Macro Analysis /

ETM Africa Insight 22 April 2021

  • Falling crude oil prices weigh on the Nigerian naira

  • African bonds under pressure in 2021 as global reflation bets intensify

  • Trouncing consensus expectations, Ghana’s economy expands by 3.3% in Q4 2020

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
22 April 2021
Published byETM Analytics


Headlining the international calendar today is the ECB rate decision. No major changes are expected at the ECB monetary policy meeting this week. The bank no longer needs to worry about rising yields, meaning that any changes to bond purchase levels will likely wait until the next meeting. The bank will unlikely change its assessment of the balance of risks facing the regional economy, but the more hawkish among them will look to contained yields and a recovery across the globe as reasons to not push for more stimulus. The tone of Lagarde's press conference will be key, but it is most likely that this week's meeting will turn out to be a damp squib.

 Today will see the US government announce its targets for climate change. In sharp contrast to Trump, the Biden administration is looking to take a lead role in Climate Change efforts. Climate activists are expecting the US to announce bold targets. There is however a fine balance that needs to be met. Forcing a change too aggressively can be disruptive. Moving too slowly will have a different set of circumstances and prompt criticism. We expect an announcement soon, which will likely shape the outlook for energy in the US economy for generations to come.

Although downside momentum appears to have stabilised, the bias remains intact. The USD has succumbed to pressure which has mounted as US Treasury yields have moderated back down. However, the recent volatility in equity markets has bolstered demand for USDs and some investors have sought to buy the USD dips. Given the lack of data to trade on and the upcoming ECB guidance today, the USD may well consolidate through the final two sessions of the week, before a busier data week resumes next week.

Gold remains focused on the topside with the $1800.00/oz handle now firmly in the cross hairs as lower US Treasury yields and a weaker USD support the price. In addition to the market influences, a safe haven bid is coming through this morning amid concerns about a deteriorating virus situation. COVID-19 infection rates are rising in certain parts of the globe leading to fears of new lockdowns.


Ghana: Data released by Ghana Statistical Services showed that producer price inflation accelerated for the third consecutive month in March. For context, producer price inflation quickened from 10.3% y/y in February to 13.0% y/y in March, its fastest pace of growth in 14 months. The persistent increase in producer prices can be partly attributed to the rise in global oil prices and the supply side constraints due to the adverse effects of the coronavirus pandemic. With supply-side inflation trending higher, we are likely to see consumer price inflation remain buoyed above the upper band of the Bank of Ghana’s inflation target if companies can pass on these higher costs to consumers.

Mozambique: Speaking on Wednesday, Mozambican President Filipe Nyusi said that the government will continue to fight the insurgency in the northern parts of the country so that peace can be established. In his speech in the country’s capital, President Nyusi noted that the government must take a measured approach in response to “terrorist attacks” in Cabo Delgado province, but added that it needs to keep a cool head and be very rational in its decisions. The course of action the government has taken so far remains ineffective and has seen Total SE’s $20bn LNG project stall. This is likely to threaten the Mozambican economy, which is relying on the project to boost growth.

Kenya: The Central Bank of Kenya (CBK) reported that the earnings from Kenyans living abroad rebounded in March, coming in at $290.8mn compared with $260.3mn in the previous month. The increase in foreign remittances was mainly due to increased inflows from North America. Note that the March 2021 overseas remittances figure is notably higher than the $228.8mn received during the same period in 2020. The increase in remittance flows in March was likely a function of easing restrictions and further reopening the economy. This increase in foreign remittances is likely to offer some support to the Kenyan shilling.

Nigeria: During parliamentary proceedings held yesterday, the Nigerian Senate approved a plan by President Muhammadu Buhari to borrow $2.7bn from international lenders to fund critical projects across its economy. According to the chairman of the approving committee, Clifford Ordia, the funds will be sourced from the Export-Import Bank of Brazil, World Bank and Deutsche Bank of Germany. The bigger portion of the finances would be disbursed to the country’s 36 states and the remainder to finance priority projects. Tapping into the international market will drive higher the country’s debt obligations which are already using up about 50% of Nigeria’s revenue.

Forex: Falling crude oil prices weigh on the Nigerian naira

Following more than two months of consolidating within the 408/410 range, the USD-NGN breached above the upper band of the range on Wednesday. The pair rose by 0.29% to reach a high of 410.21 yesterday. The recent rise in the USD-NGN comes on the back of the decline in global crude oil prices.

