Macro Analysis /

Bonds face a dichotomy of soaring inflation pressures and mounting growth risks

  • Forex: Uganda’s trade gap persists, threatening the Shilling’s resilience

  • Fixed Income: US Treasury yields plunge as market tempers rate hike bets and risk-off intensifies

  • Macroeconomic: Inflation and growth concerns intensify as oil breaches $110/bbl

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
2 March 2022
Published byETM Analytics


The safe haven bid has pushed bullion to levels above the $1935.00/oz handle and we have remained there for the Asian session. Investors are gravely concerned about the potential of the Ukrainian conflict becoming more acute. Some analysts are pointing to Russia ramping up the onslaught given the fact that Putin may view the current situation as he has nothing to loose following the heavy sanctions instituted by the west. Heavy sanctions against Russia have investors fearing the worst when it comes to palladium supplies. Palladium recorded strong gains yesterday and this has extended into today’s trading session. The noble metal is clear through the $2600.00/oz mark and further gains cannot be ruled out.

Aluminium looks on target to test the record highs of $3525/tonne seen on Friday last week. The metal is remains well bid on the back of the Ukrainian conflict which has supply chains stretched and energy prices testing new highs making certain smelting operations in the EU uneconomical to run. The fact that the west has blocked certain Russian banks from accessing the Swift payments system has raised fears of supply disruptions as may of this shipments cannot be physically paid for. It is worth noting that some 900 000 tonnes of production a year from Russia is at risk here, certainly not an insignificant amount. 


Ethiopia: Last month, Ethiopia launched a fund to attract investment for at least $150bn worth of state-owned companies and assets. The country is seeking billions of dollars of foreign investment as it presses on with reforms to open up its state-managed economy and boost economic growth. The launch of Ethiopian Investment Holding, which allows a degree of private investment, marks a key way from the longstanding state-led development model that promoted national control of sectors such as banking, logistics and telecoms. Note that under PM Abiy Ahmed, Ethiopia has committed to opening up its economy and has planned a series of privatisations, including the sale of a stake in Ethio Telecom. The government allocated the country’s first telecoms licence last year, while Abiy recently pledged in parliament to open the banking and financial sector to foreign investors.

Mali: Data released yesterday by debt agency Umoa-Titres showed that Mali has failed to pay 46.32bn CFA francs ($78.5m) in principal and interest on a government bond, pushing its debt defaults due to sanctions following two coups to $180mn. The sanctions include border closures and restrictions on financial transactions. Note that Mali has more than a dozen treasury bills and bonds maturing this year, one of them on March 9.

Nigeria: As part of a number of legal reforms to the country’s constitution, Nigerian lawmakers yesterday passed a constitutional reform bill that will allow state governments to supply electricity, breaking the monopoly of the country’s federal government. The bill, which still has to be approved by lawmakers in Nigeria’s 36 states before it can be signed into law by President Muhammadu Buhari, could diversify the sources of electricity supply in the West African nation, which suffers from perennial power shortages.

Nigeria: Nigeria’s Stanbic IBTC Bank PMI pointed to a robust overall improvement in business conditions in February. The PMI rose to 57.3 from 53.7 in January, it's strongest reading since November 2019. Survey results show that quicker expansions in output, new orders, employment and purchasing underpinned the last improvement. At the same time, firms were hopeful that higher investments and customer numbers would support output growth over the course of the coming year. On the cost front, unfavourable exchange rate movements, higher prices for raw materials and rising wages led to a substantial rate of input inflation. Subsequently, selling charges were lifted sharply. Mounting inflationary pressures could force the central bank of Nigeria to consider hiking rates in the near future.

Tanzania: In its biannual Tanzania Economic Update report, the World Bank said that the country needs to accelerate the pace of its vaccinations to help quicken its economic recovery. Since President Hassan launched a vaccination programme in July, about 2.4mn doses have been administered in the country of about 60m people, and according to the World Bank, this is “a slow pace by global standards.” The World Bank forecast Tanzania’s economy to grow between 4.5% -5.5% this year from an estimated 4.3% last year. Over the medium-term, growth is projected to average over 6% as pandemic conditions ease and export and domestic demand recover. Regarding fiscal dynamics, the World Bank said the fiscal deficit may widen to 4.2% of GDP this year amid revenue shortfalls and spending to manage the pandemic and on infrastructure projects.

