Macro Analysis /

Fiscal alarms in Kenya sound after the Senate approves higher debt ceiling

  • Forex: Dollar rationing could trigger fuel shortages in Ghana

  • Fixed Income: Kenya’s debt dynamics are in focus as Senate approves a proposal to raise the debt ceiling

  • Macroeconomic: Ghanaian bond yields are starting to look attractive at these levels

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
23 June 2022
Published by


Oil remains under pressure this morning, tracking a broader slump in commodity prices as recession fears continue to rip through the markets. Brent has sunk to $108 per barrel, extending its decline from yesterday and posting a loss of more than 6% over the last two sessions so far. WTI, meanwhile, has plunged to $103 per barrel, but at one point, was trading below $100. Global recession fears were amplified yesterday by Fed Chair Powell’s testimony to Congress, where he said that a soft landing for the US was very challenging but that more rate hikes are still needed to contain inflation. A slowdown in US and global growth will help to lessen some of the tightness in the market at the moment, but as we have noted before, there is still a long way to go before the market will return to a more balanced structure. Nevertheless, we are seeing demand for downside protection on oil rise, indicating that traders are becoming a bit more concerned over the impact of weaker demand. Oil price forecasts, therefore, are likely to be revised a bit lower over the next few weeks.   


Egypt: The Central Bank of Egypt will today meet to decide on its interest rates. Bloomberg consensus expectations are for the central bank to hike the deposit rate by 100bps to 12.25% as they seek to combat rampant inflation. Moreover, in the context of a hawkish Federal Reserve, a significant rise in the policy rate may be needed for a recovery in portfolio flows. We are of the view that the CBE will go ahead with another bold rate hike today. Investors should keep an eye out for comments on the impact of the upcoming quarterly fuel price adjustment.

Africa: To help countries in East and Southern Africa deal with spreading food stress that is expected to affect around 66.4mn in the region by July, the World Bank has approved a $2.3bn program. According to the Washington-based lender, the funding is meant to ease food-system shocks spurred by drought, conflicts, pests, and disease outbreaks that the war in Ukraine has exacerbated. The bank said the food systems resilience program would "enhance inter-agency good crisis response strategies including strengthening early-warning systems and rapid-response planning," as well as boost emergency support to producers and provide emergency trade measures and food reserves. Aside from the danger of a major humanitarian crisis, it is worth noting that food shortages have contributed to inflationary pressures on the continent.

Egypt: Egypt's parliament has approved the state budget for the financial year that begins on July 1, with expenditure rising by 15% and the deficit by 14.5%. Specifically, spending will climb to EGP 2.07trn ($111bn) in 2022/23 from EGP 1.79trn this year, while the deficit will increase to EGP 558.2bn from EGP 487.7bn. Meanwhile, the 2022/23 budget deficit is forecast to edge down to 6.1% of GDP from 6.2% this year. According to Finance Minister Mohammed Maait, the budget reflects the government's desire to continue Egypt's development and improve the lives of its citizens despite the recent economic shocks. That said, it is worth noting that the budget deficit remains sizeable and could widen further given the unfavourable external conditions.

Ghana: Supply-side inflationary pressures remained entrenched in the Ghanaian economy in May. Specifically, producer price inflation accelerated further to 33.5% y/y from 31.4% y/y in the month prior. Producer price inflation in Ghana has risen since September 2021, and the May reading was the fastest pace of price growth since December 2014. The persistent increase in supply-side inflation will culminate in higher consumer prices as producers pass some of the costs to consumers. This suggests that inflationary pressures will remain robust in the economy.

Nigeria: Data from the Central Bank of Nigeria showed that both M2 money supply and private sector credit extension (PSCE) accelerated in May. The former came in at 25.5% y/y from an upwardly revised 22.7% y/y in April. M2 money supply accelerated for the second straight month and compared with a growth rate of 18.26% in the corresponding month of 2021, suggesting that monetary dynamics in Nigeria remain loose and conducive to a build-up of inflationary pressure.

Zambia: Minister of Mines Paul Kabuswe said that Zambia needs to hold a bigger stake in new mines and that local communities should benefit more from the mineral value chains. According to Kabuswe, the Zambian government is planning to increase the state's shareholding in new mines to ensure that Zambia maximises its benefits from the sector. Kabuswe said, "going forward, I don't think there will be a mine where Zambia will own less than 20% of shares. Those days of 10% shareholdings are gone."

South Africa: The big news out of SA this morning is that Health Minister Phaahla has signed off on the removal of the last remaining COVID-19 restrictions in SA. These include the wearing of masks in public, curbs on gathering sizes, and border checks for COVID-19. This is welcome news, and will allow for a more complete recovery of the South African economy. Recall that the economy already experienced some improved momentum at the start of the year due to SA’s initial phase of reopening, and although it is unlikely to last, it will have a material impact on the ZAR’s performance through SARB policymaking and trade balance dynamics.

Forex: Dollar rationing could trigger fuel shortages in Ghana

Ghana is reportedly reluctant to spend its limited dollars on importing fuel, raising concerns that a fuel shortage looms in the country. Reports quoting sources close to the matter indicated that the monthly fuel import bill for the country surged to $450mn in May from $250mn in January on the back of higher oil prices and yet the government is only offering about $100mn a month at its foreign exchange auctions, and licensed bulk distributors can no longer plug the shortfall in the black market. The Bank of Ghana (BoG) is likely trying to protect its foreign currency reserves as the Ghanaian Cedi continues to weaken despite several interventions.

