Macro Analysis /

EM debt default fears have eased, Ghanaian cedi continues to outshine its peers

  • Forex: Ghanaian cedi extends recovery as debt restructuring takes place

  • Fixed Income: Emerging market debt default fears have eased

  • Macroeconomic: Recap of latest Africa interest rate decisions

Alexa Archibald
Alexa Archibald

Commodities Analyst

Kieran Siney
Takudzwa Ndawona
ETM Analytics
8 December 2022
Published byETM Analytics


FX: Ahead of the FOMC decision next week, investors are positioning for a slightly easier stance to monetary tightening, where the Fed will raise rates by 50bp. With inflation on the retreat and getting released just before the FOMC decision, the Fed will have the benefit of seeing the latest inflation print. Inflation is currently reversing and potentially dropping faster than anticipated. If the inflation picture continues to moderate convincingly, the probability is high that the market will shift to an easier monetary policy outlook and the USD will soften. The USD appears to be on the defensive and will likely remain that way through the trading sessions ahead, especially as China moderates its Covid policies and risk appetite steadily improves. Add to that the collection of economic data that is showing a turn in the business cycle, and the USD will remain on the defensive. The EUR-USD is trading just below 1.0500, while the GBP-USD is now just under 1.2180. Both majors appear to be settling into a range ahead of the weekend and next week’s FOMC decision.

Fixed income: US bond yields tumbled yesterday, dropping by between 12bp and 14bp across the curve. The move lower for yields was started by the weaker-than-expected unit labour cost data out of the US, with the moves then exacerbated by the current positioning backdrop, receiving flows in the swaps market, and rising geopolitical tensions. The 10yr benchmark ended the session near 3.405%, while the 2v10 spread continued to invert and closed the day near -84bp. We are seeing a bit of a reversal in early trade this morning, with both the 2yr and 10yr yields up by around 4bp through the Asian session. However, this will remain limited given a lack of data coming out that could ease recession concerns, while Fedspeakers are in their blackout period ahead of next week’s FOMC meeting.


Kenya: Kenyais reportedly in talks with the World Bank for a $750 million (KES 92.1 billion) concessional loan to be secured before the end of June next year. This will be Kenya’s fifth loan under the World Bank’s Development Policy Operation (DPO) framework, which has seen the country access $3.25 billion (KES 399 billion at the present exchange rate). The loan will be part of the KES 280.7 billion ($2.3 billion) earmarked for external borrowing in the current financial year. “The proposed package under discussion with the World Bank aims at promoting sustainable, resilient and inclusive growth,” Finance Minister Njuguna Ndung’u was reported saying.

Nigeria: The Central Bank of Nigeria (CBN) slashed the daily withdrawal limit from automatic teller machines in a bid to boost digital payments in Africa’s most-populous nation. Now the maximum a customer can withdraw at ATMs is 20,000 naira ($44.97) a day, down from the previous limit of 150,000 naira. Meanwhile, weekly cash withdrawals from banks are restricted to 100,000 naira for individuals and 500,000 naira for corporations, and any amount above that limit will attract a fee of 5% and 10%, respectively, the central bank said. The decision is the latest in a string of central bank orders aimed at limiting the use of cash and expanding digital currencies to help improve access to banking.

Morocco: The Moroccan government is in talks with a private Indian group, Adani, to establish two hydrogen projects in 2023. Moroccan Minister of Energy Transition and Sustainable Development Leila Benali stated that Adani is interested in Moroccan hydrogen projects, which aim to produce cost-efficient green energy for export to the EU and diversify its energy supply chain away from Russia. Recently, Morocco has placed a strong emphasis on renewable energy, drawing major projects for the production of energy from wind turbines and solar photovoltaic panels. In light of the current supply situation, the government is hopeful that green hydrogen will reduce Morocco's reliance on imported ammonia, which can be produced using hydrogen instead.

Kenya: A local newspaper reported that the country’s electricity distributor is seeking regulatory approval to bill some consumers in foreign currency due to rising exposure to the depreciating shilling and shortage of foreign currency. Kenya’s power sales are currently denominated in local currency, while power-purchase agreements are in different currencies, resulting in foreign exchange risk. The planned billing changes are targeted at customers such as export processing zones, foreign missions and the horticulture industry, whose incomes are in foreign currencies.

Nigeria: Oil production in Nigeria is starting to recover as measures put in place to deal with oil theft bear fruit. Chief upstream investment officer at the state-owned Nigerian National Petroleum Co., Bala Wunti, reported that the country raised production to 1.59mn barrels/day as of December 6, with the increase in output largely on the back of the collaboration between the NNPC and private contractors employed to tackle crude theft. Wunti added that lost output averaging 250k barrels/day in the past six months had been recovered, and oil production is now projected to increase to 1.8mn barrels/day by next month.

Africa: The African Development Fund (ADF), which is a concessional window of the African Development Bank (ADB), providing grants and soft loans to Africa’s low-income countries, secured $8.9bn in funding. In a statement from the ADB, the largest replenishment in the history of the bank will fund the 2023 to 2025 financing cycle that will help connect 20mn people to electricity, 24mn people will benefit from improvements in agriculture, access to water and sanitation for 32mn people and 15mn people will benefit from improved access to transport. 

