UST futures are edging marginally higher in early trade at the start of the week, following Friday’s losses after the market was pressured by declines in European markets and ahead of a slew of corporate issuance this week. Yields are down by just over 1bp this morning after gaining more than 10bp across the curve on Friday, with bund and gilt curves steepening out on increasing rate hike wagers and ahead of planned sovereign bond sales in Europe this week.
Policymakers are sticking to their hawkish outlooks, with ECB Chief Lagarde stating on Friday that they must stay the course in their battle against inflation. Rates traders pushed their expectations for peak rates in the Eurozone to 3.44% as a result. This placed some significant pressure on peripheral bonds, with Italian yields rising the most since the last ECB meeting. Concerns over inflation remaining elevated given China’s reopening and central bankers remaining hawkish could keep core bond markets under a bit of pressure in the near term.
Ghana: Reports citing sources close to the matter indicate that Ghanaian banks are holding out for better terms in a domestic bond-exchange program aimed at easing the government's debt-service burden. No bank will make a profit in 2022 if they accept the new bonds offered under the exchange, and some face collapse, according to two people familiar with ongoing talks between the government and lenders. Ghana is restructuring most of its public debt, estimated at GHS 467bn ($39.2bn) as at the end of September, to qualify for a $3bn bailout from the IMF. Local bondholders have been asked to voluntarily exchange GHS 137.3bn of debt for new bonds that will pay zero interest in 2023 and less than existing securities in the ensuing years. The repayment of the principal for the new bonds won't start until 2027 and end in 2038, under current terms. Meanwhile, banks are reportedly negotiating for principal repayments to start by 2026 and end around 2033. The sources added that banks that own about a third of the existing securities will make losses on the difference between the net present value of their current holdings and the new bonds.
Ghana: S&P on Friday downgraded Ghana’s foreign-law Eurobond due January 2026 to ‘D’ (default) from ‘CC’. At the same time, the ratings agency affirmed its other ratings, including its ‘SD’ long-term sovereign credit rating on Ghana. The agency noted that it lowered the issue rating on the foreign-law foreign currency Eurobond due to the Ghanaian government failing to pay around $41mn in interest due on January 18. S&P added that over the next few months, it expects Ghanaian authorities to engage with holders of Eurobonds to formally restructure the foreign currency-denominated debt. The missed payment was in line with the government communication last month. The government said that owing to economic pressure, it would suspend debt payments on Eurobonds, commercial term loans, and most bilateral debt.
Morocco: Consumer price inflation in Morocco stood at 8.3% in December, the highest on record and unchanged from the month prior. On a m/m basis, consumer prices rose 0.1% in December. Continued increases in the prices of food and non-alcoholic beverages and transportation drove the strong inflation number. Overall, price pressures in Morocco remain elevated, and this should see policymakers persist with their hawkish approach to monetary policy. In December, the central bank raised its key interest rate for a second consecutive meeting in a bid to combat surging inflation which had sparked rare protests.
Nigeria: The latest data from Nigeria's NNPC shows that the state-owned firm spent NGN 4.39trn ($9.7bn) on a petrol subsidy last year, a cost the government has blamed for dwindling public finances. The data also showed that the NNPC did not remit funds to federal accounts last year, leaving a hole in public finances at a time when the government has been warning that low revenues and large deficits left it unable to stimulate the economy. Despite calls from international lenders such as the IMF to remove the costly subsidy, Finance Minister Zainab Ahmed has said the subsidy will remain in place until mid-2023 and set aside NGN 3.36trn ($7.5bn) to spend on it.
Nigeria: Finance Minister Zainab Ahmed has said that Nigeria is refusing to join an overhaul of the global taxation system it says is skewed to the interest of rich nations and could potentially hurt Nigeria's tax revenues. According to Ahmed, the negotiations were not conducted on an equal footing, favored wealthy economies, and created rules that are too complex for Nigeria to effectively implement. Zainab added, "If we sign up to this, it means we're excluded from getting taxes from medium-sized companies that we now actually, by our own laws, have an opportunity to collect taxes from." Nigeria's continued holding out casts a shadow over the OECD-led initiative, which aims to set a minimum corporate tax rate at 15% and share out rights to tax the world's biggest firms more fairly.
Uganda: Uganda's Energy Minister on Friday said that Uganda plans to announce a third oil licensing round in May in an effort to further develop a sector on track to produce its first oil in 2025. In a statement detailing developments in the sector, the minister said that the next licensing round would be announced at a regional conference in Kampala in May but stopped short of saying how many blocks would be put up for auction. Uganda discovered commercial hydrocarbon deposits near its western border with the Democratic Republic of Congo. The country is also developing a crude export pipeline and a domestic crude refinery that will help commercialise the country's oil resources.
