Macro Analysis /

EM debt issuance plunges at the start of 2022 amid tighter lending conditions

  • Forex: Bearish bias in the Kenyan Shilling persists but is showing signs of moderating

  • Fixed Income: Junk status emerging market sovereign debt issuance at a multi-year low amid taper fears

  • Macroeconomic: SA bonds defy broader bearish bias as optimism over the 2022 budget grows

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
18 February 2022
Published byETM Analytics


Geopolitically, concerning Ukraine, the US remains in the thick of it and has accepted an invitation to meet Russia next week on the condition that they do not invade Ukraine. Russia is raising the ante for the West to honour the Minsk agreements that were never fully implemented, but the US remains unconvinced of Russia's motives. The US still believes that Russia is angling for an invasion. Russia, for its part, contends that it is not looking to invade Ukraine. That being said, Russian President Putin will use the opportunity to gain some concessions out of Europe.

While the near-term outlook for the US economy is rosy, the medium to longer-term outlook is turning cloudy. A number of factors, including soaring inflation and expectations for tighter monetary policy conditions, are weighing on the longer-term outlook for the U.S. economy. As always, the leading indicator will provide some valuable insight into the health of the US economy and the growth outlook for the world's largest economy. For now, the indicator suggests that the recovery is set to persist this year, despite expectations for several rate hikes

There does not appear to be any safe-haven bid coming to the rescue of the USD, not even with the prospect of the Fed front-running its tightening and hiking rates more aggressively. The USD's lack of response to Bullard's hawkish comments also suggests that there are a lot of rate hikes priced in or that the market no longer believes him. Either way, there is no obvious reason to pile into the USD unless one anticipates a full-blown war to spark a big sell-off in global equity markets and a sharp rise in risk aversion.


Egypt: Egypt has sold $28.7bn worth of bonds this year as of February 16, according to data compiled byu Bloomberg. The issuance was down 9.7% compared to the same period a year earlier. Meanwhile, the USD value of pound bond sales reached $26.7bn, up 2.75 versus the same period last year. Local currency issuance is at the highest since 2011, while foreign currency issuance was down 66% to $1.93bn compared to the comparable period a year earlier.

Morocco: Industry and Trade Minister Ryad Mezzour has indicated that subsidies are projected to cost the state MAD 20bn this year, 18% above what was budgeted by the crop and fossil fuels importing country. Mezzour, added that authorities would not alter subsidy policy even as international prices continue to rise. Note that official data shows that subsidy spending in January has already consumed almost a third of the total budgeted for 2022.

Mali: Data from West Africa monetary union’s debt Umoa-Titres showed that Mali has defaulted on more than $93mn in interest and principal payment since January due to regional sanctions. Since the end of January, Mali missed payments on interest on treasury bonds on four occasions. It also missed a February 10 deadline to pay the principal on a treasury bond. The defaults highlight Mali’s worsening economic situation due to severe sanctions, which include border closure and financial restrictions imposed on the country by the regional bloc over the delay of election by the country’s military junta. On Wednesday, an official from Moody’s said that the missed payments were credit negative, which increases the risk of losses on regional banks that hold Mali’s sovereign bonds.

Rwanda: In a surprise move, the National Bank of Rwanda hiked its benchmark interest rate for the first time in almost 10-years as it tries to balance the need to stem inflation with underpinning the recovery of the economy. The Monetary Policy Committee (MPC) raised the key rate by half a percentage to 5.0%. According to Governor John Rwangombwa the rate increase was based on the bank’s projection that inflation “threatens to go above our upper band of 8% by the end of the year.” Inflation in Rwanda is forecast to average 7.5% this year from about 0.85 in 2022, partly due to an anticipated surge in the cost of food. Note that the rate hike by Rwanda’s central bank is the biggest in Sub-Saharan Africa this year.

Zimbabwe: Finance Minister Mthuli Ncube, speaking in an interview on the sidelines of the EU-Africa summit in Brussels, said that Zimbabwe has secured a guarantor to support the planned sale of a $200mn bond which will be listed on the Victoria Falls Exchange. Ncube said “we think that in the next two months, we should be able to release the bond. We are looking to raise $200mn, but also to test the market, potentially tranching it into three parts.” Ncube added that the country had secured “an international bank” to offer a guarantee for the bond but stopped short of providing details. Note that the Victoria Falls Exchange began operating in late 2020 and allows trading exclusively in dollar securities to give investors the option to raise funding in hard currency.  

Oil producers: Oil is heading for its first weekly loss since mid-December as prices have come off their highs amid positive prospects regarding the Ukraine situation, and with utterings that an Iran deal is close. The Brent front-month contract is trading back around $92.40 per barrel as a result after touching highs of $96.78 per barrel earlier this week. The news on the Ukraine front is that US Secretary of State Blinken will be holding a meeting with his Russian counterpart next week, allaying some fears that an invasion is imminent. Therefore, the risk premium built into oil at the moment may be unwound a little further.

