Macro Analysis /

Foreigners pull $20bn from Egyptian bonds, KES to remain under pressure

  • Forex: Bearish bias on the Kenyan Shilling is likely to remain despite forecasts for strong remittance inflow growth

  • Fixed Income: Fitch affirms Morocco’s credit rating at BB+

  • Macroeconomic: Egypt suffers $20bn in foreign outflows from the debt market this year

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
16 May 2022
Published byETM Analytics


Some weak data out of China has seen oil tumble at the start of the new week, ending the commodity’s run of four straight gains. China’s industrial output and consumer spending levels slumped in April on account of the strict lockdown measures put in place, while oil demand and crude processing across the country dropped sharply. This data has seen the front-month Brent contract slide back below the $110 per barrel level after closing last week at over $111.50. Continued concerns over the health of China’s economy should keep oil relatively contained, for now, preventing the bulls from breaching the $115 per barrel resistance level over the near term. Meanwhile, leaders from Europe will be meeting today to discuss the latest round of sanctions against Russia. Rumours suggest that the oil ban may be delayed given the objections from the likes of Hungary. If the ban is delayed, it will reduce some of the supply concerns present in the market, and could add some further downside pressure on prices.

The gold price is steady this morning holding clear of the $1810.00/oz mark in the Asian session as investors look to the dollar and US Treasury yields for further short term direction. The yellow metal has had a torrid time of late closing at its lowest level since February on Friday as the dollar runs hot. Longer-term, we remain buyers but as mentioned in previous comments we expect strong volatility in the short term as the price action is driven by headline news and gyrations in the USD.


Angola: Headline inflation in Angola slowed further in April, coming in at a 9-month low of 25.79% y/y from 27% y/y in March. On a month-on-month basis, consumer prices slowed to 1.12%, marking the slowest monthly pace of price growth in the economy since June 2019. Much of the slowdown in the headline reading can be attributed to the pass-through effects of a stronger Angolan Kwanza. The Kwanza has been Africa's best-performing currency against the USD, up by almost 27% on a year-to-date basis. While prudent monetary policy and a stronger currency may help slow inflation, it is worth noting that rising international food prices remain a headwind.

Botswana: The Friday session was all about inflation with Statistics Botswana reporting the April reading while the Central Bank revised its inflation forecasts. The April CPI reading came in at 9.6% year on year, which was a decline on the March reading, which posted 10%. We would however like to point out that the month on month increase was substantial, up 3% in April versus 0.3% in March. The usual suspects were at play here, with the transport category rising by 5.7% month on month. The category includes fuel prices which were adjusted higher on the 29th March 2022. The bank now expects inflation to average 8% this year from an initial forecast of 7.2%.

Kenya: To soften the blow of increasing prices, the Kenyan government has decided to continue paying fuel subsidies. The government, however, did not provide any details on how long the program would remain and comes after the country bore the brunt of the severe shortages at filling stations last month as the government delayed subsidy payments to oil companies. While the subsidy will provide some relief to consumers, it is set to further strain Kenya's public finances.

Kenya: Treasury Secretary Ukur Yatani, in a gazette, said that Kenya was increasing its tax revenue target for the fiscal year ending June to KES 1.74trn ($14.98bn) from an earlier KES 1.71trn goal. Meanwhile, tax income in the 10 months through April is at KES 1.46trn, equivalent to 84% of the revised target. Yatani also revealed that Kenya had spent KES 840.8bn or 57.7% of tax revenue collected so far to service public debt. With economic growth forecast to slow to 4.9% this year from 4.9% in 2021 on the back of risk factors such as erratic weather, rising commodity prices, reduced export earnings, and lower tourism earnings due to Russia's invasion of Ukraine, and August elections, it remains to be seen whether these tax revenue targets will be achieved.

Nigeria: In a media briefing on Friday, Information Minister Lai Mohammed revealed that ten cabinet ministers had resigned to run for political office in compliance with President Buhari's directive. Buhari had directed all cabinet ministers who intended to run in national elections next February to resign from their posts by May 16 to ensure they didn't benefit from their government positions unfairly. Lai added that those ministers would be replaced without delay. Meanwhile, unconfirmed local reports suggest that the Central Bank of Nigeria Governor Godwin Emefiele has withdrawn from the race to succeed Buhari.

Uganda: Uganda Revenue Authority Commissioner-General John Musinguzi on Friday said that Uganda is improving tax collection with a tax-to-GDP ratio target of 18% by 2023-24. Uganda's tax collections fund about 47% of the budget, and the country borrows the rest. According to Musinguzi, at 13% of GDP, Uganda is below the sub-Saharan average of 16% of GDP, and to fully fund its spending, Uganda would have to double its ratio to 26% of GDP.

Burkina Faso: S&P on Friday affirmed Burkina Faso's 'CCC+' long-term and 'C' short-term sovereign credit ratings. S&P noted that the ratings were removed from CreditWatch, where they had been placed on January 26. The outlook is stable. S&P added that the stable outlook balances the risks stemming from the tense security and humanitarian situation in the Sahelian region of Burkina Faso against a strong post-pandemic economic recovery and elevated gold prices, which have boosted export revenues.

Forex: Bearish bias on the Kenyan Shilling is likely to remain despite forecasts for strong remittance inflow growth

Remittances inflows, the largest source of foreign exchange in Kenya, are expected to grow by at least 20% this year, according to WorldRemit. Kenyans abroad sent home a record $3.72bn last year, 20% more than the previous year. Central bank data shows that remittances in the first three months of this year are already about a quarter higher than a year earlier. WorldRemit’s director for Europe, Middle East Africa, Sharon Kintanjui, was quoted as saying, “there is definitely going to be some strong inflows. The only caveat is obviously from a global standpoint, there inflation that is happening and there are also some key political risks that are at play.” Meanwhile, new technology such as blockchain and increased competition from venture capital-backed companies is forecast to ultimately lower the cost of sending remittances to about 6% from 16%.

