Macro Analysis /

Ghana expected to hike rates, hawkish central banks seen as biggest tail risk

  • Forex: Persisting current account deficit weighs on the Kenyan Shilling

  • Fixed Income: Hawkish central banks are seen as the most significant risk for markets by fund managers

  • Macroeconomic: Another African sovereign credit rating outlook upgraded on the back of soaring commodity prices

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
23 May 2022
Published byETM Analytics


Gold has had a better start to the week with gains of around 0.5% recorded thus far and a break of $1860.00/oz certainly not off the cards. The dollar has come under pressure first off and this is currently the driving metal. Analysts will be starting the session with the question, is this merely a dollar related move, or are we on track for further gains in the medium term. As pointed out many times before, we favour gold for its hedge characteristics and would be buyers on any dips to create the correct mix of assets in a broader portfolio. Investors equally may choose to go overweight during times of geopolitical tensions and heightened inflation risks which we are undoubtedly facing right now.

Copper prices are at a two week high as we enter the start of the EU session. The global bellwether for economic growth has taken a decidedly bid tone driven by dollar losses and renewed hopes of a speedy Chinese recovery post the lockdowns following Beijing’s surprise cut of its benchmark reference rate for mortgages. The benchmark 3m LME contract is currently trading just short of 0.5% higher on the session at $9463.00/tonne.


Ghana: The Bank of Ghana will deliver its latest verdict on interest rates today. Policymakers are faced with the conundrum of whether to support economic growth or tame runaway inflation. Given inflation is forecast to exceed the Monetary Policy Committee’s estimates after accelerating at a faster than anticipated pace in March and April, there is a strong argument for another bold rate hike. In line with consensus expectations, we expect the Bank of Ghana to deliver a 200bps rate hike today, taking the benchmark interest rate to 19%.

Africa: To boost grain production to help avert potential food shortages as a result of the war in Ukraine, the African Development Bank has announced a $1.5bn fund. The African Development Bank said on Friday that it would use the facility to supply about 20mn farmers with climate-smart certified seeds and fertilizers. That will facilitate the rapid production of 38mn tons of food, including wheat, corn, rice, and soybeans, equivalent to a $12bn increase in output over two years. According to the bank, African countries face a shortage of at least 30mn tons of food due to disruptions triggered by war. The bank estimates that there is a two million-ton fertilizer gap. The war has upended grain shipments at a time when global stockpiles were already tight, raising the risk of a full-blown hunger crisis.

Kenya: In a report by Treasury, Kenya signed nine external loans totalling KES 137.9bn ($1.2bn) in the four months through April. Six of the loans are from multilateral lenders and three from bilateral creditors. The total includes $750mn from the World Bank, of which $520mn is from the International Development Association’s concessional financing arm and $230mn from the International Bank for Reconstruction and Development. Increased external borrowing against a backdrop of persistent Shilling weakness is likely to further drive debt servicing costs higher in Kenya. Kenya: Kenya’s public debt is forecast to breach the proposed ceiling until 2026. According to National Treasury, the public debt will surpass a proposed threshold for the next four years owing to several challenges, including the pandemic, bad weather, and supply chain disruptions. The current present value of public debt to GDP is 61.7% and is forecast to remain above the threshold of 55% over the medium term before declining to 53.2% in 2026. Treasury added that “public debt is sustainable, but faces high risks worsened by the global coronavirus pandemic shocks.” Meanwhile, Kenya’s August elections have a fund shortfall of KES 20.5bn, with Treasury having allocated the electoral agency and other parties KES 44.2bn, against financing requirements of KES 64.7bn.

Morocco: Headline inflation in Morocco accelerated for the third straight month in April, coming in at 5.9% y/y from 5.3% y/y in the month prior. This was the fastest pace of price growth in the economy since January 2008 and was driven by an increase in food and non-food products. The former rose by 9.1% while the latter quickened to 4.7% from 3.7% in March. On a month-on-month basis, prices climbed 1.8%. The continued acceleration in inflation is likely to test the central bank’s policy stance going forward after policymakers in March kept the benchmark rate at a record low of 1.5%, as they sought to limit the damage to the agri- and tourism-reliant economy from the drought and global insecurity.

Uganda: Finance Minister Henry Musasizi said on Friday that lawmakers had approved a 2022/23 budget increase to UGX 48.1trn. According to Musasizi, the budget for the fiscal year starting July 1 will “mark the recovery for the economy.” The economy is forecast to expand by 6% in 2022/23 from an estimated 3.8% this fiscal year. Meanwhile, debt is projected to rise above 52% of GDP in 2022/23.

Senegal: The International Monetary Fund (IMF) on Friday announced that it had reached a staff-level agreement with Senegal on economic and financial policies under which the country will receive a $217mn loan if approved late in June. The Washington-based lender added that once approved, the loan will help authorities cushion the impact of soaring fuel and food prices, made worse by the war in Ukraine and the economic slowdown of Senegal’s main trading partner Mali, which is facing sanctions for failing to restore democracy since a 2020 coup. The agreement is subject to approval from the fund’s management and the executive board, which is expected to meet in late June.

Forex: Persisting current account deficit weighs on the Kenyan Shilling

The current account balance plays a significant role in a currency’s resilience or lack thereof. Given this, it is worth taking a look at the latest current account data out of Kenya. Provisional data released on Friday by the central bank showed that Kenya’s current account deficit widened to 5.3% of GDP in the 12 months through March 2022 from 4.7% of GDP in the 12 months through March 2021. The central bank attributed the wider deficit to a higher import bill, particularly for oil, which more than offset increased receipts from agricultural and service exports, and remittances. Data released on Friday showed that remittance inflows totalled $355mn in April 2022 compared to $299.3mn in April 2021, an 18.6% increase. The cumulative inflow for the 12 months to April 2022 totalled $3.968mn compared to $3.308mn in the same period in 2021, marking an increase of 20%. The US remains the largest source of remittances to Kenya, accounting for 62% in April.

