Morning Note /

Global supply chain crisis worsens, Chinese lending to Africa tanks

  • Forex: Central Bank of Kenya orders commercial banks to ration Dollar sales amid a shortage of the hard currency

  • Fixed Income: Headwinds for Kenyan bonds persist amid heightened fiscal risks and political uncertainty        

  • Macroeconomic: Global supply chain crisis worsens on the back of China’s stringent covid restrictions

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
26 April 2022
Published byETM Analytics


Yesterday was a bloodbath for industrial metals with losses recorded across the board. The market panicked as investors looked at how the COVID-19 virus is spreading through China. Talk of Beijing being locked down in a similar fashion to Shanghai was running wild through chat forums across the globe. 3m copper fell by 3.43%, 3m aluminium by 4.89% and zinc by 6.19%. This morning we have a recovery underway, 3m LME copper is up by 2.19% at the time of writing at $9983.00/tonne. This is being driven by bargain hunters and a slightly weaker dollar. It is worth noting that these moves have occurred at time when liquidity is certainly lower than it has been in the past. The cost of trading on exchanges has ramped up given the wild price swings and this has discouraged participation potentially exacerbating the situation.

Yesterday saw a massive clear out of stale longs resulting in the spot price of gold dipping below the $1900.00/oz handle. What started with the market assessing the threat of tighter US monetary policy resulted in a full scale capitulation. As mentioned yesterday, it must be noted that the reason for tighter US monetary policy is a direct result of sustained higher inflation dynamics in the US, gold provides an excellent hedge against structural inflation which is what we are currently experiencing on a global level.

Oil prices are rebounding this morning following a two-day slide, which briefly took the benchmark front-month Brent contract back below the $100 per barrel mark. Prices have recovered to around $103.45 this morning as the market digests the PBoC’s pledge to increase support for China’s economy amid fears that Beijing could be next to be placed under lockdown.


Chinese lending to Africa: Chinese lending to African governments fell to a 16-year low in 2020 as the impact of the coronavirus deterred countries on the continent from borrowing, according to a report published by the Boston University Global Development Policy Center. This marks a 78% decline from a year earlier to just $1.9bn. The report stated that “the Covid-19 pandemic significantly constrained the fiscal discretion of many African borrowers, likely impacting willingness to borrow, and intensified the cautionary lending practices of Chinese lenders in recent years.” Although the pandemic induced economic collapse in economic growth has strained finances in the region, China is still the largest single creditor to Sub Saharan Africa. According to the World Bank’s Africa’s Pulse report published last week, China accounts for around 60% of total official bilateral debt in Africa. According to Boston University, Chinese financiers signed 1,188 loan commitments worth $160bn with African governments and state-owned companies from 2000 to 2020. The biggest borrowers were Angola, Ethiopia and Zambia.

Africa’s food crisis: Africa could lose more than $10bn of food production to a fertiliser crisis emerging from Russia’s invasion of Ukraine, according to the African Development Bank. The looming food crisis has prompted African Development Bank President Akinwumi Adesina to call a meeting of finance, public and private sector leaders to discuss access to fertilisers for Africa in mid-May. Regional leaders are expected to discuss the bank’s African Food Crisis Response and Emergency Facility, among other strategies aimed at boosting food security on the continent. As mentioned last week, historically, food insecurity and elevated food prices have led to massive bouts of social unrest.  

South Africa: Last week was one of the worst weeks for the ZAR since the lockdown, and this week has not begun much better. Despite the depreciation that was recorded last week, the ZAR remained on the defensive. Adding to the pressure of all that impacted the ZAR last week was also the rise in risk aversion this week as global stock markets sold off aggressively. The ZAR was one of several emerging market currencies yesterday that had a tough day. Whether or not the sell-off is sustained will determine the number of outcomes in the coming months, but the one thing it has secured is the need for the SARB to hike rates further to make any negative speculation against the ZAR more punitive to conduct. Overnight, however, there was some good news that may see the ZAR's slide stall. For all the negativity in global stock markets yesterday, Wall St bounced back and ended in the green. This morning, Asian stock markets have followed suit and will play a significant role in stabilising the ZAR. As it is, technical indicators overnight show that the ZAR has lost some of its underlying momentum, and more such behaviour may well be confirmed today.

Ethiopia: A spokesperson for the Tigrayan forces told Reuters on Monday that its forces are entirely withdrawing from the neighbouring region of Afar in Ethiopia. The spokesperson said that he hoped the move would allow for desperately needed food aid to reach the war-torn region of Tigray. While this is encouraging, Reuters said that it could not immediately independently confirm the statement. Conflict in northern Ethiopia, which began in November 2020 in the Tigray region and spilt over into Afar in 2021, has calmed since the government declared a unilateral ceasefire last month, saying it would allow humanitarian aid to enter. The restoration of peace in the region has provided a boost to investor sentiment. That said, investors remain wary of turning bullish just yet.

Zambia: President Hakainde Hichilema announced yesterday that the government is very close to picking a buyer for Mopani Copper Mines. The government took on $1.5bn worth of debt to buy the mine from Glencore at the start of 2021. Glencore could not see the commercial value given the political backdrop at the time. It is well known that the mine requires substantial investment to increase its output, but given the new administration and tailwinds that copper is expected to experience in the coming decade, this may well be a good investment at the right price.

