Macro Analysis /

Bank of Ghana steps up FX intervention, EM bonds down 9% in 2022

  • Forex: Bank of Ghana announces additional measures to support the Cedi

  • Fixed Income: Tightening financial conditions remain the primary risk facing emerging market bonds

  • Macroeconomic: Inflated debt levels are compounding inflation risks in Sub Saharan Africa

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
5 April 2022
Published byETM Analytics


Oil prices rebounded strongly overnight as traders mulled the high possibility that more sanctions against Russia are coming, with some that could include the energy sector. Prices surged yesterday by their most in two weeks, taking the front-month Brent contract back towards $108 per barrel, while WTI is trading near $105 per barrel. The rally may be a little overdone given that it is very unlikely that Europe will be able to announce any sanctions on Russia’s energy sector, given their dependence. Thin trading conditions, meanwhile, could have exacerbated the move with many traders in Asia out as key markets there are closed.

Nevertheless, the market remains extremely tight at the moment. This was evident in yesterday’s price-setting by Saudi Arabia, which raised its prices for all regions. Shipments of Saudi’s Arab Light Crude to Asia for next month were set at a record differential of $9.35 a barrel compared to the benchmark, highlighting the supply issues facing the region as buyers continue to shun Russian crude.


Democratic Republic of Congo: Policymakers at the DRC's central bank opted to leave the prime interest rate unchanged at 7.5%, despite rising food and fuel prices due to the effects of the coronavirus pandemic and the war in Ukraine. Recall that the central bank reduced its prime interest rate three times last year, from 18.5% to 8.5%, and then again in January by another 100bps to 7.5%. After the meeting in January, the bank said it would keep the key rate unchanged at 7.5% throughout the year. The central bank revised its year-end inflation forecast to 6.52% from 5% previously and compared with 5.28% in 2021. According to the bank, the economy is set to suffer repercussions of the pandemic and Russia's invasion of Ukraine through the rise in prices of petroleum and food products as the country is a net importer. The growth forecast for 2022 was raised to 6.4% from 6.1% on the back of the current rise in commodity prices.

Kenya: In a survey conducted by the Central Bank of Kenya in March, bank operations surpassed pre-pandemic levels and are on track to reach "much higher levels in 2022", indicating activities are back to normal, supported by the re-opening of the economy and better management of the pandemic. The survey found that around 76% of the lenders expected private sector credit growth to be supported by demand from the economic recovery, while political risk ahead of the August elections is a major risk.

Kenya: In a bid to calm fears of a potential fuel shortage and forestall a crisis, Kenya will pay subsidy arrears to petrol retailers this week. Recall that Kenya rolled out a fuel subsidy in April last year to cushion consumers from the surge in the price of oil in international markets. To date, the government has spent KES 36bn ($313mn) subsiding fuel, which has helped stabilise at the pump and keep inflation within the central bank's target range. However, the latest surge is causing cash flow problems at some smaller fuel retailers, leading to supply shortages. According to an official from the government, the government owes companies KES 13bn which will be settled this week. The respite cannot come soon enough for the frustrated motorists who have been queuing in long lines at petrol stations for days due to the biting shortages, prompting the government to say it has adequate fuel stocks. According to a government official, "this is an artificial shortage."

Mozambique: Southern Africa Heads of State yesterday postponed talks on whether it would extend the deployment of troops fighting the Islamic State-linked insurgency in Mozambique's Northern region that has prompted TotalEnergies SE to stall a $20bn natural gas project. The deployment mission is set to end on April 14, and talks have yet to be rescheduled. In February, CEO Patrick Pouyanne said that the gas project would only restart once there is lasting peace and displaced people return home. Delays in bringing the project online could threaten its feasibility and deprive Mozambique of attracting massive hard currency inflows.

South Africa: South Africa received its second round of good news in as many days last night when President Ramaphosa announced an end to the State of Disaster. There will be a transitional period of thirty days in which some restrictions remain, but for the most part, SA is inching its way towards opening up fully and making people's healthcare their responsibility. Vaccines are known; they are available, if people choose not to use them and become very sick, that will be a consequence of their life choices, but healthy people will no longer be restricted and neither will economic activity. This will come as a relief for a country struggling with so many growth headwinds, especially for the tourism industry, which may benefit from SA becoming known as a destination free of uncomfortable travel restrictions.

Uganda: In positive news for the fiscal hawks, Uganda forecasts its budget deficit, including grants and debt relief, will narrow to 3.6% of GDP in the coming fiscal year, from an estimated 5.4% in the current period. National Treasury also revised the fiscal deficit estimated for 2021/22 to 7.5% of GDP. Meanwhile, to plug a UGX 6.37trn budget funding shortfall, Uganda plans external financing of UGX 3.54trn and domestic borrowing of UGX 2.84trn. Resource inflows around UGX 43trn are forecast in 2022/23, and external debt repayments of UGX 2.46trn. 

