Macro Analysis /

Comments from top presidential candidate provides some reprieve for Kenyan bonds

  • Forex: Ghanaian Cedi remains the most volatile currency in the West/North African region

  • Fixed Income: Bearish bias in Kenya bonds eases as top presidential candidate signals possible fiscal consolidation

  • Macroeconomic: Surging coal to oil ratio underpinning South Africa’s terms of trade

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
9 March 2022
Published byETM Analytics


After a solid bull run, the USD appears to be taking a breather. A record trade deficit would've been a wake-up call, but there is also likely to be some repositioning ahead of the ECB decision and statement tomorrow, although for the most part, investors are anticipating that the central bank will prioritise growth and default to delaying rate hikes. Nonetheless, the USD may be in for a period of profit taking, after a phase of risk-induced appreciation.

Yesterday was a wild ride for the base metal markets. The London Metal Exchange was forced to halt trading in the nickel pit and cancel the days trades following a massive price spike which caused the metal to double to over $100000/tonne. The surge was blamed on short covering by one of the world’s top producers of the metal.

Oil’s bull run continues with the price of Brent rising back above $130 per barrel following the announcements yesterday that the US and UK would ban imports of Russian energy products. The bans themselves will actually do very little to the market, as Russian imports of crude only make up about 3% for both the US and UK. The bans, therefore, are more an attempt at a show of force than an actual move that will cripple Russia’s energy export sector. For this to happen, Europe will need to begin banning Russian crude, which is highly unlikely at the moment given that they have a much greater dependence than the US or UK. It is estimated that Europe currently spends around $1bn a day in importing Russian energy products, with oil being among the more difficult to replace from other sources.


Democratic Republic of Congo: The International Monetary Fund has warned that higher commodity costs linked to Russia's invasion of Ukraine risk slowing down the DRC's economic recovery from the coronavirus pandemic. The IMF said that the surge could squeeze the DRC's budget for development spending as the government subsidises fuel prices. The IMF has long counselled the government to decrease or eliminate fuel subsidies. Despite the headwinds, the IMF said Congo's 2022 economic outlook remains "favourable" and encouraged the government to bolster its reserves to protect itself from unstable commodity markets.

Kenya: Treasury Secretary Ukur Yatani yesterday said that Kenya had published a legal notice setting the debt ceiling at 55% of GDP in present value terms. The new measure, which requires lawmakers' approval, conforms with "international best practice in setting debt limits." Yatani added that "there are circumstances under which the debt limit may be exceeded such as the depreciation of the shilling, significant balance of payment imbalances or abrupt fiscal disruptions and therefore there is need to address such eventualities in law." If approved, this would mark the third time in less than eight years that Kenya is changing the way it determines the maximum amount of government debt it can hold.

Nigeria: State-owned Nigerian National Petroleum Corp reported that it spent NGN 1.6trn ($3.8bn) subsidising the pump price of gasoline last year. The NNPC imports the entirety of Nigeria's fuel requirements, mainly through swap arrangements with traders in which crude oil is exchanged for gasoline. Note that the World Bank has recently indicated that the cost subsidy, which was extended by 18 months after labour unions threatened to protest a decision to remove it, could more than double to NGN 4trn this year because of rising crude prices.

Mozambique: The IMF yesterday said that Mozambique's request for an economic program could reach its board for approval by the end of June. The IMF added that negotiations that started at the beginning of the year are still ongoing and that there is no timeline set for their conclusion. The program could further funding from bilateral donors and would be the first since the IMF froze its last program to Mozambique in 2016 after the country acknowledged concealing about $1.2bn in sovereign loan guarantees that led to default.

Tanzania: Headline inflation Tanzania slowed to an 8-month low of 3.7% y/y in February from 4.0% y/y in the month prior. A breakdown of the data showed that the food and non-alcoholic beverages inflation rate in February decelerated to 6.1% from 6.3%. The annual inflation rate for all items without food and non-alcoholic beverages also decelerated, coming in at 2.7% from 3.1% in January. Overall, Tanzania's inflation rate remains below the central bank's target of 5.0%, providing further room for policymakers to maintain the current accommodative monetary policy stance.

South Africa: SA's economic recovery rebounded in the final quarter of the year, posting growth of 1.2% q/q, matching consensus expectations and averting a technical recession, which has been the case for several other emerging markets. The latest figures compared with a revised contraction of 1.7% q/q in Q3. On a y/y basis, the economy grew by 1.7% in Q4, slightly below forecasts and moderating from 2.9% in Q3. Overall, the economy grew at the sharpest pace in 14 years in 2021, rebounding from a coronavirus-induced contraction the year before. While the faster rebound in the 2021 number bodes well for South Africa's return to pre-Covid-19 levels of economic output this year and the government's efforts to rein in high debt, the war in Ukraine is likely to have some impact on economic growth going forward. Still, the need for the government to accelerate structural reforms to boost output and create more employment opportunities remains acute. Until then, we can expect SA's longer-term growth to be restrained somewhat, notwithstanding a favourable tailwind from exports and high commodity prices in the short term.

