Macro Analysis /

Commodity currencies experience some pressure, Ugandan bond yields notch higher

  • Forex: Mozambican Metical remains resilient, supported by better economic and fiscal prospects

  • Fixed Income: Ugandan bond yields break out of recent range as public debt jumps

  • Macroeconomic: Commodity currencies come under some pressure

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
26 May 2022
Published byETM Analytics


Gold slid overnight as the investment community once again weighed up the outlook for tighter monetary policy from the Fed following the minutes of the FOMC. The tone was less hawkish than expected with two hikes of 50 bpts pencilled in for the next two meetings, they did not indicate a more aggressive path post that. Nevertheless, it was an indicator for the bulls to go long dollars once again taking the dollar index above 102.00 which pressured the yellow metal. That said, geopolitical tensions and the threat of a US recession are keeping bargain hunters in the game. Any dips are seen by strategic investors are better entry points and thus we do not see gold slipping below the $1800.00/oz handle.

The price of copper has slipped further yesterday closing just short of 1% lower on the day at $9373.00/tonne. The drivers have not changed, demand worries with the ongoing lockdowns in China driving the narrative. There are also concerns about US monetary tightening following the FOMC minutes last night which has perked recessionary fears in the world’s largest economy. As mentioned yesterday, the longer-term outlook for copper remains good. The lack of investment in new projects coupled with the green energy transition will keep the market well supported.


Central African Republic: The World Bank has expressed concern about a plan by CAR to set up a crypto hub following its recent adoption of Bitcoin as official currency, citing a lack of transparency and the effect the move may have on financial inclusion. The World Bank, in a statement, said that “It is important that the relevant regional institutions, such as the central bank and the banking authorities, are fully consulted and remain in the driver’s seat. It will be physically impossible” for the World Bank to fund the crypto project.” The bank added that the $35mn funding approved on May 5 was meant for improving CAR’s existing public financial management system through digitisation of processes such as payments of salaries and tax collections, not the crypto project dubbed “Sango.”

Kenya: Ahead of the monetary policy meeting at the end of the month, the Kenya Bankers Association has urged the central bank to raise the benchmark interest rate to curb inflation and halt the sell-off of the local currency. The lobby added that banks remain unable to price risk, which is stifling credit growth and economic activity and that “under these circumstances that have a bearing on both price stability and economic growth adversely, the need to take policy action to quell the depreciation is warranted.” Kenya last hiked its policy rate in July 2015 and has held the rate at 7% for two years. A weaker currency and inflation closer to the top of the central bank’s target range suggest that risks for policy tightening exist at the upcoming meeting.

Kenya: The United Nations yesterday announced that it plans to issue a reproductive health social bond for Kenya at 10.7%. The UN agencies plan to raise $13mn with the development impact bond, whose proceeds will help link adolescent girls in Kenya to sexual and reproductive health services. The bond to be issued in September is backed by a $7mn investment by the UN Joint SDG Fund.

Nigeria: In a positive security development for the country, the International Maritime Bureau has exited Nigeria from the IMB Piracy List. This means that Nigeria is no longer on the list of piracy-prone countries, and according to an official from the Nigerian Navy, the consequences are enormous and positive for the shipping industry, general maritime commerce, and the national economy. The delisting of Nigeria is expected to lead to improved shipping in the country’s waters and thereby bolstering economic activity.

Tanzania: Data from the Bank of Tanzania showed that coffee export revenue fell by 27%, and the volume declined by 19% in April compared with March. Specifically, the value of coffee beans sold for export fell to $10.2mn in April from $14mn in March, while the volume fell to 2,900 metric tons, from 3,600 metric tons. The decline in export earnings is likely to weigh on Tanzania’s foreign earnings, given the sector is a major source of hard currency and the country is Africa’s fourth-largest producer.

Zimbabwe: Zimbabwe’s inflation rose back above 100% in April, accelerating to 131.7% from 96.4% in the month prior. The surge back into triple digits came on the back of a central bank devaluation of the local currency. Prices rose by 21% m/m. The central bank introduced a new interbank rate at which most commerce will take place. The central bank introduced the new interbank rate at 276 per dollar on May 9. That was two days after President Mnangagwa temporarily barred banks from lending and introduced other measures to halt the Zimbabwe dollar plunge on the black market, where it trades at more than 400 to the dollar.

Botswana: Mining activities are still suspended at Khoemacau copper mine following an accident last Friday which killed two miners. The specific cause of the accident is still unclear and under investigation. The miners were part of the blast team, and they were on a mission in Tshukudu, 140 metres underground. It is hoped that mining can be resumed soon as the country is counting on the Kalahari copper belt to shift its reliance on the diamond industry for its hard currency earnings. Diamonds currently makeup around 70% of Botswana’s exports and thus an additional revenue source would create export resilience which is needed.

