Macro Analysis /

Bank of Ghana looking to strengthen Cedi, Kenyan bonds extend losses

  • Forex: Widening real rate to remain supportive of the Mozambican Metical

  • Fixed Income: Kenyan bonds come under stern selling pressure in the first week of 2022

  • Macroeconomic: Despite a modest decline in December, global food prices remain elevated

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
10 January 2022
Published byETM Analytics


Following last week's disappointment concerning the softer than expected non-farm payrolls data, the USD is finding some traction this morning as investors position for the Fed nomination testimonies and the U.S. inflation data scheduled for release. Expectations of tighter monetary policy will be reinforced, and this will likely prevent the USD from coming under any further pressure through the week ahead.

In the commodity space, oil has steadied in early trade this morning after recording its largest weekly gain in a month last week. The front-month Brent contract is holding just below the $82 per barrel mark as oil production has been restored in Libya and Kazakhstan, with the former seeing a total rise to 900k barrels a day. The market seemed to have priced in worst-case scenarios for these two countries, which have not played out just yet. Furthermore, we have demand concerns rising once again out of China as they maintain their zero-COVID policies, with local Omicron cases being confirmed there. This suggests more restrictions could be on the cards as the variant will spread quickly


Ghana: In an attempt to strengthen the Ghanaian Cedi, the Bank of Ghana (BOG) is reportedly set to auction $450mn in the first three months of the year. The BoG will publish the auction calendar for the Foreign Exchange Forward Auction on a quarterly basis, and the calendar will be published one week preceding the next quarter on the BoG's website. Moreover, the BoG will publish and make available on its website guidelines that will govern the Competitive multiple-priced Foreign Exchange Forward Auction. Meanwhile, bids will be invited as per the prescribed format to buy US dollars against the Ghana cedis, which would be done separately on each auction date.

Kenya: In a move to ease the economic burden that Kenyan's are currently facing, the Ministry of Energy announced a 15% reduction in power costs on Friday. In a statement, the ministry said that the reduction would take place immediately and would cover the whole of 2022. The ministry added that "the tariff reduction is a fulfillment of a commitment made by President Uhuru Kenyatta to the nation, that the first tranche of reduction, 15%, will be reflected in the bills covering the end of the year in 2021." Moreover, the ministry said it is working to see the second 15% reduction is affected in the first quarter of the year, bringing the total cut to 30%. The reduction will boost livelihoods and economic growth by reducing the cost of living, putting more money in Kenyans' pockets, and reducing the cost of doing business.

Mauritius: Data from the Bank of Mauritius showed that international reserves jumped to a record high in December. Specifically, international reserves rose 10% to $8.56bn in the final month of 2021, enough to cover 21.8 months of imports, compared with 19.7 months at the end of November. The increase in reserves will bolster the country's ability to keep its currency stable and meet increased demand from dollars for importers. Note that the country's currency came under pressure as demand for imports, such as fuels, food, and equipment, increased in the second half of last year, helping fan inflation to its highest rate since February 2018.

Nigeria: Data from the National Bureau of Statistics showed that Nigeria attracted $1.73bn worth of capital inflows in Q3 2021, 98% higher than the $875.6mn recorded in the preceding quarter. The increase was mainly due to the 120.8% surge recorded in the country's portfolio investment. Foreign portfolio investments in the review period increased from $551.37mn recorded in Q2 2021 to $1.2bn. While the increase in capital inflows in Nigeria is a welcome boost, it is worth noting that Nigeria's capital importation is still significantly lower than pre-pandemic levels, averaging $1.5bn in 2021, compared to an average of $5.99bn recorded in 2019 and $4.2bn in 2018.

Nigeria: Nigerian Manufacturing companies have urged the government to halt a tax on sweetened beverages due to start this month, saying it is unlikely to generate the desired income and could cause some businesses to collapse. Earlier last week, Finance Minister Zainab Ahmed announced an excise levy of NGN 10 per litre on all non-alcoholic carbonated sweetened beverages as part of measures to discourage excessive sugar consumption and boost revenue. According to the International Monetary Fund, Nigeria's tax take as a proportion of GDP is one of the lowest globally, and Ahmed has previously said that Nigeria's lack of revenue is the country's main fiscal challenge. According to an official from the Manufacturers Association of Nigeria, the tax may not be justified in the long run as it will raise production costs, adversely affecting production levels and intimately resulting in dwindling profits.