Forex: Bearish bias in the Kenyan Shilling persists but is showing signs of moderating

Foreign currency reserves play a crucial role in determining a currency's resilience or lack thereof. With this in mind, it is worth looking at the latest data from the Central Bank of Kenya (CBK). Weekly data showed that foreign exchange reserves decreased slightly from $8.22bn on February 3 to $8.20bn on February 10. Pulling back the lens, Kenya's foreign exchange reserves have fallen by $621mn since the beginning of the year. The CBK has used some of its reserves to support the Kenyan Shilling (KES), which has remained under pressure at the start of the year. The KES, down by -0.42% on a year-to-date basis against the USD, has weakened due to increased hard currency demand from oil and energy sectors. Adding downside pressure to reserves has been the fact that the CBK has reportedly used a portion of them to repay loans from China for the construction of the standard gauge railway.

While the reserves have edged lower, the CBK noted that the current level of foreign exchange remains adequate and equates to 5.01 months of import cover. This meets the bank's statutory requirement to maintain at least four months of import cover and the EAC region's convergence criteria of 4.5 months of import cover.

Following lower than expected dollar inflows from the most recent auction, the KES is expected to come under pressure next week, especially as demand for hard currency remains robust in the oil and energy sectors. This, therefore, suggests that further downside risks exist to the country's foreign exchange reserves.

Fixed Income: Junk status emerging market sovereign debt issuance at a multi-year low amid taper fears

It is no secret that it has been a tough start to the year for fixed income markets, primarily due to the hawkish pivot in monetary policy from central banks across the world and the high level of volatility across financial markets. The aggressive shift in monetary policy comes on the back of persistent supply chain pressures and the sustained rally in commodities, with food and energy prices reaching multi-year highs at the start of 2022. The bearish bias across fixed income markets has been widespread, with US Treasury and emerging market bond yields, for the most part, higher since the start of the year.

Emerging market debt sales, in particular, have suffered as traders price in more aggressive monetary policy tightening and a shift in the tide of global dollar liquidity. Data compiled by Bloomberg shows that junk status (non-investment grade) emerging market bond issuance is running at the slowest pace in six years at the start of 2022. For context, junk-rated emerging market bond issuance from January 1 to February 15 sits at around $10bn. This compares to just shy of $50bn for the same period in 2021 and 2020.

While it has been a slow start to the year in terms of issuance, with almost $1trn of dollar- and euro-denominated emerging market debt set to mature this year against the backdrop of wide financing gaps, governments are likely to be left with little choice but to return to the debt market and pay the higher price for borrowing in the months to come. Note that the average yield for non-investment grade emerging market bonds sits at around 8% currently, its highest level since mid-2020.

History shows that emerging market bonds tend to sell off in the run-up to a global rate hiking cycle. However, once the hiking cycle has kicked off, the higher yields on offer tend to lure investors back into emerging market bonds. We expect this to be the case later this year, especially given lingering concerns over growth and extremely high base effects of inflation, which should prompt a marked deceleration in inflation next year and a possible correction lower in lending rates the world over. Brazil is a case in point, with its benchmark interest seen rising further to 12.25% at the end of this year. Thereafter its benchmark interest rate is seen moderating to 8.00% at the end of next year. The market is also now pricing for a moderate easing in monetary policy in the US over the medium term.

In terms of Africa, there are already signs of increased activity on the issuance front, with several governments talking about potential hard currency issuances. We have even seen the likes of Zimbabwe looking to issue $200mn in local currency debt in the months ahead. As mentioned above, higher borrowing costs will be a tough pill that government’s in Africa will have to swallow as they all have financing needs to fulfil.

Macroeconomic: SA bonds defy broader bearish bias as optimism over the 2022 budget grows

This is arguably the most optimistic we have been going into a South African annual budget in a decade. In his MTBPS speech in November, Finance Minister Godongwana made a number of key commitments including, a list of structural reforms, reducing support for dysfunctional SOEs and utilizing any near-term windfalls to reduce the country's overall debt burden. Encouragingly, the Finance Minister has also communicated that there is a need to crowd in the private sector, allowing it to play a more significant role in augmenting economic growth.

That said, these promises require action to have any material impact on the path of SA both from a fiscal and economic perspective. The government has been gifted a lifeline after a change in the methodology used to calculate GDP suddenly makes the country's debt pile look significantly more manageable. Therefore, the government must use the window of opportunity provided by the rebasing of GDP and better than expected mining revenues to steer the country towards a brighter future for all.

While there has been an improvement in SA’s of SOE’s on the state, fiscal position over the past year, due to surging commodity prices and the rebasing of GDP, SA’s economy remains vulnerable in the event of another crisis given its weak fiscal position and lack of fiscal buffers. Given SA’s lacklustre economic outlook, the heavy dependence and lingering social problems, it is unlikely that the government will be in a position to rebuild these buffers in the coming years unless some serious reforms are rolled out.

Although SA remains in a fragile fiscal position, the government’s bond term structure is favourable from a credit rating perspective, given its relatively long duration debt profile and the fact that most of its debt is denominated in local currency. Adding to the attractiveness of SA bonds is how liquid the local bond market is relative to some of its EM peers

Financial markets will be watching closely to see how the government uses this fiscal space in the upcoming budget. Concrete evidence of fiscal constraint and commitment to structural reforms will undoubtedly position SA as a top emerging market investment destination in 2022. It is in the hands of the Finance Minister to make the most of this opportunity.