Macro Analysis /

Dollar surges on US inflation surprise, SA's medium-term budget in focus

  • Forex: Inflation in Ghana moves further away from central bank target, partly due to a weaker Cedi

  • Fixed Income: It goes from bad to worse for Ethiopia as the country faces another ratings downgrade

  • Macroeconomic: South African Finance Minister set to present medium-term budget update later today

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
11 November 2021
Published by


Fears of a strong US inflation print proved correct. US consumer prices rose 0.9% m/m in Oct, leading to a 6.2% y/y growth, which is the highest in over 30 years. Core US inflation rose to 4.6% y/y due to a 0.6% m/m increase in October to take the core measure comfortably over double the targeted inflation measure. All this comes against a backdrop where US weekly jobless claims fell a further 4k to 267k as the labour market continues to stage a solid recovery.

As anticipated, US inflation surprised to the topside and sent investors scurrying back to the USD as a safe-haven instrument. Traditionally, higher inflation points to the loss of purchasing power of every USD. But in this case, the focus is on the stagflationary effect that an intense inflation episode could exert, and how the negative growth could hold asset price consequences. Any negative impact on growth would almost certainly translate into higher levels of risk aversion and turn investors more judicious in where they place their funds. Furthermore, the USD will also benefit from the higher probability that the Fed will need to bring forward the timing of any rate hike to help counter inflation, especially if it becomes stubbornly entrenched.


Angola: Fitch Solutions yesterday downgraded the growth forecasts for bank loans in Angola. After a 2.4% contraction in 2020, Fitch now forecasts bank lending to customers in Angola to grow 2.5% this year and 6.2% in 2022, which is a downward revision compared to 4.5% and 8.2% previously forecast. According to Fitch, "a stable Kwanza for the rest of the year and under appreciation in 2022 will act as a credit growth limiter." Fitch also said that it expects banks to "shift the focus from the public sector to the private sector in this and next year" and forecast the sector's profitability to improve in the coming quarters.

Egypt: Egypt's urban annual consumer price inflation in October slowed to 6.3% y/y from 6.6% y/y in the month prior. On a month-on-month basis, inflation climbed to 1.5% from 1.1%, marking the fastest pace of price growth since October 2020 amid rising food and education costs. Food and beverages, which account for the largest single component of the inflation basket, were up 11.6% on an annual basis and 1% from the previous month. Meanwhile, education was up 12.7% m/m, reflecting the new year school fee hikes. The current annual level still leaves inflation in the lower bracket of the central bank's target range of 5%-9% and helps keep Egypt's real rate among the highest in the world, a key factor drawing investors into the local debt market.

Nigeria: Central Bank Governor of Nigeria (CBN) Godwin Emefiele yesterday said that the CBN will start raising rates on the intervention loans to businesses hit by the coronavirus pandemic from April next year. According to Emefiele, the rates on loans will revert to 9% from the current 5% due to an increase in economic activity and the end of lockdowns.

Uganda: Uganda is seeking a UGX 3.8trn supplementary budget with the coronavirus pandemic having negatively impacted revenue. The Finance Ministry has asked lawmakers to approve additional funding that will partly be used to cater for shortfalls in Defense Ministry expenditure and classified expenses for the State House. Note that lockdown measures to contain the spread of the coronavirus pandemic disrupted revenue collection in Uganda. In July, Treasury asked ministries, departments, and agencies to cut spending this fiscal year due to an estimated revenue shortfall of about UGX 2trn.

Mozambique: The political turmoil in Mozambique continued to intensify yesterday as President Filipe Nyusi fired Defence Minister Jaime Neto, marking the third minister removed from the Cabinet within 24 hours. Recall that Interior Minister Amade Miquidade and Minister in the Presidency for Civil Affairs Adelaide Amurane were both fired on Tuesday. The ministerial reshuffle comes amid the deployment of regional forces in northern Mozambique, as the government and the SADC group of countries escalated their fight against the insurgents to restore peace and calm in the region. While the situation remains fragile, there has been some significant progress to restoring peace and order in the northern province of Cabo Delgado, which is home to much of Mozambique’s natural gas reserves.

Mozambique: Sticking with Mozambique, there was a big development relating to the tuna bond scandal on Wednesday. The $2bn tuna bond scandal sent the country’s economy into a free fall in 2016, resulting in a marked deterioration in its fiscal position in recent years. On Wednesday, South African High Court Judge Margaret Victor overturned a decision by South African Justice Minister Ronald Lamola to send Chang back to Mozambique, where Chang also faces charges. Judge Victor ruled that the former Finance Minister is to be extradited to the US. Recall that Chang has been in custody in a prison near Johannesburg since he was arrested at OR Tambo International Airport in December 2018 on account of a US warrant.