Zambia: On Saturday, Zambia's Industrial Development Corp (IDC) announced a cancellation of a request for expression of interest from consultants for financial and operational restructuring of Zesco Ltd.  Note the IDC had announced on January 4 that it was seeking consultants to Zesco a financially viable and investment-grade utility over the medium term. Zesco plans to restructure all of the $3.5bn its owes creditors. The debt includes nearly $1.2bn of arrears the utility owes to privately-owned power producers that supply the company electricity. Some of Zesco's biggest creditors also include the Industrial & Commercial Bank of China Ltd., the Export-Import Bank of China, and the Development Bank of Southern Africa.

Forex: Widening real rate to remain supportive of the Mozambican Metical

Against a backdrop of several challenges, the Mozambiquan Metical (MZN) was resilient in 2021. For context, the MZN was the third best performing African currency against the dollar, among those tracked by Bloomberg. The MZN racked up gains of 16.56%, with only the Angolan Kwanza (+17.06%) and the Zambian Kwacha (+26.95%) faring better. Partly underpinning the remarkable resilience of the MZN was the country’s high positive real rate. Mozambique has one of the most competitive real rates globally, and falling inflation in December has further increased this rate.

Specifically, CPI data released on Friday showed that Mozambique’s annual inflation rate in December declined from a 4-year of 6.77% in November to 6.74%. On a month-on-month basis, consumer prices rose 1.5% vs 1% in November. Note, policymakers at the Bank of Mozambique expect headline inflation to remain in single-digit territory in the short-to-medium term. This is despite the prevalence of high risks and uncertainties stemming from rising food and fuel prices and supply constraints in the international market.

The fall in inflation has seen Mozambique’s real rate (Policy rate – CPI) widen to 6.51%  and is one the best globally due to the central bank’s prudent approach to monetary policy. With this approach set to persist for the foreseeable future, MZN bulls may remain supported at the start of 2022.

Fixed Income: Kenyan bonds come under stern selling pressure in the first week of 2022

The combination of domestic and external headwinds saw Kenyan bonds extend their losses in the first week of the new year. Kenyan bond yields across the curve continued to rise last week, with the 2023 and 2031 infrastructure bond yields for instance climbing 45bps and 9bps on the week, respectively. The sustained sell-off in Kenyan bonds comes against the backdrop of mounting concerns over the country’s fiscal position as the public debt pile continues to balloon.

Adding to the topside pressure for Kenyan bonds yields was the surge in US Treasury yields as bets intensified that the Federal Reserve will normalise policy aggressively this year with as much as three interest rate hikes being priced in. Domestically, inflation risks also remain tilted firmly to the upside, partly driven by the sustained depreciation in the Kenyan Shilling. As mentioned last week, since the start of the pandemic, the KES has lost more than 10% against the USD.

Recall that Kenyan faced a wave of negative credit rating action last year amid rising fiscal and external pressures. Ratings agencies flagged that Kenyan urgently needs to rein in its debt before the country slides into a position of fiscal distress. However, given that this year is an election year, we see it as highly unlikely that the government will implement any meaningful debt consolidation measures. Therefore, we assess fiscal risks in Kenya to be skewed firmly to the upside. As such, against the backdrop of deteriorating external conditions for fixed income markets, the bearish bias in Kenyan bonds is expected to remain entrenched in the months ahead.

Macroeconomic: Despite a modest decline in December, global food prices remain elevated

Inflation remains the buzzword for investors at the start of the new year. While investors will find some relief in the fact that global food prices moderated in December, it must be noted that food price inflation remains acute and is still one of the main drivers of global consumer price inflation. The latest data published by the UN’s Food and Agriculture Organisation showed that while on a month-on-month basis, food prices decreased by 0.9% in December, compared to levels seen a year ago, food prices were up 23.1%.

Some of the standout drivers of food price inflation last year were maize and wheat prices, which were 44.1% and 31.3% higher than their respective averages in 2020. This was largely due to robust demand and tighter supply, particularly among major wheat exporters. The FAO said in its December report that rice was the sole major cereal to register a decline in prices in 2021.

Heading into the new year, we expect global inflation to remain strong in the first six months of 2022. Afterwhich we see scope for a moderation in consumer prices due to the high base effects of H2 2021. That said, we still assess inflation risks to be skewed to the topside for 2022 and as such, expect tighter monetary policy conditions this year. Recall that many central banks across the globe have already begun tightening policy.