Macro Analysis /

Ethiopian assets rebound as tensions in Tigray ease, USD plunges on Fed comments

  • Forex: Ugandan Shilling extends its winning streak at the start of 2022

  • Fixed Income: Ethiopia’s 2024 Eurobond stages a recovery as security threats in Tigray ease

  • Macroeconomic: Bank of Ghana leaves rates on hold, calls on government to cut spending to ease inflation

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
1 February 2022
Published byETM Analytics


Wall Street posted another stellar session overnight, unwinding more of the losses sustained earlier in the month. It was still a very poor month for equity markets. However, the bargain hunting that emerged prevented it from being much worse. The recovery now helps to ease risk aversion even more and will offer a boost to riskier, higher beta markets. It also means that the USD may come in for a deeper correction.

The catalyst for the Wall Street surge and the USD retreat were comments from Fed speakers yesterday afternoon that was slightly less inflexible on the monetary policy outlook than the FOMC statement alluded to. Although an end to QE and a hike in March is still on the cards, what happens after that is less clear and will depend on a combination of economic data and the manner in which inflation unfolds. Any moderation in inflationary pressures could change expectations concerning the Fed's anticipated rate hikes and the moderation of the Fed balance sheet.

Oil had its best start to the year in three decades this January as resilient demand and tight supplies continued to support the market, driving the front-month Brent future above the $90 per barrel mark for the first time since 2014. This morning, however, we have seen the contract drop back below this key level amid some likely profit-taking ahead of OPEC+’s next meeting, which takes place tomorrow. Brent gapped lower at the open this morning and is currently holding steady near $89.50 per barrel in anticipation of the next OPEC+ output increase announcement.                                                                        


Egypt: Finance Minister Mohammed Maait has indicated that Egypt is set to resume its privatisation program in March. Minister Maait was quoted as saying, “we can expect more state-owned companies to offer shares on the EGX in the coming weeks.” The comment came days after Planning Minister Hala El-Said announced that the government plans to accelerate privatisation by selling stakes in state-owned firms every month or two. The government’s privatisation drive gained momentum late last year with the successful IPO of state fintech firm e-Finance and a secondary stake sale by Abu Qir Fertilizers. Before then, the program had only delivered one secondary offering in the three years since its announcement due to poor global market conditions and the pandemic.

Ethiopia: State-owned Ethiopia Telecommunications Corp. failed to reach its first-half revenue target due to outages and disruptions caused by the war in the north of the country. According to CEO Frehiwot Tamiru, Ethio Telecom raked in ETB 28bn ($561mn) in the six months through January 7. That was 7% more than a year earlier, but 14% below the target. Meanwhile, property worth almost ETB 329mn was destroyed in the violence. Note that the conflict has dented investor confidence in one of the world’s fastest-growing economies leading to capital flight.

Ghana: Data from the Bank of Ghana showed that gross reserves fell to a 6-month of $9.70bn in December from $10.80bn in the month prior. According to the BoG, the current level of gross reserves equates to 4.4 months of import cover and compares with a reserve position of $8.6bn (4.0 months of import cover) at the end of 2020. However, as of January 28, gross reserves have since increased to $9.9bn. The improvement in the reserve position in January is likely to provide some buffer for the local currency going forward.

Kenya: Headline inflation in Kenya slowed to a 14-month low in January, coming in at 5.39% y/y from 5.73% y/y in the month prior. The slower pace of price growth in the economy was a result of food and transport costs rising at a slower price. On a month-on-month basis, prices rose 0.3%. A further breakdown of the data showed that the increase in the food and non-alcoholic drinks index, which comprises a third of the inflation basket, rose 8.89% from a year ago due to the increase in the cost of items such as cabbages and spinach. Meanwhile, housing, water, electricity, gas and other fuels inflation slowed to 5.11% from 6.2% in December. Overall inflation in Kenya remains within the central bank’s 2.5% - 7% range, and Governor Patrick Njoroge last week said that a 15% cut on electricity tariff effective January, and the continued tapping of a fuel subsidy to keep prices stable, will help anchor inflation in the near- and medium-term. It is worth noting that a weaker Kenyan Shilling poses upsides risks to the inflation outlook.

Kenya: Provisional data from the Central Bank of Kenya showed that Kenya’s current account balance is estimated at 5.4% of GDP in 2021 compared to 4.6% of GDP in 2020. The widening of the current account deficit according to the CBK reflects a higher import bill, particularly oil, which more than offset increased receipts from agricultural and services exports, and remittances. From a currency perspective, a widening current account deficit poses further downside risks to the Kenyan Shilling, which has come under notable selling pressure in recent weeks.

South Africa: Less than a week after a relatively hawkish FOMC statement, Fed speakers appear to be walking back some of that hawkishness and made the outlook for monetary policy and rates a little more data-dependent. Whether that be a response to the financial market volatility sparked or merely softer views within the Fed remain to be seen. However, the result was a retreat in the USD, the biggest in some three weeks as investors repositioned for a Fed that would not hike regardless. In a more indebted society, neutral rates, output gaps and inflation projections can change, especially if underlying monetary forces moderate. For the ZAR this was good news and helped it recover to levels approaching those seen before the Fed and SARB decisions. Readers should recall just how much of this news had been priced in ahead of these decisions. Had the market been given information that caused it to price in significantly more, it would have struggled to do so. The overnight USD-ZAR retreat is therefore justified and logical.