Forex: Bank of Ghana announces additional measures to support the Cedi

The Ghanaian Cedi (GHS) was the worst-performing African currency among those tracked by Bloomberg in Q1. For context, the GHS lost around 17.11% against the USD. The Cedi came under pressure amid increased demand for the USD, as investors sought dollar-denominated assets due to unfavourable ratings of the country’s economic outlook by rating agencies such as Fitch and Moody’s. Concerns that Ghana will not achieve its revenue and debt targets sparked a broad-based sell-off in domestic assets.

Against this backdrop, it is unsurprising that the Bank of Ghana (BoG) has set up measures to stem the Cedi’s slide. Yesterday, the BoG announced that it would sell a total of $350mn to authorised dealers in Q2 in the Foreign Exchange Forward Auction. The move is expected to boost the supply of dollars in the market to help support the Cedi. The bank will sell $100m in April and June and $150mn in May. The announcement yesterday comes after the BoG injected $100mn into the forex market last week to shore up the Cedi and facilitate its further appreciation against major trading currencies while also triggering a fuel price reduction in the country. The move is part of the BoG’s plans to boost the supply of dollars in the financial system and make them available for Bulk Oil Distributing Companies with the requisite licences and qualifications.

While the above-mention measures and positive fiscal developments through the passing of the e-levy last week could support the Cedi in the near-term, fiscal concerns persist, which will remain a headwind to the GHS. Concerns over the credibility of the country’s fiscal targets remain, while an unfavourable external backdrop amid the war in Ukraine and tightening global financial conditions will come as further headwinds to the Cedi.

Fixed Income: Tightening financial conditions remain the primary risk facing emerging market bonds

The hawkish pivot from developed market central banks in recent months has come as a stern headwind for emerging market sovereign debt as the market prices for higher interest rates across the globe. The hawkish shift in monetary policy has been broad-based, with central banks ranging from the Federal Reserve to the Bank of Mozambique raising interest rates as rising food and energy prices fuel inflation.

Tightening financial conditions is the main risk facing emerging market dollar debt, with rising US Treasury yields eroding a significant portion of total emerging market Eurobond returns in 2022. According to Bloomberg data, emerging market bonds have lost on average 9.16% since the start of the year. Compounding the risks for emerging market bonds has been uncertainty and inflation risks pertaining to the war in Ukraine.

Another factor contributing to the sizeable losses in emerging market debt this year has duration-related pressures. Note that duration measures the level, slope and shape of emerging market bond curves, while spread risk reflects credit fundamentals and factors such as liquidity or lack thereof in the secondary market. According to Bloomberg’s calculations, duration risk has eroded around 700bps from the performance of emerging market debt since August 2021, just before the significant shift in global monetary policy began.

In line with the US Treasury curve, shorter-dated and medium dated emerging market bonds are underperforming this year as interest rates across the world rise. Emerging market bond returns could come under additional selling pressure if inflation pressures rise further as central banks will be forced to turn more aggressive.

Looking ahead, with inflation pressures set to remain acute against the backdrop of heightened uncertainty surrounding the war in Ukraine and the covid situation in China, we expect emerging market bonds to remain under pressure in the months ahead. Moreover, the broader flattening bias in the fixed income market is expected to persist.

Macroeconomic: Inflated debt levels are compounding inflation risks in Sub Saharan Africa

Inflation risks in Sub Saharan Africa have risen sharply in recent months on the back of surging commodity prices and persistent supply chain pressures. According to a report released by the International Monetary Fund on Monday, high public debt also adds to inflationary pressures in Sub-Saharan Africa. The International lender said Sub Saharan African countries face critical monetary policy challenges as stagflation risks intensify.

The IMF said that the pandemic has dented economic growth, adding that the recovery is likely to leave output below the pre-pandemic trend this year. Moreover, the IMF noted that several Sub Saharan African countries have seen inflation rise sharply, in some instances driven in part by fiscal pressures from high public debt levels.

In its report, the international lender said that the economic impact of the war in Ukraine, particularly the impact on food and energy prices, is likely to intensify inflationary pressures in Sub Saharan Africa further. The IMF said that countries with managed or free-floating exchange rate regimes could benefit from allowing currencies to adjust while focusing monetary policy on domestic objectives.

The IMF stated that many countries in the region with floating exchange rate regimes have characteristics and vulnerabilities that can limit the benefits of fully flexible exchange rates. According to the IMF, shallow markets could also compound exchange rate movements and result in excessive volatility.

Lastly, the IMF said that weak central bank credibility could cause exchange rate changes to have a more significant effect on inflation, effectively a higher currency passthrough on inflation. History shows that currency passthrough in low-income countries is substantially higher than is the case in developed economies. The IMF noted that currency mismatches and high currency passthrough on inflation could cause output and inflation to move in opposite directions in the wake of an external shock.