The topside momentum in oil appears to be fading, with Brent crude falling for a third straight session this morning. Since the start of the week, oil has dropped by almost 2.50%, fuelled by an equity market sell-off as investors reevaluated the global economic outlook amid rising virus cases in countries such as India and Japan.

Additional topside impetus for the USD-NGN has stemmed from lingering idiosyncratic vulnerabilities in Nigeria, which include a flagging economy, high debt servicing obligations, dollar illiquidity, looming stagflation and deeply negative real rates.

The recent sell-off has seen the NGN extend its year-to-date losses to more than 3.00% against the USD, making it the third-worst performing African currency this year.

On a trade-weighted valuation basis, the NGN is overvalued by around 6.00%, according to the in-house PPP model. This overvaluation is partly due to the central bank FX market interventions that prevent the currency from returning to its fair value. It must be noted that Nigeria’s FX reserves remain fairly healthy and should provide enough ammunition for the central bank to continue supporting the NGN through its market interventions in the foreseeable future.

Fixed income: African bonds under pressure in 2021 as global reflation bets intensify

Expectations of rising inflation the world over have come roaring back since the start of 2021, with the global economy adjusting to its new normal with massive levels of both monetary and fiscal stimulus set to support a strong economic rebound. The increase in expectations for faster inflation sparked one of the worst periods for bond markets in recent years.

While African bonds have regained some of their earlier loss in recent sessions, tracking the recovery in US Treasuries that began at the start of April, the broader bias across African bonds markets this year is decisively bearish. This is reflected by the decline in Bloomberg’s African Bond Index, which excludes South Africa, driven by a surge in US Treasury yields amid growing reflation bets.

For context, the African Bond Index has fallen by around 2.5% this year. Interestingly, this is slightly less than the JP Morgan Emerging Market Bond Index, which is done 2.8% in 2021. Note that we use the JP Morgan Emerging Market Bond Index as a proxy for the performance of emerging market bonds.

While African bonds and emerging market have fared similarly this year, it is worth pointing out that African bonds significantly outperformed their emerging market counterparts last year. This may have been a function of African bonds being less liquid and therefore harder for investors to rotate out of their positions. Looking ahead, given the significant progress being made on the vaccine front, which points to a strong recovery in global growth, against the backdrop of heightened commodity prices, inflation risks are tilted to the upside. Therefore bets for central bank policy normalisation are expected to rise in the months ahead, which would keep global bonds on the defensive.

Macroeconomic: Trouncing consensus expectations, Ghana’s economy expands by 3.3% in Q4 2020

Ghana’s economy rebounded from its first recession in more than a decade in Q4 2020. Coming in well above consensus expectations, economic activity in Ghana expanded by 3.3% y/y in Q4 2020 from a contraction of 3.2% in the previous quarter. Note that analysts polled by Bloomberg had pencilled in GDP growth of 1.2% for Q4. On an annual basis, Ghana recorded GDP growth of 0.4% in 2020, the slowest pace of economic growth in almost 4 decades. The statistics agency revised the contractions in Q2 to 5.9% from 3.2% previously and to 3.2% from 1.1% in Q3 when pandemic-related shutdowns stifled economic activity.

Bolstering the marked recovery in the world’s second-largest cocoa producer in Q4 was the easing of virus containment measures and recovery in commodity prices. A breakdown of the GDP report showed that non-oil GDP expanded by 4.5% y/y in Q4 and 1.3% for the full year in 2020.

Stats Ghana said in its report that the Agriculture Sector was the main driver of GDP growth, recording growth of 8.2% in Q4. Other sectors that recorded substantial recoveries in Q4 were information & communication, public Administration, defence & social security, manufacturing and construction. The hotel and restaurant sector meanwhile recorded the steepest contraction with activity in the sector plunging -35.1%. The mining and quarrying sector also recorded sharp losses in Q4.

Going forward, the government projects that Ghana’s economy will expand by 5.0% in 2021 as the economy is reopened. That said, risks to the economic outlook are tilted to the downside. Virus containment measures introduced in February to curb the second wave of the pandemic, which included the closure of land and sea borders, may put the government’s growth forecast at risk.