South Africa: A factor assisting the ZAR or hurting the USD has been the retreat in US bond yields as a rotation to safety unfolds. The relative carry that was supporting the USD has moderated, and the USD is struggling to gain traction, even in the face of such difficulties. That said, the USD does enjoy a safe-haven bid for now, and this could change if matters escalate still further. How the war unfolds through the remainder of the week will be key. In closing, the USD-ZAR is likely to retain a slight bid tone, and the risk appears to be skewed to the topside (ZAR weakness) if matters escalate still further in Ukraine. World markets appear primed to price in difficulties.

Forex: Uganda’s trade gap persists, threatening the Shilling’s resilience

Trade flows play an important role in a currency’s resilience. It is therefore worth looking at the latest trade data out of Uganda. Data released by the Finance Ministry showed that Uganda’s trade narrowed to $271.6mn in December from $278.7mn in November. The narrowing of the trade gap was on account of an increase in export receipts and a reduction in imports during the month. Compared to the comparable period a year earlier, the trade deficit narrowed by $58.3mn from $329.9mn as both inbound and outbound shipments decreased.

A further breakdown of the data revealed that exports rose by 0.36% to $325.63mn in December, on the back of an increase in coffee export earnings, which more than offset reductions for fish and beans. Coffee benefited from higher volumes exported and a rise in global coffee prices. However, on a y/y basis, export declined by 28.5% as a result of the current halt in gold exports which have been affected by the delay in the approval of the mining amendment bill 2021. Meanwhile, imports fell by 1.0% to 597.2mn in December from $603.2mn in November following a reduction in government imports. On a y/y basis, there was a reduction in imports by 24% as both government and private sector imports declined. Due to lower project imports, government imports declined by 68.7% from $61mn in December 2020.

While the trade gap narrowed in December, the fact of the matter is that the trade balance remains negative. As such, the persisting trade balance deficit could detract from some of the gains that have seen the UGX remains resilient this year. For context, the UGX has chalked up gains of 0.77% on a YTD basis against the USD and is East Africa’s best-performing currency. Much of the UGX’s resilience at the start of the year has been attributed to a combination of increasing dollar inflows and low demand. For context, dollar inflows have been supported by higher coffee volumes and better global markets, while flows from non-governmental organisations have been constant.

Fixed Income: US Treasury yields plunge as market tempers rate hike bets and risk-off intensifies

Notwithstanding the surge in international oil prices, yields across the US Treasury curve continued to tank yesterday as the market tempered interest rate hike expectations. Moreover, the capitulation of hawkish Fed bets left a more dovish policy path priced into the front end of the curve. Specifically, traders priced out the possibility of a 50bps rate hike at this month’s FOMC meeting as growth concerns outweigh the surge in supply-side cost pressures.

Underpinning the bullish bias on the front end of the curve was sliding eurodollar rates, while tenors on the belly and long-end of the curve benefitted from stop-loss buying by fast money accounts and the rotation from risky assets to haven assets in the face of Russia’s invasion of Ukraine. Since the start of the week, the benchmark 10yr yield has shed 23bps to close yesterday’s session at 1.73%, the lowest level since mid-January. The shorter-dated 2yr yield has also fallen by 23bps since Friday’s close to 1.34% at the end of yesterday.

Looking ahead, fixed income traders will have to contend with the opposing forces of surging supply-side cost pressures driven by the spike in international oil and food prices as the conflict in Ukraine puts pressure on global commodity prices and the negative effect that it is having on the global growth outlook. Moreover, we expect risk appetite to remain muted in the near term. This should support safe-haven assets such as US Treasuries while weighing on riskier emerging market bonds.   

Macroeconomic: Inflation and growth concerns intensify as oil breaches $110/bbl

While some African countries, including Angola and Nigeria, may cheer the surge in international oil prices, most African countries will be negatively affected. The massive spike in international oil and food prices will compound economic headwinds for most African countries and, in some cases, the risk of stagflation.

Oil has kept its rally going this morning, with Brent surging above $110 per barrel just before OPEC+ members are scheduled to meet today to announce their latest decision on output. Futures in both London and New York have surged more than 6% today so far as the conflict in Ukraine remains intense, and has caused the IEA to warn of risks to global energy security. The surge also comes despite the US announcing that it will release barrels from its strategic reserves in order to try to ease price pressures. As we noted yesterday, the release will unlikely have too much of an impact given that the 60mn barrels expected to be released is only six days worth of Russian exports.

OPEC+, meanwhile, are only expected to announce another minor increase in output, given the capacity constraints that many members currently face. This suggests that oil still has some upside potential over the near term, especially as it seems as if the Ukraine conflict will not be ending anytime soon. This is highlighted by how sharply the curve structure is in backwardation. Currently, Brent’s prompt timespread is almost $5 per barrel, compared to just $1.39 per barrel seen at the start of February.