Forex: Ugandan Shilling extends its winning streak at the start of 2022

The Ugandan Shilling is, without a doubt, the standout currency in the East African currency complex. Notwithstanding the devastating impact of the Covid-19 pandemic on Uganda’s economy, Ugandan assets have remained remarkably resilient in recent months. This is due to a number of factors, including prudent fiscal and monetary policy. Speaking of which, data published yesterday showed that headline inflation in January slowed to 2.7% y/y in December from 2.9% y/y in November. The December reading remained below the lower-end of the central bank's 3%-7%, suggesting that inflation remains subdued in Uganda. That's said, the central bank at its December meeting warned that risks to the outlook remain tilted to the upside as the economy recovers and the spare capacity is absorbed, and energy costs remain high.

For now, the slowdown in inflation has seen the country's real rate (Policy rate – CPI) widen to 3.8%. From a currency perspective, the highly competitive real rate is set to further underpin the Ugandan Shilling's (UGX) attractiveness. Note a high real rate bolsters the country's appeal as a carry trade destination for international investors. Therefore, it is unsurprising to see that the UGX  gained 1.45% in January, making it the second-best performing East African currency and sixth best performing African currency last month. In addition to a competitive real rate, the UGX has been supported by hard currency inflows from remittances and exports of commodities like coffee.

While the UGX firmed yesterday, it is worth pointing out that the currency is seen trading within a broadly stable range (3.500-3.520) in the coming days on the back of typical end-of-month inflows amid low importer appetite.

Fixed Income: Ethiopia’s 2024 Eurobond stages a recovery as security threats in Tigray ease

Ethiopia has continued to make headlines in recent months for all of the wrong reasons. The country has faced a swathe of sovereign credit rating downgrades over the past 12 months on the back of an escalating civil war, economic sanctions, a worsening economic outlook and a looming fiscal crisis. Adding to investor concerns are Ethiopia’s low level of foreign reserves, increasing external financing needs and delays to expected sources of external financing.

While Ethiopia’s 2024 Eurobond was amongst the worst performing hard currency bonds in the world last year, it is worth noting that Ethiopian bonds are amongst the best performing sovereign debt in emerging markets this year following a rally sparked by the government’s decision to end a state of emergency as a 15-month conflict with rebel forces eases. At the time of writing, Ethiopian bonds had posted returns of 13% this year. That said, there is still a massive fiscal premium baked into Ethiopian bonds, reflecting the fiscal deterioration that has taken place over the past year. In 2021, Ethiopian bonds lost 28%, with much of this coming after the government announced a nationwide state of emergency in November after tensions in Tigray escalated.

While the situation in Tigray remains hostile, the have been a number of reports that the situation in Tigray is cooling off as Tigrayan forces retreat. The United Nations said in a statement that there is a demonstratable effort from the government to restore peace in the region. Moreover, after a consecutive run of rating downgrades, global credit rating agency Fitch affirmed Ethiopia’s foreign currency debt rating at CCC, a sign that risks associated with Ethiopia’s outlook are stabilising. Whether this will be a turning point for Ethiopia remains to be seen. While we have turned less bearish, we advise investors to remain cautious of investing in Ethiopian assets.

Macroeconomic: Bank of Ghana leaves rates on hold, calls on government to cut spending to ease inflation

While inflation in Ghana has trended higher in recent months and is above the central bank’s inflation target, the Bank of Ghana’s Monetary Policy Committee voted in favour of leaving its benchmark interest rate on hold on Monday. The move was in line with expectations, with the central bank leaving the key rate at 14.50%. Policymakers said that they are still assessing the impact of the November hike, where they raised rates by 100bps in a bid to quell inflationary pressures.

The MPC said in its statement that it has called on the government to implement proposed spending cuts to help cool inflation. Policymakers added that they stand ready to call an extraordinary meeting to re-assess the inflation outlook over the forecast horizon and take the necessary policy decisions accordingly if the measures taken don’t keep inflation in check.

Finance Minister Ofori-Atta recently said that the government is willing to slash spending by as much as 20%, depending on the performance of revenue, to help steer the country to a more sustainable debt trajectory as well as help ease inflation pressures. As pointed out last week, the comments from the Finance Minister have prompted a marked recovery in Ghanaian assets, which up until now have been amongst the worst performing African assets.

Note that headline inflation rose to a near 5-year high of 12.6% y/y in December. The central bank said that given the robust supply-side price pressures, headline inflation is expected to remain buoyed above its 6-10% inflation target in the coming year. Recall that annual inflation has breached the inflation target ceiling since September. In its closing remarks, the central bank said they expect the decisive implementation of the fiscal correction measures, especially the 20% cut in expenditure, to help moderate the upside risk to the inflation outlook. That said, while this should help keep inflation from blowing out further, we still assess inflation risks to be skewed to the upside.