US Treasuries are falling across the curve this morning, leading to another volatile start to the week for the market. Yields are rising around 5bp across the curve in early trade following the continued surge we saw last week that has pushed the USD to record highs when looking at the DXY Index. The US 2yr yield is now above 4.25%, while benchmark 10yr yields are nearing 3.75%. Bund futures are also on the back foot this morning while many will be eyeing the UK market after the dramatic surge in gilt yields seen on Friday following the announcement of the new fiscal measures.
For the UK, investors are now pricing in a major structural shift in the debt market as spending is set to surge, and there are no credible plans being presented on how this will be funded. This is happening at a time when the BoE is hiking rates and reducing its monetary support. Therefore, with the markets free of central bank intervention, yields are free to surge and increase the stress seen in funding markets. This could be viewed as a warning for other countries looking to take on more debt at a time like this. The spillover of this for the rest of the world, especially emerging markets, is that volatility levels are set to remain high, while credit spreads will be stressed and increase pressure on currencies to try and offset this.
Angola: Monetary policy remains in focus at the start of the new week, with the Bank of Angola scheduled to announce its interest rate verdict today. The BoA is expected to buck the global tightening trend and leave interest rates on hold today. Note that there is an outside risk that policymakers decide to loosen monetary policy to support the economy. Speaking recently, Governor of the central bank Jose de Lima Massano said that the MPC might consider cutting its benchmark interest rate as inflation slows. Massano also highlighted the resilience of the kwanza, which is helping to quell external price pressures. Note that the kwanza has gained almost 30% against the USD since this time last year, making it one of the best-performing currencies in the world. Partly driven by the appreciation in the kwanza, headline inflation in Angola has decelerated from a peak of 27.7% y/y in January to 19.8% y/y in August, levels last seen in Q1 2021.
Kenya: In a bid to raise funding for its budget shortfall, the Central Bank of Kenya has floated a government bond worth KES 60bn. The debt agency has invited investors for three papers, which include the re-opened 10- and 15-year bonds and a new 25-year bond. The central bank is reportedly seeking yields on the 10- and 15-year bonds around the bond’s coupon rates of 12.966 and 12.756, respectively. Note that the debt agency has struggled to raise its targeted amounts from the domestic bond market. For context, the government issued three bonds in July and August, the first two months of the current fiscal year, where it aimed to raise a total of KES 110bn but only managed to raise KES 54.2bn. September’s issuance also disappointed with the agency raising KES 39.02bn vs a targeted KES 50bn. Given the adverse lending conditions with global interest rates on the rise, banks, the largest holders of domestic debt, have been cautious of taking on new bonds as a result of valuation losses on their holdings when secondary market yields are rising. Foreign demand has also been lacklustre due to rising rates in the US against the backdrop of the global risk-off conditions.
Ethiopia: Ethiopia was one of the two African countries that received a sovereign credit rating update on Friday evening. S&P affirmed its 'CCC/C' long- and short-term foreign and local currency sovereign credit ratings on Ethiopia with a negative outlook. The agency said that the negative outlook captures the risk that we could lower the ratings on Ethiopia over the next 12 months due to increasing uncertainty on the availability of external funding and the potential inclusion of commercial creditors in the government's debt restructuring plans. Looking ahead, S&P said that it could lower the ratings if political tensions result in a sustained and material reduction in multilateral and bilateral financial support, further straining Ethiopia's external debt repayment capacity and already low FX reserves. These pressures could result in the country being unwilling or unable to service the interest payments on its commercial obligations, including the $33 million Eurobond coupon payment due in December 2022. On the other hand, S&P said that it could revise the outlook to stable if the political situation stabilizes, for example, via a sustained ceasefire, allowing donor funding to resume and external pressures to subside, and it becomes clear that Ethiopia's commercial obligations will not be included in the upcoming debt restructuring agreement.
Ghana: The International Monetary Fund said in a statement published over the weekend that Mission Chief for Ghana Stéphane Roudet will lead a team to continue discussions with the Ghanaian authorities on policies and reforms that could be supported by an IMF lending arrangement. Note that the Bank of Ghana has moved its key rate decision out to October 7 due to the IMF talks that are scheduled to begin today. Given the fragility of Ghana’s fiscal situation, any comments from the IMF or the government relating to a potential IMF deal will be watched closely. While a debt restructuring will almost certainly form part of the prerequisites for an IMF deal, a program with the IMF looks like the best chance for the country to return to a sustainable fiscal position and regain access to the international lending market.
Egypt: An official report showed that the value of Egypt’s exports of CNG gas and liquefied natural gas (LNG) during the last fiscal year increased more than 13 times compared to the value of exports in 2013/2014. Specifically, the value of Egypt’s gas exports came in at $8bn in the 2021/22 fiscal year or around 7.2mn tons. The report stated that Egypt achieved self-sufficiency in the country in natural gas and resumed exporting in September 2018, while it ranked thirteenth globally in natural gas production and second in Africa in 2021. Lastly, the report said that Egypt is witnessing the second highest increase in the volume of LNG exports in the world, with export rising by 5.2 million tons during 2021 compared to 2020. From a trade and current account perspective, this is encouraging and will help boost foreign currency inflows.
