Macro Analysis /

Bank of Mozambique leaves rates on hold

  • Forex: FX derivatives market pricing in significant naira depreciation in the coming months

  • Fixed Income: EM spreads are set to compress further

  • Macroeconomic: Nigerian central bank hikes by 100bps, suggests more may be coming

Alexa Archibald
Alexa Archibald

Commodities Analyst

Takudzwa Ndawona
Kieran Siney
ETM Analytics
26 January 2023
Published byETM Analytics


US Treasuries found support yesterday from a strong 5-year auction in the States and a slide in tech shares following some mixed messages from Microsoft’s earnings call. The slide in tech shares faded through the session, but Treasuries maintained a bid tone after the 5yr auction stopped through. As a result, the curve shifted slightly lower yesterday, with the belly outperforming and steepening the 5v10 spread. The 2v10 spread also steepened out to levels last seen on 17 January.


Nigeria: In a report released on Wednesday, Fitch Ratings said that Nigerian banks have sufficient capital and liquidity buffers to withstand prevailing macroeconomic challenges, providing headroom at their current rating levels. Fitch added that operating conditions for banks will weaken in 2023 due to high inflation, rising interest rates, and US dollar shortages, in addition to continued regulatory intervention and the potential for disruption caused by the general election in February. According to the ratings agency, Nigerian banks are sensitive to a negative sovereign rating action due to their high sovereign exposure. This, coupled with the concentration of operations within Nigeria, constrains their Viability Ratings at the level of the sovereign ‘B-’ rating.

Egypt: According to a poll conducted by Reuters, the Egyptian economy is forecast to grow 4.8% in the current fiscal year, faster than predicted by the government, but will not meet government targets over the medium term. The median forecasts in a poll involving 18 analysts for the fiscal year ending June were above the 4.0% growth the government predicted in a November 30 letter of intent to the IMF. For the subsequent years, the poll forecast growth of 4.5%, 5.3%, and 5.4%, less than the government’s medium-term outlook. Over the medium term, government projects growth to increase between 5.5%-6%. Meanwhile, the poll projects inflation to climb to 13.4% in 2022/23 and 16.6% the following year before settling at 8.8% in 2025. This would put it within the central bank’s target range of 5%-9%. The pound is forecast to strengthen to 26.24 per dollar by end-June 2023 but weaken again to 28.50 by June the following year. The central bank’s overnight lending rate, currently at 17.25%, is expected to drop to 15.0% by end-June before declining to 9.75% by end-June 2026.

Morocco: In a bid to prevent price growth from escalating further, Morocco’s finance minister reported that the government paid MAD 22bn ($2.1bn) for cooking and gas subsidies in 2022. Currently, the government is paying up to MAD 90 ($8.7) per bottle of gas to keep the price at MAD 40 ($3.9). The minister also said that wheat subsidies exceeded MAD 10bn ($968mn) during 2022, while sugar subsidies rose to MAD 5bn ($483.9mn). Increasing state subsidies for basic commodities pressured foreign exchange reserves as global inflation pushed up food and energy prices. The subsidies also pose notable social risks, given the threat of protest or other action when the time comes to remove them.

Nigeria: The Central Bank of Nigeria is expecting at least NGN 2trn ($4.3bn) of cash to return to banks by January 31, when the deadline to replace high-value currency notes ends. According to Governor Emefiele, residents exchanged as much as NGN 1.5trn of old notes last week, and the CBN hopes to “move closer to NGN 2trn this week.” Emefiele added that people who do not exchange the notes by January 31 will have “useless” cash in their hands. That may not happen if the central bank accedes to the request of Nigerian lawmakers who on Tuesday asked for an extension of the deadline for phasing out the existing higher denominations of the naira to July. Nigeria started issuing redesigned 200-, 500-, and 1000-naira notes in mid-December to mop up excess cash liquidity and take control of money supply.

Tanzania: Tanzania’s High Commissioner to Uganda has noted that Tanzania has contributed $121mn to Uganda’s oil pipeline. The amount accounts for almost 40% of the required contribution for the pipeline linking fields in landlocked Uganda to Tanzania’s Tanga port. The Commissioner added that Tanzania is processing further payment for its full contribution for its share in the East African crude oil pipeline. The pipeline is set to earn Uganda and Tanzania significant foreign exchange income.