Forex: Inflation in Ghana moves further away from central bank target, partly due to a weaker Cedi

Headline inflation in Ghana accelerated further in October, coming in at a 15-month high of 11.0% y/y from 10.6% y/y in the month prior. The inflation print surpassed consensus expectations of 10.9% y/y and marked the fifth straight month that inflation has risen. On a month-to-month basis, prices climbed 0.6%. The higher inflation rate followed increases in housing, water, electricity, gas, and transport prices. Non-food price inflation rose to 11% from 9.9% in September, while food price inflation which has been the headline number's main driver, slowed to 11.0% from 11.5%.

Weakness in the Ghanaian Cedi is likely to have added topside inflationary pressures in October. For context, the Cedi lost around -0.82% and was the sixth-worst performing African currency against the USD. Last month, the Cedi recorded its seventh monthly loss out of eight as rising borrowing costs and investor preference for dollar-denominated securities pressured the local unit. Pulling back the lens, the Cedi is down by -3.91% on a year-to-date basis as a rebound in economic activity has contributed to the weakness given the economy's structure which is largely dependent on imports. Improving business activity has revived demand for dollars which far outstrips supply.

With inflation exceeding the Bank of Ghana's (BoG) 6%-10% inflation target range for the second straight month and risks tilted to the upside amid elevated oil prices,  a shortage of fertiliser impacting food production, and a weaker Cedi, the BoG may be forced to consider tightening monetary policy later this month. Recall at the last Monetary Policy Committee meeting, Governor Ernest Addison said that the committee stands ready to respond appropriately if there's a higher risk of inflation moving outside the target band.

Fixed Income: It goes from bad to worse for Ethiopia as the country faces another ratings downgrade

Ethiopian assets are on the receiving end of heavy hits from market bears as the situation in the country worsens. The latest blow to Ethiopian assets came overnight with S&P downgrading the country’s sovereign credit rating to CCC from CCC+ on the back of rising political uncertainty and civil conflict, which have drastically increased liquidity and default risks.

The global ratings agency said that the recent escalation of tensions that started in the Tigray region in November 2020 is adding significant uncertainty to the policy environment and pressuring Ethiopia's already-strained external liquidity position. Recall that in response to the escalation in instability in the northern parts of the country, the government announced a nationwide state of emergency earlier this month.

Adding salt to the wounds, the US government announced this month that it would consider cutting Ethiopia's duty-free access to the US under the African Growth and Opportunities Act citing human rights abuses. This comes in addition to the US President’s signing of an executive order in September threatening economic sanctions on individuals and corporations complicit in prolonging the conflict. S&P flagged that this will have implications for trade access, foreign investment, and economic growth.

S&P said that the outlook for Ethiopia from a credit ratings perspective is negative. S&P added that the negative outlook reflects the risk to Ethiopia's creditworthiness from heightened external and political pressures tied to the ongoing conflict. It also captures the risk that commercial creditors could be included as part of the government's debt-restructuring plans under the G20 Common Framework. S&P said that it could lower Ethiopia’s rating over the next 6-12 months if ongoing political turbulence and reduced financial support places further strain on Ethiopia's external debt repayment capacity or if the government signals its intention not to service interest payments on its upcoming commercial obligations, including the Eurobond payment due December 11, 2021. Given the mounting liquidity challenges and fiscal risks, Ethiopia is becoming more of a no-go area for investors.

Macroeconomic: South African Finance Minister set to present medium-term budget update later today

Fiscal dynamics are back in the spotlight today as traders set their sights on the Medium-Term Budget Policy Statement (MTBPS), which will provide an update on the path of fiscal policy and the trajectory of SA’s public finances. At his first budget update since assuming office, Finance Minister Enoch Godongwana will be able to paint a picture of fiscal improvement, particularly on the revenue side. Tax collections have far exceeded the estimates reflected in the February budget, boosted by a stronger-than-expected economic recovery and higher mining-sector royalties.

In addition to the better than expected tax intake, substantial economic growth revisions due to recent changes in the GDP estimation methodology mean key fiscal metrics such as debt-to-GDP and deficit-to-GDP will improve notably. As such, we expect to see a marked improvement in SA’s key fiscal metrics. That said, despite the improvement in SA’s debt metrics, the country’s public debt pile has continued to surge and remains a major concern in our eyes.

The government’s reluctance to stick to prudent debt consolidative measures amid mounting political pressures suggests that social welfare expenditure and the public sector wage bill will remain bloated in the years ahead. Add to that persistent financial risks related to SA’s ailing SOEs, and it quickly becomes clear that Minister Godongwana has a tough challenge ahead of him in steering the country towards a sustainable fiscal position.

While for the first time in recent history, there will be something to cheer about heading into the MTBPS, we continue to caution that SA remains in a fragile fiscal position. The government is facing growing calls for a basic income grant to replace the emergency cash handouts supporting around 10% of the population. In addition, the government will continue to face pressure from public-sector unions to raise wages, which make up a significant portion of the budget. Although the government has managed to agree to freeze the wage bull, the current agreement only covers one year. Therefore, the risk remains that unions strong-arm the government to increase public sector wages in the years ahead. Finally, it must be noted that SA has one of the largest differentials between debt servicing costs and economic growth, which implies that public debt will continue to increase in the coming years even if the government runs a balanced budget.