From a currency perspective, the persistent current account deficit is one of the factors that have contributed to the notable weakness in the Kenyan Shilling (KES). The currency has lost almost 3% on a year-to-date basis against the USD and traded at record low levels. Pulling back the lens, the KES depreciated by more than 8% since the end of May 2021. Another headwind for the KES has been elevated oil prices, given that Kenya is a net oil importer. Dollar demand from fuel and manufacturing companies that is outstripping supply has also compounded the downside pressure.

In the coming week, the KES is set to come under further pressure amid limited dollar inflows and increased dollar demand from the manufacturing and energy sectors. A worsening drought in the East Africa region has also increased dollar demand for grain imports and is another headwind for the KES. Further out, we see more room for KES weakness as it is overvalued by more than 10% on a real effective exchange rate basis. Election uncertainty in the lead-up to the August polls will present another headwind for the currency.

Fixed Income: Hawkish central banks are seen as the most significant risk for markets by fund managers

It has been a turbulent few months for financial markets as a wave of headwinds, including monetary policy tightening, mounting global recession risks, the war in Ukraine and heightened geopolitical tensions, amongst others, hit. Risk appetite has taken a blow, and as such, there has been a broad-based rotation from riskier assets to haven assets, with money managers are the world turning highly cautious.

The May Bank of America Global Fund Manager Survey revealed that the most significant tail risk for fund managers is now hawkish central banks, with 31% of fund managers seeing it as the biggest threat to markets. Note that Covid-19, which was assessed to be the largest risk for money managers in 2020 and 2021, has slipped down the ranks, with only 1% of respondents seeing it as a threat.

Note that the hawkish shift in global monetary policy will result in fewer dollars in the global financial system, making investors increasingly cautious over what risks they are willing to take on and where they are willing to deploy funds. That said, the tightening comes on the back of unprecedented QE during the covid pandemic. Therefore, while global dollar liquidity is expected to dry up, there is still a surplus of liquidity across markets at the moment.

A looming global recession, soaring inflation and Russia’s invasion of Ukraine were also amongst the top risks identified by money managers in the Bank of America’s May GFM survey. The Bank of America noted that the dominant concerns of investors since 2011 have been Eurozone debt and potential breakdown, Chinese growth, populism, quantitative tightening and trade wars, global coronavirus, now inflation/bond tantrums and central bank rate hikes.

While we expect volatility across financial markets to remain elevated in the months ahead, as central banks continue to tighten monetary policy aggressively to rein in soaring inflation and inflation expectations, we expect the aggressive policy tightening to come to a halt in 2023. This should help ease the headwinds for fixed income markets in particular. Therefore, we advise investors to use the remaining months of 2022 to take advantage of the attractive valuations on offer across fixed income markets around the world.

Macroeconomic: Another African sovereign credit rating outlook upgraded on the back of soaring commodity prices

There was some more positive credit rating action over the weekend in Africa. Global rating agency S&P unexpectedly revised its outlook on South Africa to positive from stable on Friday evening while leaving the country’s rating at BB-, three notches below investment grade. The move suggests that the next move could be a rating upgrade in the pipeline if fiscal dynamics continue to improve.  

S&P said in its statement that the positive outlook reflects its assessment that favourable terms of trade, a path toward contained fiscal expenditure, and the implementation of some structural reforms could lead to a continued easing of fiscal and external pressures. S&P expects SA to post a current account surplus in 2022 for the third consecutive year, as prices for key metals and mining exports have risen significantly since the start of the Russia-Ukraine conflict.

The agency added that higher-than-expected tax revenue, particularly from mining companies, will help to reduce the fiscal deficit and debt as a proportion of GDP relative to its expectations six months ago. According to preliminary data, SA’s budget deficit reached 5.25% of GDP in the 2021 fiscal year, from nearly 10% in 2020. The significant narrowing was underpinned by a 26% increase in total revenue, which was largely driven by a 60% rise in corporate income tax revenue. Spending growth was more moderate at about 5.5%, despite higher-than-budgeted wages due to a one-off cash allowance and the extension of a social grant.

The government is targeting a budget deficit of 6% of GDP this year, narrowing to 4.2% by fiscal 2024 on the back of windfall revenues from the commodity sector. Fiscal consolidation efforts are centred on containing spending growth and include cuts in public-sector wages via a planned freeze of public-sector pay and limiting additional support to state-owned entities. The government projects stabilization of debt at 75.1% of GDP by fiscal 2024. S&P said that its forecasts are slightly more conservative than the government’s following the recent floods in KZN, which will have an impact on the budget in terms of higher reconstruction costs and lost revenue.

Looking ahead, S&P said that it could raise the ratings if economic growth is higher than we currently expect and if we see continued fiscal consolidation against a backdrop of structural and governance reforms and continued supportive external sector dynamics. However, it could revise the outlook back to stable if external or domestic shocks derail South Africa's economic growth over the forecast period or if fiscal financing or external pressures significantly increase. This could, for example, arise from further financing risks emanating from contingent liabilities, including the public electricity utility Eskom, or tightening financing conditions increasing the government's interest burden as a proportion of revenue.