Uganda: Official data shows that Uganda's trade deficit narrowed by 1.7% m/m to $299.9mn in November from $305.2mn in October after the value of imports fell. Specifically, imports fell 2.8% m/m to $635.7mn in November, while exports rose 4.7% m/m to $335.8m. While the trade data improved, Uganda continues to run a trade deficit which is likely to weigh on the current account balance and, by extension, the local currency.
Forex: Weaker dollar outlook to provide some support for African countries
African currencies broadly weakened against the USD in 2022, with 18 of the 23 currencies tracked by Bloomberg recording losses. While idiosyncratic challenges contributed to this weakness, the strength of the USD was a major driver. The USD rose to its highest since 2002 on the back of the Russia-Ukraine war, Europe's energy crisis, China's aggressive Covid-Zero policy, and perhaps most notably, the USD Federal Reserve's commitment to tightening monetary policy.
Such was the advance in the USD that it now finds itself extremely overvalued on a real effective exchange rate basis. The overvaluation is unsustainable, and although this does not mean it will retrace the full extent of that overvaluation, it does suggest that some degree of correction is inevitable. The most likely catalyst for a USD correction in 2023 is a Fed pivot to looser monetary policy. The worst of the ongoing inflationary episode is in the rear-view mirror, meaning the case to keep monetary conditions tight for longer is weakening. Accordingly, the market is slowly but surely starting to position for rate cuts and, in turn, USD weakness.
While the USD might not fall back to its 2021 lows anytime soon, it will likely weaken through 2023. The balance of risks is tilted against it, and a further correction appears to be more a matter of when than if. A weaker USD is, therefore, likely to provide some support to emerging and frontier market currencies that weakened notably last year. However, currencies in countries without sound fundamentals may be unable to fully capitalise on the unwinding of the USD strength.
Fixed Income: High yields, weaker currency to attract inflows into Egypt
A currency at a record low and rising yields are set to entice investors back into Egypt's fixed-income market, gradually. The EGP plunged to a record low recently, but expectations are that further weakness is coming, with the currency more than 25% overvalued still. Once this weakness materialises, it will make for an attractive entry point into the country's fixed-income market, enabling foreign investors to take advantage of record-high yield spreads for Egyptian t-bills. Almost all of the nation's t-bills are at their widest discount relative to emerging market debt, and with the central bank expected to continue to raise rates, these yield spreads could widen further and entice foreign investors back into the market. Inflation remains a concern, and with the currency regime having changed, the CBE will have to show that it is willing to hike in order to stabilise capital flows.
With the country having been shut out from raising foreign capital for almost a year, attracting foreign investment back into the market is critical. Egypt was the worst performer among emerging markets last year, with investors pulling as much as $22bn from the market in the space of just six months. Egypt was once heavily reliant on these inflows, and while policy changes are aimed at reducing this reliance, the country needs foreign capital to fund its current account and prevent a further sell-off of the currency and placing the country into a downward spiral that could lead to another economic crisis. Foreign investors seem to be turning more bullish, however, and we could start to see more firms turning towards overweight positions on Egyptian debt, given the high discounts on offer at the moment.
Macroeconomic: African central banks are expected to slow their pace of interest rate hikes
In 2022 most African central banks adopted an aggressive monetary policy tightening cycle in order to try and get inflation under control. Our expectation is that in 2023 most African central banks will slow the pace of interest rate hikes as inflation has shown signs of peaking or moderating.
This expectation was affirmed on Friday at the January interest rate decision in Angola. Angola has been an outlier among the African countries and has already started to cut, taking its benchmark rate from 19.50% to 18.00%. This is the largest rate cut we have seen globally this year so far, and officials suggested that if inflation continues to ease, more cuts will be on the cards. The key factor here is oil, as if we see prices continue to rise amid demand optimism, Angola's currency could continue to appreciate, reducing import-inflation pressures. Angola's central bank next meets in late March, so investors will be closely watching the upcoming CPI prints in order to gauge just how deep the next cut will be.
Meanwhile, expectations are that Mozambique is going to hold rates at its next MPC meeting in order to assess the impact of previous increases. Meanwhile, South Africa and Kenya are expected to start slowing the pace of hikes, with the potential to hold rates in 2Q.
Going forward, there are two major factors that are likely to impact African central bank rate decisions in the coming months. Firstly, the reopening of the Chinese economy could result in inflation rearing its head once again, which may make central banks wary of cutting rates too early. Secondly, and more importantly, is the movement in the USD. The pullback in the USD has eased pressures on African currencies, making import bills and some international debt repayments less costly. As noted above, we expect the USD to weaken significantly this year, which bolsters our view that more central banks will begin to pause their tightening cycles and even begin to discuss rate cuts.