Oil: Oil markets continued their plunge yesterday, with Brent crude sliding below $77 per barrel at one point during the session. Recession risks and demand concerns are growing, which have pressured the market and taken prices down to below pre-war levels, with WTI nearing the $70 per barrel handle after both major benchmark contracts fell by more than 10% over the last four sessions. Timespreads also continue to widen within contango for both oil grades, highlighting ample supplies as demand levels weaken into the final weeks of the year. This weakening demand was affirmed yesterday by official US government data showing a build of distillate and fuel inventories.

Forex: Ghanaian cedi extends recovery as debt restructuring takes place

The Ghanaian cedi is outperforming its African peers this week amid optimism that the debt restructuring will lead to a deal with the International Monetary Fund and a more sustainable fiscal outlook. Specifically, the Ghanaian cedi has gained an impressive 7.25% against the USD on the week, in what has otherwise been a mixed week for African FX amid a whipsawing USD. While the downward momentum in the USD/GHS remains intact, the pair will likely run into some technical support today at the 50-day moving average (12.9589).

That said, should investors see more evidence that the debt restructuring is going to plan, making a deal with the IMF more likely, we should see the USD/GHS sail past the key support level. Note that the USD/GHS has traded below the 50-DMA since December 2021. One of the focal points for investors will be local private pensions which have pushed back against the government’s proposed debt exchange. Moreover, details on the restructuring of foreign currency debt are yet to be announced, which also has the ability to impact the performance of the GHS.

From a valuation perspective, notwithstanding the sharp rebound this week, the GHS is still undervalued by around 30% on a PPP basis, suggesting that there is room for a further recovery in the currency. That said, much of the undervaluation in the GHS is warranted, given Ghana's fragile fiscal and macroeconomic conditions. The pullback in the dollar should provide some much-needed reprieve for the GHS. Notwithstanding the recent retreat, the trade-weighted USD continues to trade at very expensive levels, last seen in the early 1980s. Historically, these levels have been difficult to sustain and there is no reason to believe that this time will be any different. The unwind of the dollar’s overvaluation has begun and will likely accelerate through 2023.

Fixed Income: Emerging market debt default fears have eased

While emerging market bonds have come under some selling pressure over the past two sessions, the broad recovery that began in the final week of October remains intact. For context, the Emerging Market Total Return Bond Index is up more than 10% since the lows recorded in October. While much of the recovery has been attributed to expectations for a pivot in global monetary policy amid mounting growth concerns, it is worth noting that there has been a notable improvement in the fiscal outlook for emerging market sovereigns.

This notion is underpinned by the recent decline in the Markit CDX Emerging Market Index, which we use as a proxy for EM default risk. Specifically, the gauge has fallen from a peak of nearly 400bps in July to around 240bps. The cooling of default risk comes on the back of signs that the pace of global monetary policy tightening will slow in the months ahead, with traders pricing in the risk of possible rate cuts in 2023 in several key economies. Another factor has been the marked increase in financial aid to heavily indebted countries from international lenders such as the IMF and the World Bank.

The adoption of more conservative fiscal policy across many emerging and frontier markets has aided the easing of default risks. We have seen a number of governments cut back on expenditure following two years of aggressive spending to cushion against the Covid-19 pandemic. Moreover, while we have seen a correction lower in many commodity prices relative to pre-pandemic levels, international commodity prices remain elevated, helping to shore up the coffers of commodity-exporting nations. While it is encouraging to note that default risks in the emerging market space have cooled, many sovereigns still find themselves in a position of fiscal distress. The most fiscally fragile countries in Africa are Zambia, Ethiopia and Ghana.

Macroeconomic: Recap of latest Africa interest rate decisions

The last few weeks have seen many African central banks deliver their final interest rate decisions for 2022. For the most part, African central banks remain relatively hawkish as inflation in the region continues to run hot. Moreover, African central banks want to maintain their monetary policy differential with the US. Therefore, as the US hikes rates, so have most African central banks.

That said, while several African central banks continued to hike rates in their final policy decisions for 2022, several central banks voted in favour of leaving rates on hold, even as the Federal Reserve continues to hike rates. The latest African central bank to leave rates on hold is the Bank of Uganda, which voted in favour of keeping its Central Bank Rate at 10.00% on Wednesday.

While inflation in Uganda continues to run hot, with headline inflation still buoyed in double-digit territory, inflation pressures are easing and expected to fade in the coming months amid a drop in food prices amid improved supply. The Bank of Uganda expects inflation to average between 6 to 8% in 2023 and stabilize around the medium-term target by the end of 2023.

While a number of African central banks left their rates on hold in the latest round of rate decisions, Ghana, Nigeria, South Africa, Namibia, and Kenya continued to hike rates to anchor inflation and expectations. The Bank of Ghana was the most aggressive, hiking its benchmark interest rate by 250bps as the currency crisis continues to amplify inflation pressures.  

Looking ahead, high-base effects are going to start to come into play. Moreover, international commodity prices are correcting lower against the backdrop of slowing global growth, both of which point to softer supply-side price pressures. Proprietary indicators also suggest that the USD is ripe for a correction lower, which should provide African currencies with much-needed reprieve. While inflation pressures are expected to remain robust in the near term, we expect inflation across the continent to ease from March.