Forex: Central Bank of Kenya orders commercial banks to ration Dollar sales amid a shortage of the hard currency

The spotlight is on Kenya this morning after the central bank ordered commercial banks to ration US Dollar sales amid a severe shortage of hard currency. The order from the Central Bank of Kenya is to protect the country’s foreign currency reserves as the Kenyan Shilling continues to weaken. Note that the KES has depreciated by 7% against the USD over the past 12 months as the combination of hard currency shortages and mounting fiscal and political risks weigh.

The move from the central bank has forced businesses to begin seeking Dollars in advance as the shortages put pressure on supplier relations and the ability to negotiate favourable prices in spot markets. Concerningly, the Chairperson of the Kenyan Association of Manufacturers, Mucai Kunyiha, said that “one USD purchase transaction used to take one working day. However, due to the daily cap, manufacturers now have to plan two to three weeks (ahead), depending on the Dollar requirements for specific consignments.” Kunyiha added that planning in advance for foreign currency payments has increased working capital for Kenyan manufacturers.

Looking ahead, we remain bearish on the Kenyan Shilling, with the balance of risks for the currency skewed firmly to the downside, especially as political uncertainty heats up ahead of the August 9 presidential election. As mentioned in recent commentary, notwithstanding the recent losses, the Kenya Shilling remains overvalued, underpinning the notion that there is room for further depreciation in the currency. A depreciation in the Kenyan Shilling to levels around 120 against the USD is possible within the next few months.  

Fixed Income: Headwinds for Kenyan bonds persist amid heightened fiscal risks and political uncertainty

In a report published overnight, the International Monetary Fund said that it has reached a staff-level agreement for an extended fund facility and extended credit facility for Kenya. The agreement is subject to the approval of IMF management and the executive board in the coming weeks. Upon completion of the Executive Board review, Kenya would have access to another round of funding, bringing the total IMF financial support under these arrangements to roughly $1.18bn.

The IMF said in its statement that the Kenyan economy has been staging a robust recovery as the effects of the pandemic wane, and the authorities remain vigilant. Spillovers from the war in Ukraine are expected to have a modest impact on growth in the near term, as Kenya’s direct exposure to Russia and Ukraine is relatively limited. The IMF forecasts that Kenya’s economy will expand by 5.7% in 2022, reflecting a pickup in agriculture and continued recovery in services and other sectors.

The IMF added that Kenya’s medium-term outlook remains favourable, supported by Kenya’s proactive reform efforts, although the outlook is subject to uncertainty. Spillovers from the war in Ukraine are expected to temporarily push up inflation as domestic retail fuel prices gradually rise to global levels. The IMF noted that the Central Bank of Kenya remains committed to taking appropriate measures to contain the second-round effects of external price pressures. Moreover, the international lender said that exchange rate flexibility has served Kenya well and should continue to be a shock absorber that will help mitigate the impact of these external shocks.

On the fiscal front, the IMF noted that Kenya is on track to meet its fiscal objectives and put debt as a percentage of GDP firmly on a downward path. Kenya’s fiscal position has been underpinned by strong tax revenue performance this year, buoyed by a robust economic recovery and the important tax policy measures already undertaken as part of Kenya’s multi-year plan to reduce debt-related vulnerabilities. These resources bring resilience that will allow cushioning part of the impact of the sharp increase in global energy and fertiliser prices on households and businesses while still remaining within the authorities’ fiscal targets for the 2021/22 financial year.

That said, fiscal risks in Kenya remain skewed firmly to the upside. As such, we expect a notable premium to remain baked into Kenyan bonds until such a time that investors are convinced that the government is committed to steering the country back towards a sustainable fiscal position. Adding to the headwinds for domestic bonds is heightened political uncertainty ahead of the upcoming presidential election.

Macroeconomic: Global supply chain crisis worsens on the back of China’s stringent covid restrictions

China is once again at the heart of a new global supply chain crisis, with Beijing’s stringent covid containment measures expected to unleash another wave of chaos on supply chains between Asia, Europe and the US. This will have massive spillover effects for Africa. China’s covid zero policy amid a resurgence in covid infections has brought the pandemic full circle, just over two years after the outbreak upended the global economy.

As can be seen in the accompanying chart, shipping congestion in Chinese waters is acute. The Shipping backlogs in China, together with the impact of the ongoing war in Ukraine, have come as a double-edged sword to global supply chains, inflation and global growth. According to shipping analysts, even if the covid outbreak in China is brought under control, the disruption will ripple globally and extend through the year as backed up cargo ships start sailing again.

According to Bloomberg, China accounts for around 12 % of global trade. The stringent covid restriction has brought factories and warehouses in the world’s second-largest economy to a halt, slowed by truck deliveries and aggravated containers backlogs. In the near term, the shipping bottlenecks will mean costly delays in the  $22trn global merchandise sector, which has faced a troubled two years.

According to Flexport, a major US freight forwarder, it takes an average of 111 days for goods to reach a warehouse in the US from the moment they’re ready to leave an Asian factory, close to the record of 113 set in January and more than double the trip in 2019. The global supply chain issues are expected to keep inflation pressures elevated in the coming months and are dampening the growth outlook.