Rwanda: In a move that further escalates tensions between the two countries, Rwanda’s defence forces reportedly shot at a Democratic Republic of Congo (DRC) fighter jet that allegedly violated its airspace. In a statement, Rwanda noted that this was the third time a DRC military aircraft had entered Rwandan airspace in recent months, while the DRC denied the plane entered Rwanda. Relations between the two countries are being strained by conflict in eastern DRC, where the army is fighting the M23 rebel group that DRC says is backed by Rwanda, an allegation the Rwandan government denies. The violence has displaced 450k people. The DRC government said that it considers this “umpteenth attack by Rwanda as an act of deliberate aggression that is equivalent to an act of war and does not intend to let it stand.” The DRC warned that continued attacks by Rwanda and the M23 may affect voter-registration efforts as the country prepares for presidential elections scheduled for December.

Forex: FX derivatives market pricing in significant naira depreciation in the coming months

The Nigerian naira has been relatively stable at the start of the year, with central bank interventions supporting the currency to some degree. That said, the naira remains significantly overvalued on a real effective exchange rate basis, keeping the premium with the parallel market sizeable. This, in addition to chronic dollar shortages, elevated inflation, limited debt servicing capacity, and restrictions on dollar transactions, has increased speculation of a potential devaluation of the currency.

In the derivates market, traders are betting that the naira will weaken significantly in the coming months, with the 3- and 6-month non-deliverable forward tenors pricing in depreciation of around 13% and 22%, respectively. However, a devaluation is unlikely to materialize until after the presidential elections. Leading candidates for the presidential polls have pledged to unify the country’s multiple exchange rates if elected in February.

Nigeria adopted multiple exchange-rate regimes to avoid an outright devaluation of the naira by keeping a stronger pegged rate for official transactions and a weaker exchange rate for non-government-related transactions. The central bank has maintained the currency management system despite calls from the IMF and World Bank to scrap the practice. However, with foreign inflows and reserves declining, worsening the dollar scarcity and widening the gap between the official and parallel market rates, risks for a devaluation continue to heighten.

Fixed Income: EM spreads are set to compress further

The average spread between emerging market sovereign debt and that for developed markets has continued to narrow through 2023 so far. The spread widened sharply in 202 amid the onset of the COVID pandemic and again through Q2 and Q3 of last year as peak Fed hawkishness pressured emerging market assets. The final months of 2022 and early stages of 2023, however, have seen emerging market bonds rally, compressing their average yield spread to April 2022 levels. This compression has been a result of monetary policy and fiscal factors.

In terms of monetary policy, while emerging market central banks are still expected to keep hiking rates in the coming months, they have managed to slow the pace of inflation and are expected to end their hiking cycles within the coming months. Developed markets, however, were slower to respond to the initial surge in inflation, and thus are still within their tightening cycles. While we expect that there may not be much more in the way of rate hikes from developed-market central banks beyond Q1, yields remain relatively elevated still.

From a fiscal standpoint, emerging markets have benefited from soaring commodity prices and financing constraints, which have played a significant role in the consolidation of fiscal accounts after two-plus years of aggressive fiscal loosening to cushion the economic blow of the COVID-19 pandemic. With China’s reopening and commodity prices remaining elevated, many emerging markets will continue to experience windfall revenues. Therefore, we expect that emerging market spreads will continue to narrow over the coming months.

Macroeconomic: Bank of Mozambique leaves rates on hold

Despite inflation still being in double digits, the Bank of Mozambique (BoM) left interest rates unchanged yesterday at 17.25%, taking the opportunity to assess the impact of previous rate hikes. The BoM has been one of the most hawkish central banks in the world in the wake of the Covid-19 pandemic and, therefore, could justify keeping rates on hold despite inflation running in double-digit territory. In 2022 the BoM raised interest rates by a cumulative 400bp to combat surging inflation.

Price growth in Mozambique might cool further following a government decision not to pay public workers a 13th cheque in December. We are also likely to see inflation pullback in the coming months as global food and fuel prices have peaked and as the high base effects of 2022 take hold. Note that we already saw inflation slow in December from 11.2% y/y in November to 10.9% y/y.

For now,  slowing inflation and still restrictive monetary conditions mean that Mozambique maintains one of the highest real rates, which should provide some support to the local currency. Therefore, the BOM is likely to keep rates on hold in the coming months as it continues to allow for restrictive monetary conditions to take effect.