While strong inflows could support the Kenyan Shilling at the margin, risks remain tilted to the downside for the currency. The KES has fallen by around 2.70% against the USD on a year-to-date basis to trade at a record low north of the 116 mark. Since the end of May 2021, the KES has depreciated by around 8% against the USD. Elevated oil prices have exerted pressure on the KES, given that Kenya is a net oil importer while traditional supply sources such as the agricultural sector have remained flat. Dollar demand from fuel and manufacturing companies that is outstripping supply has also weighed.

Beyond the factors mentioned above, it is worth noting that heightening political risks, given this is an election year, could provide further support for the Shilling bears. Election-related uncertainty is inevitable given how difficult the election is to call and will heighten as August draws closer, leading to slow business activity and wavering business confidence, including possible delays to projects and investment. If disputes and social unrest do not mar the election, the effect on the economy will likely be temporary. However, disruption similar to that surrounding the previous election in 2012 would be much more damaging.

Fixed Income: Fitch affirms Morocco’s credit rating at BB+

Morocco was in the spotlight over the weekend, with Fitch publishing a credit rating update on the northern African country. Fitch affirmed Morocco’s sovereign credit rating at BB+, one rung below investment grade. The agency said that the BB+ rating reflects Morocco’s favourable debt composition, including a moderate share of foreign currency and official creditor support, reasonably comfortable external liquidity buffers and a record of macroeconomic stability, reflected in relatively low inflation and GDP volatility pre-pandemic.

Fitch said these strengths are balanced against weak development and governance indicators, with high public debt and current account deficits larger than its peers. The agency noted that while there has been an improvement in Morocco’s public finances, with the budget deficit narrowing to 5.3% of GDP in 2023 from 7.5% in 2020 and tax revenues increasing by 9.0% year-on-year in 2021, fiscal risks in Morocco remain elevated. Fitch said spending pressures from social issues, combined with fluctuations in global commodity prices and the drought, will weigh on public finances in 2022.

To cushion the economy and households from the supply shocks stemming from renewed lockdowns in China and the ongoing war in Ukraine, Fitch said the government would increase spending on subsidies for food, butane gas and the transport sector. Subsidies are expected to represent 2.6% of GDP in 2021, against 1.1% in 2021. Part of this will be compensated by higher VAT, import and corporate tax revenue collections due to high inflation. The global rating agency said that Morocco’s budget deficit is expected to remain large at 6.6% of GDP in 2022 and 6.0% in 2023, exceeding the BB median forecast of 3.8% in 2023.

Large fiscal deficits and an economic slowdown will drive a rise in debt in 2022 to 79% of GDP and 81.6% in 2023, from 74.2% in 2021, according to Fitch. The agency said that debt will, however, be broadly stable from 2023 onwards.

However, fiscal financing flexibility is underpinned by access to a large domestic investor base and strong official creditor support, which helps to contain funding risks. Note that 77% of Morocco’s debt was denominated in local currency at the end of last year, which helps limit the country’s fiscal vulnerability to currency risks. In conclusion, although fiscal risks in Morocco remain elevated, we are of the view that the risk of the country slipping into a position of fiscal distress is limited. Therefore, Moroccan bonds remain an attractive buy relative to many of their African counterparts, especially with yields buoyed at current levels.  

Macroeconomic: Egypt suffers $20bn in foreign outflows from the debt market this year

Egypt has arguably been one of the hardest-hit African countries by the spillover effects of Russia’s invasion of Ukraine, given its close trade links with the two countries at war. Egypt is facing an economic crisis and surging inflation as the country grapples with the ongoing supply chain pressures. Amid the supply-side shocks, headline inflation in Egypt has surged to almost 15%, amplifying social security risks in the country.

The combination of a looming economic crisis and surging inflation is pushing the country to apply for a new loan from the International Monetary Fund. In addition to the government’s push to secure a new loan facility with the IMF, the government has announced a raft of fiscal reforms, which include a string of planned privatisations of state-owned companies.

The government announced a plan on Sunday to more than double the private sector's share in the economy. The Egyptian government has been accused of crowding out the private sector and creating unfair competition for private businesses. The government hopes to see private sector contribution in investment grow to 65% over the next three years, up from 30% currently. Last month President Abdel Fattah al-Sisi announced plans to double its support to the private sector in a programme aimed to attract $10bn annually over the next four years.

Prime Minister Mostafa Madbouli added that the government wants to put the country back on a sustainable debt path following the devasting impact of the Covid pandemic and, more recently, the war in Ukraine on the country’s finances. Egypt targets cutting the country’s debt-to-GDP ratio to 75% of GDP in 2026. Moreover, the country is discussing converting part of the Gulf deposits to investments.

PM Madbouli said that Egypt has seen $20bn in foreign outflows from the debt market this year. The significant outflow of foreign capital from Egypt’s debt market is visible when looking at the sharp rise in Egyptian bond yields this year. For context, Egypt’s 2032 Eurobond yield has risen by more than 360bps since the start of the year to sit a whisker below the 12% mark at writing. With inflation and fiscal risks skewed to the upside in the months ahead, the bearish bias in Egyptian bonds is expected to persist. Longer-term, we remain bullish on Egyptian bonds.