According to the minister, "I have no doubt whatsoever that this being April, certainly by December the rate of inflation will have gone down to single-digit level." Zambia is in the process of restructuring its external debt with creditors and the IMF after years of over-borrowing drove its debt burden above 120% of GDP. Inflation erodes domestic currency debt but conversely makes foreign debts in hard currency more burdensome. The minister added that the government had continued to informally engage creditors, and that deal is like by the middle of 2022. According to the minister, the restructuring of Zambia's debt and provision of incentives to business was expected to drive Zambia's economic growth higher. 

South Africa: As we close out the week, the ZAR's correction looks long overdue. While there are strong cogent arguments for the ZAR to remain resilient overall and even appreciate, investors will also recognise that the ZAR appreciated some 80 cents through March and from levels back above 16.00 in Dec. So while the loss of ten cents this week may feel uncharacteristic, it is relatively small. The correction can extend further, and the ZAR's strengthening bias would remain largely intact. In particular, the weekly chart indicates that levels back towards 15.0000 are even possible in the current correction.

Forex: Ugandan Shilling kicks off April on a stronger footing

The Ugandan Shilling (UGX) has had a strong start to Q2. For context, the UGX is among the best performing African currencies against the USD tracked by Bloomberg on a month-to-date basis. Gains of 0.92% in April have seen the UGX pare some of February’s and March’s losses, mainly due to a rotation out of local bonds by foreign investors as global risk appetite soured. The UGX is now ranked as the third-best performer. Only the Angolan Kwanza and Zambian Kwacha have fared better.

Much of the appreciation in the UGX has stemmed from strong inflows from commodity exporters, especially coffee, while remittance inflows were also strong as the holy month of Ramadan began. Muted FX demand and central bank intervention have also supported the UGX. Yesterday, the Bank of Uganda (BoU) mopped up excess liquidity from the money markets, and this could trim further demand for the dollar. The BoU used a seven-day repurchase agreement to mop up excess liquidity, although it was unclear how much local currency liquidity they had mopped up.

While the factors mentioned above are set to remain supportive of the UGX in the near term, it is worth noting that headwinds exist. These include the upcoming dividends season and tightening financial conditions as the Federal Reserve signals a faster normalisation of monetary policy. Note that the IMF last month said that greater exchange rate flexibility is needed to help absorb external shocks and preserve external buffers in Uganda

Fixed Income: Bond market likely to be unphased by Kenya’s debt consolidation efforts as fiscal risks remain acute

Kenya remains in the spotlight as we head into the final session of the week as traders continue to digest the 2022/23 budget announced on Thursday. The government announced that it plans to rein in spending and is implementing measures to boost tax collections as part of its efforts to return to a sustainable debt trajectory. While this is encouraging, Kenya still faces a $7.5bn or 6.2% of GDP budget shortfall in the upcoming fiscal year, which kicks off in June.

While still elevated, it must be noted that the forecasted 2022/23 budget deficit compares to an estimated deficit of 8.1% of GDP in the current fiscal year. Treasury Secretary Ukur Yatani said to lawmakers on Thursday that the government plans to finance the KES 862.5bn ($7.5bn) budget shortfall by raising KES 581.7bn domestically and KES 280.7bn offshore. Yatani added that the government has reprioritised public spending toward pro-poor expenditure in health, education and supporting the vulnerable segment of the population.

Treasury Secretary Yatani said that concerns among Kenyans include the high cost of living, unemployment, income inequality and the country’s massive public debt burden. Kenya’s debt servicing costs are projected to surge to KES 1.39trn next year from KES 1.15trn this year. Meanwhile, government spending is expected to sit at KES 3.34trrn in the upcoming fiscal year, and tax collections are set to come in at KES 2.45trn.

Over the past decade, since President Uhuru took office, Kenya’s debt has surged on the back of his government’s aggressive spending aimed at bolstering the country’s infrastructure. While the country’s debt is approaching unsustainable levels, the current president has defended the borrowing saying that it has boosted economic growth and has helped the country improve its ports, railways and other infrastructure. According to the Kenyatta administration, the aggressive infrastructure spending over the past decade will see the economy expand to more than KES 13trn by the end of the year.

Speaking of growth, Treasury projects the economy to expand by 6.1% in 2022, slightly lower than an estimated 7.6% in 2021. While the economy is expected to continue to grow at a solid pace this year, downside risks to the outlook have intensified as a result of the ongoing supply chain challenges and marked increase in external price pressures linked to the war in Ukraine.

From a financial market standpoint, while it is encouraging to note that the government is trying to rein in its debt, we are of the view that not enough has been done to significantly alter the country’s debt trajectory. Therefore we still assess fiscal risks to be skewed firmly to the upside. As such, we expect a significant fiscal premium to remain baked into Kenyan bonds, especially as political uncertainty intensifies ahead of the August elections.

Surging container costs are forcing a shift in shipping dynamics

From engagement with clients, it has become clear that there has been a forced shift from the use of containers to bulk carries due to surging container prices. This has led us to do a deep dive into shipping rates and see how certain commodity groups will start being shipped more on bulk carriers than on container ships.

Dry bulk cargo ships carry unpackaged raw material in the ship’s holds instead of in containers. Sugar, coffee, rice, cotton, and cocoa are some agricultural products that could be transported via dry bulk vessels. Break-bulk cargo vessels can also carry sacked products, like sacked sugar and rice.

Everything in ocean shipping is connected, and that is why spillover effects from container shipping are boosting dry bulk fundamentals just as demand for traditional cargoes is rising. The spot rate for all bulker size categories has not been this high since the late 2000’s.

Market effects are transmitted from one shipping segment to another in three main ways:

  • If a ship switches cargo types

  • If cargo switches ship types

  • If Asian shipyards fill up

Bulkers are starting to benefit from the spillover trades typically carried on container ships. This change is definitely substantial in the long term as we see this dislocation in the container market.

Many sugar and rice traders have switched back to booking dry bulk vessels over containers to avoid shipping container shortages and supply chain issues.

Without an end in sight for container-shipping delays, the switch to bulk makes sense for companies trying to get back to business. But it’s unclear if, to stay in business, companies will return to containers or make more bulk shipping the new normal once container ports are flowing again.

Looking ahead, containers full of frozen food and chemicals are piling up in the Shanghai port due to the Chinese lockdown, and testing means truckers cant get to the docks to pick up boxes. Truckers form a crucial component of supply chains in China, as they are responsible for moving raw materials from coastal ports to factories further inland. Their backlog is likely contributing to growing ship queues off China. This could result in further delays and higher freight rates in the coming months. Therefore, more exporters could start looking to use bulk carriers as containers may become less available and the cost too high.