Macro Analysis /

Egypt, Kenya and Nigeria join the distressed club, Fitch downgrades Namibia

  • Forex: Persistent foreign exchange shortages could see Nigeria lose its frontier market status

  • Fixed Income: Three more African nations joined the distressed club in June

  • Macroeconomic: Food security remains a key challenge for African countries

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
27 June 2022
Published byETM Analytics


Oil prices have kicked off the new week on a steady footing this morning, holding onto Friday’s gains with the front-month Brent contract hovering around $113 per barrel while WTI is trading near $108 per barrel. We continue to see bullish market signals flashing even though crude has been caught up in the more broad-based selling of commodities in recent sessions, owing to global recession fears. Timespreads are still pointing to scarce supplies as demand has been holding up well against a backdrop of weaker output from several OPEC+ members, despite the cartel implementing output hikes every month. As a result, any further losses for crude owing to global economic concerns will remain short-lived and capped until we see signs that enough demand destruction is occurring to bring the market back into balance. Meanwhile, The US and Iran will reportedly resume negotiations this week, with the EU acting as a mediator between the two. Any newsflow from this will be eyed closely, although for now, it appears that any sort of deal that could bring Iranian crude back to the market is still a long way off.  

Quarter-end buying may feature prominently as a driver of risk appetite and the USD this week. The USD has been on the retreat and could extend further if fund managers make good on their guidance that they are looking to buy back into stock markets that have rerated to cheaper levels. Movements in the USD have been the driver of currency movements globally, and that is unlikely to change as it remains a key safe-haven instrument in which to hide. Developments in commodity markets and Ukraine and their impact on inflation and monetary policy remain the epicentre of all concerns. For now, the EUR-USD has stabilised just above 1.0550, while the GBP is trading up against 1.2280 against the USD this morning. The JPY is similarly consolidating around 134.80/dlr.


Egypt: To overcome challenges created by Western sanctions on Moscow over the war in Ukraine, Egypt and Russia are considering using their local currencies in trade transactions. According to Egypt's minister of trade industry, Egypt will adopt a payment mechanism to allow the use of the Russian ruble in trade exchange with Moscow. The financial sanctions have hindered Egypt's trade transactions with Russia, a major source of wheat. The new payment mechanism could help Egypt acquire the wheat it desperately needs. Wheat and grains form the cornerstone of a bread subsidy program used by about 70% of its population.

Kenya: As campaigning heats up ahead of the eagerly anticipated presidential election in August, Deputy President William Ruto on Friday vowed to offer interest-free student loans and double funding should he be elected as president. In a statement by Ruto, funding to the state-owned Higher Education Loans Board will rise to KES22bn ($186.7mn), while funding for research will grow to 2% of GDP from 0.8%. Ruto's main opponent Raila Odinga has pledged free education from early childhood to tertiary level and to employ more teachers. While the pledges from the two main candidates may draw support from the voters, it remains to be seen whether they will be feasible given Kenya's fragile fiscal position at present. The winner of the election will have to contend with a growing debt burden exacerbated by the coronavirus pandemic. Key fiscal metrics such as debt to GDP and debt servicing costs to GDP have risen sharply, 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.

Namibia: A study funded by the US Agency for International Development (USAID) has said that limiting the illegal trade in wildlife and bringing poaching to zero in Namibia could increase the contribution the tourism sector makes to the economy by 20% in the next decade. The USAID study added that success in these efforts would benefit tourism-related businesses and help to boost income from the sector to $1.5bn after a decade. Namibia has lost a significant number of rhinos, elephants, pangolins, and other wildlife to poaching. These losses have had a much broader impact, and as a result, tourism and conservation-hunting industries have adversely affected rural livelihoods, in addition to the impact on the domestic economy.

Namibia: As part of efforts to reduce its dependence on supplies from its neighbours, Namibia's state-owned electricity provider has started operating its first fully-owned solar-power plant. According to Namibia Power Corp, the 20-megawatt photovoltaic plant in the western Erongo region is expected to supply 67.8 gigawatt-hours of electricity annually. Given Namibia relies heavily on importing electricity from South Africa, Zambia, and Zimbabwe, the solar-power plant will lessen that dependency and potentially reduce the electricity import bill. Namibia, which is the driest country in sub-Saharan Africa and has more than 300 days of sunshine a year, aims to increase local generation capacity to 879 MW by 2025 from 624 MW, through the commissioning of 50 MW of independent power producer projects and an additional 220 MW NamPower, according to its deputy minister of mines and energy.

Nigeria: Minister of State for Petroleum Resources Timpre Sylva said on Friday that the government is working to enhance security to reduce oil theft, raise output, and bring back short-term production. Furthermore, Sylva expressed optimism that Nigeria will be able to meet its OPEC quota by August. Nigeria has been unable to boost its dollar supply despite higher oil prices as it cannot fulfill its OPEC+ quotas due to crude theft and diversion of oil revenues to subsidise gasoline prices for its population.