Ghana, in recent years, has been able to issue Eurobonds, which has bolstered its reserve position and allowed policymakers to support the currency. However, a fragile fiscal outlook and tightening global financial conditions have prevented Ghana from entering the Eurobond market this year. This has weighed on its foreign reserves, which stood at $8.34bn, equivalent to the 3.7 months of import cover at the end of April and compared with $9.70bn at the end of December 2021. While the BoG is looking at alternative ways to boost its foreign exchange holdings, a shortage of dollars has in part contributed to the significant sell-off in the Ghanaian cedi. The cedi has lost over 22% against the USD on a year-to-date basis and is ranked dead last amongst African currencies tracked by Bloomberg.

While the Bank of Ghana and the finance ministry have adopted several measures and strategies, we are of the view that the outlook for the cedi remains bleak in the near term. Concerns over the country's fiscal objectives remain while an unfavourable global macroeconomic backdrop persists. Risks, therefore, exist that Ghana's fiscal metrics could deteriorate further due to lower lower-than-expected revenue and increased borrowing. The view of further weakness is supported by the non-deliverable forwards market, which is currently pricing in depreciation to over GHS 9.0 per dollar in the next six months.

Fixed Income: Kenya’s debt dynamics are in focus as Senate approves a proposal to raise the debt ceiling

Kenya’s debt dynamics are in the spotlight following the blowout that has materialised in the country’s Eurobond market and as the Senate opens the door for increased borrowing. Yields across the Kenyan Eurobond curve have surged this year as the combination of tighter monetary conditions, risk-off conditions, and mounting political and fiscal risks dampen demand for Kenyan sovereign debt. The shorter-dated 2024 Eurobond yield has risen by more than 1000bps since the start of the year to close yesterday’s session a whisker about 15.0%. Movements on the long-end of the curve have been less pronounced but still significant, with the 2032 Eurobond yield up 575bps since the start of the year to sit at 12.5% at yesterday’s close.

Investors are on edge this week after the Senate approved the proposal to raise the debt ceiling to KES10trn from KES 9trn set in October 2019, which was an increase from KES 6trn previously. The increase in the debt ceiling means that the Treasury can now turn to local and international lenders to plug the KES 846bn budget deficit in the KES 3.33trn budget for the 2022/23 financial year that starts on July 1. According to the Finance committees of the Senate and the National Assembly, Kenya’s debt stock currently sits at KES 8.6trn.

The leader of the majority in the National Assembly, Amos Kimunya, who initiated the debate on the debt ceiling adjustment, told MPs that the country is in a situation where it cannot do the 2022/23 budget without raising the debt cap. Kimunya added that the increase in the debt ceiling is an interim measure that will allow the next government to seek funding to run its programmes as it works towards sustainable ways to raise internally generated revenue.

With politics in focus ahead of the upcoming presidential election, it is worth highlighting that Senators from both sides of the political divide differed on the need to increase the debt ceiling. Those allied to Deputy President William Ruto said the borrowing appetite by the government is strenuous to the economy, especially at this time when the cost of living has gone up. Those supportive of Raila Odinga said that having debts would not negatively affect the country as long as the money is used for the intended purpose it was borrowed for. The varying stance on the path of borrowing between Ruto and Odinga has resulted in increased uncertainty ahead of the election, which will add to the headwinds facing Kenyan Eurobonds. We expect the bearish bias in Kenyan Eurobonds to persist in the coming months.

Macroeconomic: Ghanaian bond yields are starting to look attractive at these levels

While international oil prices continued to tumble yesterday, easing the pressure on the global bond complex, Ghanaian Eurobond yields closed Wednesday’s session higher. The sell-off in Ghanaian Eurobonds came on the back of disappointing economic data, with GDP growth decelerating to 3.3% y/y in Q1 of 2022 vs consensus expectations of 5.3% and 7.0% in Q4 2021. The slowdown in growth was driven lower by weaker growth in the country’s three largest sectors. Specifically, growth in the industry sector decelerated to 1.3% y/y from 4.8% y/y, while activity in the agriculture and services sectors slowed to 5.6% and 3.7% from 8.2% and 8.1%, respectively.

The slowdown in economic activity comes on the back of tighter monetary conditions, ongoing supply chain pressures, weak sentiment and soaring inflation as supply-side cost pressures continue to run red hot. Ghana has increased its key interest rate by 450bps this year as policymakers look to rein in inflation. Expectations are that the economic growth decelerated further in Q2 following the sharp depreciation in the cedi, and as higher input costs and continued raw material shortages weigh on activity.

The deteriorating growth outlook will add to Ghana’s fiscal woes, which have compounded in recent months after access to the international debt market faded. The aggressive tightening in global monetary policy has pushed up lending costs in the international debt market significantly, making it unfeasible for the Ghanaian government to fund itself in the Eurobond market. Recall that Ghana has tapped the international bond market in recent years to plug its budget shortfall and refinance maturing debt. While fiscal risks in Ghana remain elevated, at these attractive levels, there is value to be found in looking to go long Ghanaian bonds.