Forex: Mozambican Metical remains resilient, supported by better economic and fiscal prospects

Although not as impressive as the gains recorded in 2021 Bloomberg, the Mozambican Metical has been resilient in 2022 thus far. The currency has chalked up gains of 0.19% against the USD on a year-to-date basis to currently rank as the 5th best performing African currency. Only the Guinean Franc (+5.64%), Nigeria (+2.07%), South African Rand (+1.38%) and Rwandan Franc (+0.47%) have bettered the MZN's performance. The resilience of the MZN comes despite turbulent conditions for emerging market and frontier market currencies amid headwinds such as monetary policy tightening, mounting global recession risks, and the war in Ukraine.

The resilience of the MZN can be attributed to idiosyncratic factors such as an improvement in the security situation in the mineral-rich province of Cabo Delgado and better economic and fiscal prospects. For context, Moody's in March upgraded the country's outlook to positive from stable while affirming its Caa2 rating. The agency said that the positive outlook was underpinned by prospects of broad-based improvements in Mozambique's credit profile led by Liquified Natural Gas production and the government's efforts to strengthen public governance, which may improve over time. Meanwhile, earlier this month, the country reached an agreement on a $456mn deal with the IMF nearly six years after the Washington-based lender froze a previous arrangement because the government concealed more than $1bn of debt. The program will enhance the government’s economic recovery efforts and also provide broader support to address some of Mozambique's long-term structural challenges, particularly the management of public resources and governance.

While fiscal risks in Mozambique remain elevated, we expect to see continued positive policy reform, prudent fiscal policy, and management from the government in the coming months. In addition to the LNG sector, which is set to provide a massive boost to the country's fiscus, we expect the MZN to remain supported in the near term.

Fixed Income: Ugandan bond yields break out of recent range as public debt jumps

Ugandan bonds have been particularly resilient to the adverse global market conditions so far this year. However, signs are emerging that the resilience is breaking down with yields across the curve beginning to rise sharply. For context, Uganda’s local currency 10yr bond yield has risen by more than 20bps since the start of the week and is trading above the 14.00% mark for the first time since the first week of the year.

The bearish bias comes on the back of rising public debt and a deterioration in Uganda’s fiscal position. The government has blamed the rising debt on the devastating impact of the Covid-19 pandemic. According to official figures, Uganda's public debt rose to UGX 69.5trn in mid-May. A breakdown of the debt reveals that UGX 44trn of Uganda’s debt is made up of external debt and UGX 25.4trn is borrowed domestically.

To plug its fiscal deficit, the government said it plans to borrow around UGX 9.7trn from both domestic and external lenders in the 2022/2023 fiscal year to finance a UGX 47trn budget. The Finance Ministry said that human capital will account for 25.3% of the budget and spending on governance and security will total 24.7%.

According to the Bank of Uganda, the country's ratio of total debt service to domestic revenue rose to 29.3% in the year ending 2021 up from 23.3% in the same period in 2020, mainly driven by domestic debt service. While fiscal risks in Uganda have intensified during the pandemic era, resulting in a modest rise in Ugandan bond yields, we expect Ugandan bonds to remain relatively resilient in the weeks ahead. That said, with both fiscal and inflation risks skewed to the upside, we expect the topside bias in Ugandan bonds to persist going forward.

Macroeconomic: Commodity currencies come under some pressure

Once again, the USD has been instrumental in driving broader EM currency direction. Simultaneously, most EM and commodity currencies came under pressure. This as the USD staged a modest recovery from a one-month low. Global risks remain well elevated. For many countries, terms-of-trade have deteriorated in large part due to the buoyancy of the oil price against a backdrop of falling commodity markets. South Africa is a case in point, with terms-of-trade now dropping to pre-covid levels. In other words, no longer is the mining industry windfall going to prop up the ZAR or the fiscus to the same extent as it did throughout the pandemic.

And then, there is the question of monetary policy and what the SARB will do. It has fundamentally different challenges to those of other countries, most notably because of the record high unemployment rate, unstable power that is singlehandedly strangling growth out of the economy, a municipal crisis and faltering infrastructure. As a country, SA cannot sustain a policy of keeping up with other global central banks. The mismanagement of the economy dictates that it carries higher degrees of risk than most, which will eventually be reflected in the ZAR's performance.

At the moment, that is masked by the extremely overbought USD that might need to correct weaker for its own idiosyncratic reasons and the inflation differential, which is uncharacteristically in SA's favour. Notwithstanding all the structural issues that SA has to deal with, a weaker USD and high global inflation will see the ZAR continue to trade with some faux resilience. Over time, that might erode, especially if any semblance of normality returns to global markets.

About the only other mitigating factor to mention is that the ZAR tends to perform a little better when the SA economy is struggling, and at the moment, it is struggling. Things may get even worse if the SARB continues to hike and global growth craters due to the coordinated central bank tightening. Weak growth tends to result in weak demand for imports and will support a surplus in the trade and current accounts. In summary, ZAR may well prove resilient for a while longer, but not for good reasons. It may beat expectations vs the USD merely because the USD is overbought and needs to correct, and because the domestic economy is hamstrung by years of maladministration and structural headwinds.