Macro Analysis /

Green bond issuance to surge, UN launches lending market for African bonds

  • Forex: Kenyan Shilling plunges to a fresh year-to-date low on increased importer demand and low inflows

  • Fixed Income: African countries look to take advantage of the explosion in appetite for green investment

  • Macroeconomic: South African Reserve Bank seen hiking rates in November due to recent bout of ZAR volatility

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
5 November 2021
Published by


The USD is ending the week on a firmer footing, boosted by the combination of some strong labour market data earlier in the week. The data has given rise to expectations that the payrolls figures scheduled for today will beat expectations to the topside. Also, supporting the USD has been the weakness of the GBP after the BoE failed to lift rates yesterday. Furthermore, the possibility of some risk aversion exists on account of more difficulties in the Chinese property sector that will raise concerns about China's economic prospects in the coming quarters. Barring any nasty surprise in the payrolls data, the USD should end the week on a slightly firmer footing, although it should be added that there is a lot priced into the USD.

Capturing the headlines yesterday was President Biden's announcement on Covid vaccine rules for businesses. The Biden administration has mandated that workers at US companies with at least 100 employees be vaccinated against Covid-19 or be tested weekly from 4th January onwards. This decision will undoubtedly be challenged in the courts, while the Republicans have responded quickly with a backlash, vowing to do everything possible to protect individual freedoms of choice. Biden has adopted this stance to drive up the number of vaccinated people to overcome the pandemic. 

It was a volatile session for oil yesterday as the markets reacted to the latest announcements from OPEC+. The cartel and its allies stuck to its initial plans, keeping the output increase for December at 400k barrels a day while also strictly maintaining their compensation mechanism, which prevents producing nations from increasing their production levels above their allotted quota even if they under-produced in prior months. This definitively illustrates how OPEC+ is not worried about the current level of supply, and is still enjoying the high revenues that current prices are bringing in despite the risks that surging energy costs pose to the global economic recovery. Oil prices initially surged on the announcements, with the front-month Brent contract rising to almost $85 per barrel in intraday trade. These gains were quickly pared, however, as investors assessed this to mean that the US could be releasing supply from its strategic reserves very soon.


Africa: Speaking at a briefing yesterday, Director of the Africa Centres for Disease Control (CDC) John Nkengasong said that African countries need to start widely using rapid antigen tests to take advantage of lulls in the pandemic and quickly react to any small, local coronavirus outbreaks. According to Nkengasong, "we are at a trough in the number of infections, so I am appealing for the continent to scale up testing and to scale up vaccination. If we vaccinate now intensely, we can blunt the next wave and if we test now, we can find hotspots before it flares back up." Nkengasong called on African countries to gather information that will help them make informed decisions early on, before a need for further harsh lockdowns. Vaccine hesitancy and a slow rollout in many countries on the continent threaten to derail the economic recovery.

Africa: The UN launched a new short-term lending market for African bonds in a move that it says could trim billions of dollars from government borrowing costs across the continent. According to the UN, the liquidity and sustainability facility (LSF) will allow investors to use African debt issued in foreign currencies such as dollars and euros in repo transactions. An initial $200mn is planned for early next year, with funding expected to be provided by Africa Export-Import Bank and other investors. Backers of the project are seeking additional sources of funding to scale up the facility. According to the UN, the funding is expected to include a portion of the $650 special drawing rights created by the IMD, and the size of the facility could reach $30bn. The facility will focus on countries that the IMF does not judge to be at high risk of fiscal distress.

Egypt: Egypt has sold $174.8bn worth of bonds this year as of November 3, according to Bloomberg calculations. The issuance was up 18% compared to the same period a year earlier. Meanwhile, the US dollar value of pound bond sales reached $163.8bn, up 19% versus the same period last year. Local currency issuance was the highest since 2010, while foreign currency issuance was up 4.7% to $11bn versus the same period last year.

Mozambique: Exxon Vice-President for Upstream Oil and Gas Liam Mallon yesterday said that the company will require more work to be done to restore security in Mozambique's Cabo Delgado province for it to move ahead with its planned natural gas project there. According to Mallon, "good progress has been made in the overall situation but more remains to be done….There are plans in place and we continue to engage among the partners and with government." Exxon has delayed making a final investment decision on the project, which Standard Bank estimates could cost more than $30bn to build, making it Africa's biggest private investment once approved. It's yet to commit to a timeline for the project. Part of the delay is due to a four-year Islamic State-linked insurgency that prompted TotalEnergies SE to halt work and evacuate its adjacent $20bn development after a March attack on a nearby town.

Tanzania: Finance Minister Mwigulu has said that Tanzania plans to increase spending by 7.4% in the 2023//23 budget to TZS 39.38trn to enable the government to invest in more infrastructure projects. The budget deficit is forecast to remain below 3% of GDP in 2022/23, compared with an estimate of 2.6% in 2021/22. Meanwhile, the government may borrow about TZS 2.4trn from external commercial sources and may get TZS 3trn in concessional loans and grants. The minister also said Tanzania plans to borrow as much as TZS 5.3trn from the domestic market while TZS 24.7trn of the 2022/23 budget will be spent on recurrent expenditure and TZS 14.6trn on development programs.

