Macro Analysis /

Bond market not fully convinced about Ghana's debt consolidation measures

  • Forex: Egyptian Pound devaluation helps kick-start IMF negotiations

  • Fixed Income: Ghana announces measures to ease fiscal pressures, market not fully convinced

  • Macroeconomic: South African Reserve Bank delivers a hawkish 25bps rate hike

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
25 March 2022
Published byETM Analytics


Carry trades appear to be back on, with some low yielding jurisdictions such as Japan unable to respond to the tightening guidance by the Fed. The JPY has been left to flounder and is now closing out the third consecutive week of losses. The result has encouraged carry trades with the JPY reclaiming its status as the world's funding currency.

In the commodity space, Brent crude prices have dropped back below the $120 per barrel mark when looking at the front-month contract, following the meeting of EU leaders yesterday that failed to deliver any fresh action on the Russian energy sector. Even if there was no consensus reached yesterday, there will likely still be a lot of chatter in the markets in the coming weeks over further sanctions, which should keep the market volatile and lead to some further major price swings. The futures curve, meanwhile, will likely remain strongly backwardated, with the current prompt time spread trading at around $3.55 per barrel as demand for immediate physical delivery of barrels remains strong.

The safe haven bid in the gold market remains the driving force as we enter the final day of trade for the week. The yellow metal has continued to build on yesterday’s gains this morning and we are now looking clear the $1965.00/oz mark should the momentum be maintained.


Angola: Finance Minister Vera Daves de Sousa yesterday said that the window to sell $2.8bn worth of Eurobonds many come "any moment" and that "we are watching everything with tranquillity." The minister further said that the banks helping Angola arrange the sale have not yet reported back to the government. The comments come after Nigeria became one of the first few nations to successfully issue a Eurobond since the start of Russia's war in Ukraine and suggest Angola is waiting to see the market reaction. Angola is looking to take advantage of its improving fiscal dynamics and still relatively favourable lending conditions to raise funds to repay existing debt and diversify its energy-dependent economy.

Botswana: Today will see the release of the Q4 2021 GDP print. The market will be eagerly awaiting the data, even if it is dated by comparison to the likes of the inflation numbers as it will give insight into the level of recovery achieved post the COVID-19 pandemic. The real GDP for 2021 is expected to come in 7.5%, while the 2022 reading is expected to come in at 5.5% as domestic demand recovers. The risks to these forecasts going forward come from the higher commodity and energy prices as the Ukrainian conflict shows no signs of ending in the near future.

Egypt: Yesterday, the finance ministry reported that Egypt had issued yen-denominated bonds equivalent to $500mn. The coupon is at 0.85%, and the maturity is five years. Before yesterday, Egypt had never sold yen bonds. The move is part of measures to diversify funding for the economy under pressure from the war in Ukraine and soaring commodity prices.

Egypt: Egypt's Supply Minister has noted that Egypt will not hold its next international wheat tender before mid-May as the government turns to the local harvest while the war in Ukraine sends prices surging. The announcement comes after the country scrapped its past two tenders as participation dwindled and offer prices soared in the wake of the conflict. Egypt often pauses its tenders near this time as its local crop is collected, but a three-month break would be lengthier than the usual lull in purchases. The minister also noted that Egypt had received all the Russian wheat it had ordered and is exploring alternative sources and will hold talks with Argentina next week. Authorities target buying 5mn to 6mn tons of local wheat this season.

South Africa: On Thursday, President of the African Development Bank Akinwumi Adesina announced that the bank will commit R42.5bn ($2.8bn) in new financing to South Africa over the next five years. This includes a R6bn package to help Eskom transition towards using cleaner energy sources. The funding for Eskom adds to an $ commitment made by the US, UK, Germany, France, and the European Union at the COP26 climate summit in Glasgow in November to help the utility reduce its greenhouse-gas emissions. Key to meeting  South Africa's climate change ambitions is Eskom's ability to transition from coal which it uses to supply more than 80% of its power. According to Adesina, the Eskom funding plan details are still being finalized and won't add to South Africa's debt.

Sudan: The United Nations has warned of a deepening food crisis in Sudan as a result of the country's economic downturn, displacement, and devastated harvests. According to the UN, "the combined effects of conflict, economic crisis, and poor harvests are significantly affecting people's access to food and will likely double the number of people facing acute hunger in Sudan to more than 18mn people by September." The fall in the Sudanese pound and the rising food and transportation prices are also making it more difficult for Sudanese families to put food on the table, and a lack of access to hard currencies is expected to cause the currency to depreciate further. The UN, therefore, called for immediate support to provide critical agriculture inputs to vulnerable farming households before the main agriculture season starts in June so that they can produce enough food and become self-reliant.

Forex: Egyptian Pound devaluation helps kick-start IMF negotiations

The focal point in the Africa FX market this week has been on the Egyptian Pound (EGP). This comes after the Central Bank of Egypt on Monday hiked its interest rate for the first time since 2017 and allowed its currency to weaken sharply as it moved to absorb shocks from global inflationary pressures. The EGP weakened markedly after holding steady for about two years. Bloomberg data shows that the EGP depreciated by over 17% to close around 18.500 on Tuesday after weeks of pressure on the currency as foreign investors pulled out billions of dollars from Egyptian treasury markets following Russia's invasion of Ukraine. Since then, the local currency has appreciated slightly but is now ranked as the second worst-performing currency on a year-to-date basis against the USD, down by more than 16.0%. Only the Ghanaian Cedi (-17.80%) has fared worse among the African currencies tracked by Bloomberg.