Forex: Ghanaian Cedi remains the most volatile currency in the West/North African region

The Ghanaian Cedi (GHS) has come under notable selling pressure at the start of 2022. The GHS is the worst performing African currency against the USD on a year-to-date basis amongst those tracked by Bloomberg. The GHS has lost nearly 11% in 2022 so far and traded at record low levels. Much of the GHS weakness can be attributed to factors including perceived risks in the economy due to high-interest payments on borrowed funds and financial challenges. This has fueled the selling of the country’s international bonds by some investors and consequently a reduction in foreign inflows. Moreover, sustained high demand for hard currency and strains on supply has added downside pressure to the currency.

Unsurprisingly the Cedi has been the most volatile when looking at the historical volatility of currencies in the West/North Africa region tracked by ETM. The 1-month historical volatility tenor is currently at levels north of 20% and has trended higher from levels below 5% at the beginning of February. The 3-month tenor, meanwhile, is trading just below 16%.

While the Bank of Ghana could intervene to halt the slide in the GHS by injecting more dollars, we are of the view that persisting fiscal concerns, especially as financial conditions continue to tighten, will remain a significant downside risk to the currency. Meanwhile, higher borrowing costs will likely continue deterring private investment into the economy, driving up demand for imports, which will add further downside risks to the local currency.

Fixed Income: Bearish bias in Kenya bonds eases as top presidential candidate signals possible fiscal consolidation  

While Kenyan assets have come under considerable selling pressure this year as the combination of external factors and heightened fiscal concerns weighed, the bearish bias seems to be waning. This comes on the back of encouraging comments from Deputy President William Ruto, the front-runner to win this year’s presidential election, saying that if he becomes president, he will scale back spending in a move aimed at reining in the country’s ballooning debt pile.

Deputy President Ruto told reporters that he plans to implement a bottom-up model with the creation of a KES 200bn fund to support small businesses to expand their production. Importantly, Ruto noted that this would be done by diverting funds within the budget, which the Finance Ministry projects to be around KES 3.3trn in the 2022/23 fiscal year. The proposed bottom-up program would mark a significant shift from the Kenyatta administration’s approach to expanding the local economy through robust infrastructure spending.

Recall that while President Kenyatta’s infrastructure spending has bolstered the country’s economy, it has come at a high cost to its fiscus. Key fiscal metrics such as debt to GDP and debt servicing costs to GDP have risen sharply under the Kenyatta administration, to the point where credit rating agencies and international lenders, including the International Monetary Fund, have warned that Kenya faces a high risk of debt distress. Therefore, fiscal hawks will warmly welcome a shift in fiscal policy, especially as global lending conditions worsen.

In a bid to finance its larger than previously expected budget shortfall, National Treasury plans to offer $1bn in Eurobonds this year. The planned Eurobond issuance comes amid rising global interest rates and dampened appetite for risk and, therefore, will come at a higher cost to the government. That said, while fiscal risks remain elevated, with Deputy President Ruto highlighting the need for more conservative fiscal policy and plans to increase the tax base, Kenya’s fiscal outlook is looking more sustainable. That said, the market will need to see concrete evidence of a shift to more sustainable fiscal policies before it turns bullish on Kenyan bonds. For now, the risks are for the topside bias in Kenyan bond yields to persist.

Macroeconomic: Surging coal to oil ratio underpinning South Africa’s terms of trade

As politicians engage in virtue signalling, the financial market response holds real consequences that ordinary households will have to live with. The US yesterday decided to ban the importation of Russian oil, and US President Biden was sure to leverage off that as much as possible. However, the decision affects just 3% of US crude oil imports and just 1% of crude oil processed by oil refineries. The UK has done the same thing, but again, affecting just 3% of their oil imports. Neither one was a difficult decision to make, and the ultimate impact on Russia is minimal.

Scroll across to Europe, and the picture is very different. They may try to wean themselves off Russian energy, but at best, they will be able to reduce their purchases by somewhere between a half and two-thirds by the end of the year, and that assumes a concerted effort to do so. In the interim, oil prices drift back above $130pb and will hold severe consequences for many households looking to work from home once again, but for different reasons.

South Africa will have to manage the impact of the rise in coal prices. On the one hand, this is excellent news for the country as coal prices have risen even faster than oil prices. On the other hand, it hurts Eskom, and it is unclear whether SA can take advantage of the favourable market conditions. Coal prices may have boosted SA's terms of trade and should give SA a leg up. However, SA miners are unable to export such bulk minerals efficiently. SA's ports have turned into export blockages. An excellent opportunity to boost SA's growth and resources industry may go begging if the throughout of our ports cannot cope with the demand. Data from the Richards Bay Coal Terminal shows that coal export volumes in 2021 were the lowest in 25 years. Another disastrous SOE failure of Transnet and the port negatively affects the entire country.

While the impact of this war continues to influence commodity prices from grains, through to PGMs heavily, and other industrial minerals and energy, SA will not receive the full benefit. Once again, poorly run SOEs stand in the way of a significant windfall. One can only speculate on how much stronger the ZAR might've been if the country could export without the port blockages. It would've helped keep SA inflation in check, and the SARB would've been under less pressure to respond with hikes. In the end, SA's exports will still benefit from the high prices, but the volumes are not what they should be. The ZAR may enjoy some support but could've enjoyed even more.