South Africa: SA’s economy-wide PMI gauge in October to start the final quarter of the year on the back foot. The headline PMI gauge dropped to 48.6 in October versus 50.7 in September, the third consecutive deterioration in business operating conditions. The sharp fall in activity across the private sector stemmed from the two-week metalworker's strike that disrupted output and sales, coupled with the shortages of raw materials, also contributing to weaker activity, longer lead times, and acceleration of input price inflation. With confidence about the future output weakening, growth in the sector is likely to remain subdued. Additional headwinds for the private economy, namely the return of load-shedding, exorbitant commodity prices, weak fiscal dynamics, and the absence of reforms, will delay the recovery.

Forex: Kenyan Shilling plunges to a fresh year-to-date low on increased importer demand and low inflows

Kenyan Shilling bears remain firmly in control at present. A combination of increased importer demand across all sectors for foreign exchange and low supply has weighed on the KES, which closed at a fresh year-to-date low of 111.58 yesterday, according to Bloomberg data. Note this was just shy of its weakest level on record seen in mid-December. The session's losses of 0.11% saw the KES extend its year-to-date drop to -2.12% against the USD. According to a basket of twenty African currencies tracked by Bloomberg, this has seen the KES rank 11th in terms of performance.

In October, the KES recorded its fifth straight monthly drop against USD, marking its longest losing streak since November 2020 as increased demand from oil and merchandise importers and rising inflation, especially fuel prices, pressured the currency. Increased demand for dollars has resulted in foreign-exchange reserves declining as the Central Bank of Kenya attempts to ease pressure on the currency. For context, foreign exchange reserves fell to $9.18bn by October 28, the seventh straight week of decline.

Looking to next week, the KES is expected to remain under pressure, hurt by increased importer dollar demand from all sectors amid depressed supplies of hard currency. That said, plans by the government to sell its maiden green bond is expected to offer the currency some relief before the end of the year.

Fixed Income: African countries look to take advantage of the explosion in appetite for green investment

As the world shifts to more sustainable energy and low carbon transport, demand for green bonds is gaining traction. Green bonds are one of the fastest growing categories of fixed income instruments that raise funds for projects with environmental benefits. Recall that green bond issuance reached a new record in 2020 as the world shifts to more environmentally friendly infrastructure.

Last week, the Climate Bonds Initiative, a non-profit body that promotes investment in the low-carbon economy, forecasted that green bond issuance would reach a record high of $500bn in 2021, up from $297bn recorded last year. Next year, global green bond investment is expected to double and reach $1trn for the first time in a single year by the end of 2022.

There is a strong global trend in place and that is one of decarbonisation. News wires have been tracking information coming out of the global COP26 climate change summit in Scotland, where there is a strong push to ease the world’s reliance on coal. South Africa for example inked a deal where it would receive $8.5bn to help end its reliance on coal. South Africa has been targeted as a major emitter of greenhouse gases given its coal fired power stations. The deal will be funded by wealthier nations and does have regional and global implications.

African countries have taken advantage of the pent-up demand in the international green bond space, with a handful of African sovereigns issuing green bonds to fund green infrastructure projects in recent years. According to the German Development Bank, Africa only accounts for around 1% of global green bonds. The latest African country looking to tap the green bond market is Kenya. In a statement on Thursday, the Kenyan government said that it is ready to sell green bonds to finance climate adaptation and mitigation activities. Kenya named JP Morgan Chase and Citigroup as lead arrangers for the sale, targeting to raise as much as $700mn by the end of December.

Director of climate change financing at Kenya’s National Treasury Peter Odhengo said that Kenya's priority is climate adaptation though the country is now focusing on mitigation due to lack of financing. Since 2019 Kenya has received $2.5bn from the World Bank to finance climate change adaption. Given the global shift to more sustainable investment and the hunt for yield amongst investors, we expect demand for the Kenyan green bonds to be robust.

Macroeconomic: South African Reserve Bank seen hiking rates in November due to recent bout of ZAR volatility

The recent bout of currency weakness and sustained rise in global commodity prices has led to a change in our assessment of the outlook for interest rates in SA. In a bid to show its commitment to its primary monetary policy target, we now expect the SARB to deliver a 25bps interest rate hike later this month. We expect the central bank to use the November MPC meeting as an opportunity to anchor inflation expectations while simultaneously protecting the Rand from further volatility.

Recall that headline inflation in South Africa has risen notably in recent months, climbing to 5.0% y/y in September. Underpinning the acceleration in headline inflation has been a marked rise in administered prices against the backdrop of soaring commodity prices, particularly fuel and food costs. Going forward, we expect international crude and fuel prices to remain elevated, which should keep inflation buoyed in the months to come.

That said, it is important to point out that the tight monetary dynamics against the backdrop of a fragile economic recovery suggest that inflation is likely to remain relatively contained in the months ahead. Note that in an environment of tight monetary conditions and weak economic growth, an exogenous price shock will be recessionary rather than inflationary. Moreover, ETM’s inflation risk index suggests that while inflation could quicken in the near term, consumer prices are expected to moderate in the first half of 2022, partly due to base effects.

In conclusion, while we still think the market is overly hawkish further out, we expect that the SARB will want to move pre-emptively to protect the ZAR and SA from an inflation episode, while at the same time keeping inflation expectations anchored, restablish a positive real interest rate and restore some balance. Policymakers will be a bit worried about recent ZAR volatility and will want to make the point that they have not forgotten about their primary mandate.

At its November meeting, the SARB can move the Repo rat higher and still describe the move as a shift away from ultra-accommodative support to just supportive policy. Note that even if the SARB were to hike rates by 100bps in the coming months, SA’s monetary policy would still be described as accommodative or neutral at best.  We expect the SARB to keep monetary policy accommodative in the months ahead while moving towards a position of neutrality.