The weakening of the EGP among the other measures implemented by CBE has, however, been welcomed by the International Monetary Fund and allowed for negotiations to begin over a possible new loan as shockwaves from Russia's invasion of Ukraine add pressure to the economy. Recall the IMF on Wednesday noted that the Fund staff are working "closely" with the Egyptian government after they asked for its help to "implement their comprehensive economic program." The program is likely to help anchor confidence in Egypt's fiscal and reform trajectory as well support portfolio inflows.

Going forward, it remains to be seen whether the CBE will continue to manage the EGP or allow it to float more freely. The former could raise the risk of external imbalances building up once again and the need for further devaluations.

Fixed Income: Ghana announces measures to ease fiscal pressures, market not fully convinced

Ghana has been in the firing line of fiscal hawks in recent months as concerns over the country’s debt trajectory intensified amid a combination of domestic and external pressures. Much of the increased fiscal risk is a function of fears over the country’s ability to refinance itself in the international debt market due to tightening global financial conditions against the backdrop of deteriorating appetite from international investors for risky assets due to the ongoing Covid-19 crisis and more recently the war in Ukraine. This comes against the backdrop of persistently weak tax revenues, an inflated public sector wage bill, wasteful fiscal spending and mounting concerns over the country’s ability to roll over maturing debt.

Recall that up until now, Ghana has financed a large portion of its budget shortfall in the international debt market by issuing Eurobonds. Until the hawkish shift from major central banks in September last year, lending conditions in the international bond market have been favourable due to record low interest rates and a healthy appetite for risk. This afforded Ghana the chance to raise funding at low costs in recent years. However, due to the significant deterioration in Ghana’s fiscal outlook and hawkish pivot in monetary policy around the globe, investors are demanding massively increased premiums for holding Ghanaian debt.

According to Bloomberg data, Ghana’s 2026 Eurobond yield has more than doubled since this time last year, climbing more than 900bps to sit at 15.54%. It is worth noting that Ghana’s 2026 Eurobond yield has pulled back from its peak of 17.45% reached on the 7th of March. Some of the recovery came on Thursday after the government announced that it was slashing government wages to ease fiscal pressures. President Akufo-Addo said that the measures, which include a reduction in discretionary spending, lower salaries for top public servants and a moratorium on imported vehicles for government employees, would shave around $400mn off the fiscus. The President added that the measures will ensure the budget deficit narrowed to 7.4% of GDP this year from an estimated 12.1% last year.

While the measure announced yesterday will provide some fiscal reprieve, it is not enough to meaningfully alter the country’s debt trajectory and restore confidence amongst investors that the government is fully committed to steering the country back towards a sustainable fiscal path. That said, the measures are a step in the right direction and are a sign to investors that the government is attempting to rein in its debt. For now, though, we expect a significant fiscal premium to remain baked into Ghanian sovereign debt until there is concrete evidence that the government is committed to bold fiscal reforms and the country’s tax revenue issues are resolved.

Macroeconomic: South African Reserve Bank delivers a hawkish 25bps rate hike

The MPC voted 3-2 in favour of a 25bps rate hike at its March sitting, taking the repo rate to 4.25%, in line with economists' and Bloomberg expectations. The split vote points to dissension amongst the policymakers, in what was by no means an easy decision as they seek to preserve price stability by countering the upward pressure of inflation and providing ongoing support to the economy.

The decision to hike would have been made easier by the Federal Reserve and other major central banks shifting their policy stances to even more hawkish amid the expected short term commodity shock.

Note that SARB has been prudent in its monetary policy, raising rates by a cumulative 75bps since the tightening cycle commenced in November 2021, demonstrating its commitment to restore medium-term inflation expectations.

The SARB's revised inflation forecasts were fairly hawkish due to higher energy and commodity prices from the effects of the war in Ukraine, heightening uncertainty in the future. Moreover, the expected Eskom tariff hike next month amongst other administered prices continue to present short-to-medium term risks. Specifically, the SARB anticipates inflation for the full-year 2022 to rise to 5.8% (vs 4.9% in January) and 4.6% in 2023 (vs 4.5%).

It is still premature to say the direct impact of the war on consumer prices in the upcoming months. The balance of these risks lies in Rand's resilience to external shocks. We remain bullish on the Rand as it stands to benefit from the positive tailwind from the commodity boom. SA's current account will thus remain in surplus for longer than previously anticipated, supporting the Rand.

While the current macroeconomic backdrop remains highly fluid, the decision to hike would go some way in promoting foreign inflows via a favourable interest rate differential and encourage investment and savings over consumption. Further interest rate hikes are still on the cards this year, which Governor Kganyago stated would remain data-dependent. Based on today's decision, the likelihood of a steeper policy path ahead has increased.

From our standpoint, however, we view the more aggressive rate hike path as unwarranted due to the state of the underlying economy and the persistently weak credit cycle, which will help contain inflation going forward. Therefore, we are of the view that the market might be currently too aggressive in its pricing of rate hikes.