Forex: Currency pressures in Nigeria persist
The dislocation between Nigeria’s official and parallel currency markets has continued to widen. For context, the naira depreciated to 715 against the dollar on Friday in the parallel market, the weakest level on record. This means that the spread between the official rate, which ended Friday’s session at 435.58 against the USD, and the parallel rate has widened to 64%, levels not seen since 2016.
Recall that Nigeria continues to run a multiple exchange rate regime. The official spot rate is tightly controlled by the central bank, while the unauthorized parallel exchange rate is freely traded and reflective of supply and demand dynamics. As mentioned last week, falling foreign exchange inflows and reserves, partly due to an inability to benefit from the higher than budgeted international oil price, have pressured the Central Bank of Nigeria (CBN) to ration the supply of dollars. This has exacerbated the scarcity and heightened activity in the parallel market as individuals and firms look for alternative ways to obtain foreign currency.
As global dollar liquidity dries up and dollar scarcity worsens, pressure will mount on the Central Bank of Nigeria to devalue the official rate to allow for a narrowing in the gap between the official and the parallel market rate. While headwinds facing the NGN are acute, with the sharp decline in global oil prices and sustained decrease in domestic production of oil adding to the downside risks, it is worth noting that the country’s reserves remain relatively healthy. Specifically, Nigeria’s gross FX reserves stood at $38.49bn on Friday. That said, Nigeria’s reserves are declining as the central bank continues to support the NGN. Moreover, with African countries effectively being priced out of the Eurobond market, we are unlikely to see a material increase in reserves in the near term. As such, we see a high probability of a devaluation in the NGN before the end of the year.
Fixed Income: Fitch Ratings downgrades Ghana on the back of debt restructuring concerns
Over the weekend, the big news in the African fiscal space was that Fitch Global downgraded Ghana's long-term local- and foreign-currency issuer default ratings to CC, from CCC. Note that Fitch doesn’t typically assign outlooks to issuers with a rating of CCC or below. The ratings downgrade didn’t come as a surprise, with Fitch warning just last week that Ghana is at risk of a possible default on its debt.
Fitch said in its statement published on Friday evening that the downgrade reflects the increased likelihood that Ghana will pursue a debt restructuring given mounting financing stress, with surging interest costs on domestic debt and a prolonged lack of access to Eurobond markets. The agency added that there is a high probability that the IMF support programme currently being negotiated will require some form of debt treatment due to the climbing interest costs and structurally low revenue as a percentage of GDP.
The global ratings agency said that it believes this will be in the form of a debt exchange and will qualify as a distressed debt exchange under its criteria. At the time of writing, the government had not confirmed or denied press reports that Ghana is preparing to negotiate a restructuring. The agency highlighted that interest costs on external debt are lower than for domestic debt and near-term external debt amortisations appear manageable. However, Fitch said there could be an incentive to spread a debt restructuring burden across domestic and external creditors. Therefore Fitch doesn't have a strong basis for differentiating between foreign- and local-currency ratings.
From a financial market perspective, while much of the negative news is already priced into Ghanaian bonds and the cedi, the ratings downgrade will add to the headwinds facing domestic assets. As it stands, a debt restructuring looks unavoidable, particularly if the country is to secure a much-needed deal with the IMF. Although there is a risk for a further sell-off in Ghanaian assets from current levels, on a valuation basis, Ghanaian bonds are looking extremely attractive. That said, we caution against turning bullish on Ghanaian bonds just yet until there is clarity on the path forward.
Macroeconomic: Nigeria’s new deep seaport should help end cargo congestion and boost trade
Nigeria is pinning hopes that its new deep seaport will help to alleviate supply chain pressures in the country, which have impacted trade flows and weighed on economic activity. Moreover, the government expects the new port to help boost foreign direct investment into the country.
The $1.5bn Lekki deep seaport is expected to open in March next year, and the port has the potential to reduce cargo wait times from around a month currently month to just a few days. The shorter wait time will likely make Nigeria the favoured trade hub in the region.
Nigeria is Africa’s biggest economy and most-populated country. But inefficiency, decaying infrastructure, and congestion at the Lagos ports have led to cargoes bound for Nigeria being diverted to Ghana and Togo, costing billions in lost revenues and raising local prices.
The Lekki deep seaport will hopefully attract cargoes that have been lost to neighbouring countries, therefore increasing revenue flow into Nigeria. Shorter lag times at the Nigerian ports will help to bring down the cost of shipping, potentially resulting in producers pushing less costs onto the consumers.