Namibia: Namibia was in the firing line of global rating agency Fitch over the weekend. Fitch downgraded Namibia’s Long-Term Foreign-Currency Issuer Default Rating to 'BB-' from 'BB’ previously and left the outlook unchanged at stable. In its rating review, Fitch said that Namibia’s fiscal risks are acute. The global rating agency said that modest growth prospects and a rigid expenditure profile would keep Namibia's fiscal deficits elevated relative to its 'BB' peers.

Forex: Persistent foreign exchange shortages could see Nigeria lose its frontier market status

As a result of persisting foreign exchange shortages, Nigeria is set to lose its frontier market status, according to the MSCI. The global provider of financial market indices indicated in a statement that it is looking at downgrading the MSCI Nigeria indexes to standalone markets status from frontier market status. The global head of Index Management Research was quoted as saying, "there has been a continual and severe deterioration in the ability to repatriate funds from Nigeria. Given the prolonged nature of the issues affecting the market's accessibility, we have put forth the consultation to reclassify the MSCI Nigeria Indexes."

Nigeria has been hamstrung by dollar scarcity amid an inability to capitalise on higher oil prices. As a result, the Central Bank of Nigeria has had to ration the supply of dollars forcing individuals and firms to turn to unauthorised dealers to meet their foreign exchange requirements. This has led to a hoarding of dollars and a creation of shortages sending the Nigerian naira to a record low 614 on Friday in the parallel market where it is freely traded. The dollar shortages have been exacerbated by increased political spending ahead of next year's presidential election and rising demand for imported petrol amid robust global oil prices on the back of the war in Ukraine. The naira's plunge in the parallel market has driven the premium between it and the official rate, which closed on Friday at NGN418.74 per dollar, to around 47%.

We are of the view that persistent weakness in the parallel market could force the CBN to devalue the currency once again. Since 2020 the CBN has done so in a bid to narrow the spread between the official and parallel market rates. Our in-house models suggest that the naira is overvalued by over 10% on a real effective exchange rate basis, suggesting room for depreciation.

Fixed Income: Three more African nations joined the distressed club in June

Fiscal risks are intensifying in Africa as global interest rates continue to rise, with central banks tightening monetary policy to curb soaring inflation and inflation expectations. The aggressive tightening in global monetary policy has driven up debt servicing costs across Africa while at the same time dampening demand in the international bond market, where many African governments have been funding themselves in recent years. This comes on the back of the devastating fiscal impact of the Covid-19 pandemic.

Fiscal premiums demanded by investors for holding African sovereign debt have surged over the past nine months as global financial market conditions tighten, compounding fiscal risks across the continent. This month has seen three African countries join the list of sovereign bonds trading at distressed levels. We define this as a sovereign bond yield trading near or above 1000bps over US Treasury yields. Kenya, Egypt and Nigeria were among four emerging market sovereigns to join the list of distressed nations this month.

Eurobond yields in Egypt, Kenya and Nigeria have surged this year, reflecting the impact of the global monetary policy tightening, the war in Ukraine and the supply crunch for food and fuels, which is driving inflation across the world to multi-decade highs. For context, Egypt’s 2032 Eurobond yield has risen almost 450bps since the start of the year, while the corresponding Kenyan and Nigerian yields have increased by 585bps and 520bps, respectively.

With lending conditions expected to worsen in the months ahead as fiscal pressures intensify and interest rates across the world continue to rise, we are likely to see the number of African Eurobond issuers in distressed territory rise. Moreover, the risk of another African sovereign defaulting is also expected to increase.

Macroeconomic: Food security remains a key challenge for African countries

Supply shocks relating to the war in Ukraine, soaring international food prices, and regional droughts have compounded the risk of a food crisis in Africa. Africa relies heavily on food imports from Russia and Ukraine and is therefore extremely sensitive to the war between the two European nations. According to the African Development Bank, Africa faces a shortage of at least 30mn metric tons of food, particularly wheat, maise and soybeans, as a result of the conflict in Ukraine.

With a large portion of the African continent already on the poverty line, the socio-economic impact of the food crisis has the potential to be massive if the necessary assistance and measures are not put in place. The African Development Bank called on the G7 ministerial conference to do more to tackle the increase in global food insecurity on Friday. In addition to food aid, the African Development Bank and African Union have jointly created the African Emergency Food Production plan to avert the looming food crisis.

The African Emergency Food Production program will provide 20mn smallholder farmers with certified seeds and will increase access to agriculture fertilisers and enable them to rapidly produce 38mn tons of food worth $12bn. As climate change worsens across the continent, it is imperative that there is more investment in food production and farming innovation. While we do expect food production to improve in the years ahead as more investment flows into Africa’s agriculture sector, near-term food insecurity risks remain acute.

Moreover, supply shortages and soaring international food prices are expected to continue to keep inflation across the continent elevated. This comes against the backdrop of elevated international oil prices, both of which suggest that central banks across the continent will have to remain hawkish in the months ahead until supply chain pressures subside and inflation across the continent moderates.