Macro Analysis /

Is China setting a precedent with Zambia?

  • Rise in remittance levels may alleviate some pressure on Egypt’s current account deficit

  • China’s commitment to restructuring Zambia’s debt has raised hopes for heavily indebted EMs

  • Economic conditions in Nigeria’s private sector improved in July

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
2 August 2022
Published byETM Analytics


Global bond yields continue to plunge as economic growth concerns become heightened and risk conditions take a knock amid growing US-Sino tensions. US 10yr yields have slumped to 2.550% this morning, deepening the inversion of the curve with the 2v10 spread now around -30bp. German and UK bonds also saw their yields decline yesterday with the benchmark gilt now trading just above 1.800% after yields have dropped almost 40bp over the last month.

The Aussie yield curve, meanwhile, has flattened quite sharply this morning after the RBA hiked rates by 50bp. The increase was as expected but the markets have taken the statement as being a bit less hawkish than expected. This speaks to the general trend we are seeing within global bond markets, which could keep investors risk averse and weigh on emerging market and pro-cyclical assets.    

Shifting the focus to commodities, the oil markets have not had a good start to August, with Brent plunging below $100 per barrel yesterday while WTI has slumped towards $93 per barrel. Both benchmarks lost more than 5% yesterday amid global growth concerns and an easing of the tightness within the physical market. Brent’s prompt timespread has narrowed sharply and is below $2.00 per barrel currently. While this is still very wide by historical standards, it is down from more than $4.00 per barrel seen less than a month ago. Supply conditions within the world’s major producers are improving, while the demand outlook has taken a notable hit in recent weeks as growth forecasts are downgraded, and monetary policy tightening continues to choke some of the life out of the world’s economy in order to try to bring inflation under control. Focus will now turn towards OPEC+ tomorrow for their latest virtual meeting to decide on what the output policy will be for September. The cartel and its allies have already restored, in theory, all of the output that they cut during the pandemic. However, not all are managing to meet their current quotas. This suggests that there is very limited room for further production increases beyond this month, which could see oil’s recent plunge start to bottom out.


Nigeria: Reports from Reuters citing a letter sent to the government indicate that Dubai’s Emirates airline plans to reduce flights to Nigeria due to challenges in repatriating revenue. According to the letter, $85mn had been stuck in the country as of July, a figure that had been rising by $10mn per month. Emirates plans to reduce the number of flights to Lagos to seven from eleven by mid-August as trouble repatriating funds is impacting its commercial viability, and efforts to address the issue have been met with unlimited success. Expectations are that more airlines could follow suit should the Central Bank of Nigeria, which restricts access to foreign currency to tackle a severe dollar shortage, does not address the airlines’ issues.

Egypt: Data from the Central Bank of Egypt showed that net foreign direct investment (FDI) in Egypt grew by 183% in the first three months of 2022 to reach $4.1bn, compared to $1.4bn in the corresponding period of 2021. The Q1 2022 reading was the highest level of FDI recorded in Egypt since Q1 of 2018. In the first nine months of the fiscal year, 2021/22, net FDI into Egypt rose by 53% to $7.3bn. With Finance Minister Mohammed Maait recently calling for Egypt to attract more FDI and increase exports to wean itself from the once lucrative carry trade,  increasing FDI will be a welcome development. Egypt is seeking to attract more local and foreign investments and to support the role of the private sector as a partner in various development processes. For the fiscal year 2022/2023, the Egyptian government is planning to increase FDI to around $10bn.

South Africa: South Africa’s Absa PMI came in worse than expected, with a figure of 47.6 points in July from 52.2 points in June, signaling a contraction in business output. The most significant declines that led to the overall weak PMI were business activity (39.8 points), new sales orders (35.4 points), and employment (47.0 points). The decline in manufacturing output has been primarily due to large-scale power outages in the country that have disrupted businesses' daily operations. This will continue to be an ongoing issue in the country in the absence of private sector reforms. A further concern is the low growth environment that firms face in the country, which will continue to weigh on their output, compounded by unfavourable international trade conditions. As a result, manufacturing production may continue to decline, leading to a broader slowdown of economic growth in South Africa.

Zimbabwe: The Reserve Bank of Zimbabwe kept its benchmark interest rate unchanged at 200% yesterday. The central bank expects monthly inflation to continue slowing during its outlook period after decelerating for the first time in six months in July. The bank added that the disinflation trend will be reinforced by measures taken by government the government to stabilise the foreign exchange market.

Kenya: While much of the focus in Kenya is centred on the upcoming presidential election, it is worth noting that Kenya is seeking to raise KES 50bn from reopened bonds to finance its budget shortfall. The sale of reopened 3-,10- and 20-year bonds began on July 29 and will close on August 16. The coupon rate on the debt sale is set at 11.766%, 12.30%, and 13.444%, respectively. Given all the uncertainty ahead of the election and concern over the country’s fiscal degradation, it will be interesting to see how demand fares.

East Africa: The International Organisation for Migration (IOM, UN Migration) has said that drought and flooding in East Africa are displacing millions of people. Speaking to journalists on the sidelines of the high-level inter-ministerial conference on Migration, Environment, and Climate Change, UN Migration Regional Director for East Africa, was quoted as saying, “we can no longer talk about climate change without talking about human mobility because this is how climate change is affecting our region, and also our continent. The impact of displacement and the whole issue of relocation due to climate change is what we need to deal with.” The official added that the region must raise the issues of climate-induced mobility at global platforms and, later this year, at the 27th Conference of Parties to draw attention to the problem.

Forex: Rise in remittance levels may alleviate some pressure on Egypt’s current account deficit 

Along with tourism, the Suez Canal, and the export of goods, remittance inflows constitute one of Egypt’s key sources of foreign exchange revenue and play a crucial role in helping narrow the country’s chronic current account deficit. With this in mind, it is worth looking at the latest remittance inflow data from the Central Bank of Egypt. The data showed that remittances from Egyptians living and working abroad rose 2.1% y/y to $29.1bn in the first eleven months (July-May) of the fiscal year 2021/2022. This compared with $28.5bn in the corresponding period of the fiscal year 2020/21.

Given that Egypt is a top global exporter of skilled labour, especially to the Gulf region, it is likely to be a beneficiary of an oil-fuelled regional economic boom due to growing remittances flows back home from ex-pats. While this may ease some pressure on the current account, the deficit remains sizeable and may widen further amid higher import costs due to the war in Ukraine. 

Overall, Egypt’s external vulnerability remains significant given the chronic current account deficit and its dependence on portfolio investment inflows, as seen at the onset of the Ukraine war in March. Greater exchange rate variability may be required to avoid another buildup of external imbalances and to facilitate adjustments to shocks, as recently communicated by the International Monetary Fund. Against this backdrop, risks for another currency devaluation exist, given the Egyptian pound remains overvalued on a real effective exchange rate basis.

Fixed Income: China’s commitment to restructuring Zambia’s debt has raised hopes for heavily indebted EMs

China has set a precedent for how it could treat heavily indebted nations after Beijing paved the way for the restructuring of Zambia’s debt. Zambia owes nearly $6bn to Chinese entities, of which it says a third is commercial debt, owed to Chinese state-owned companies and banks. Until April, when it joined Zambia’s creditor committee, co-chaired by France, China had held a hard stance on Zambia’s debt with Beijing, suggesting that it was unwilling to participate in the restructuring of Zambia’s debt.

However, China has made an about turn with the creditor committee stating over the weekend that it supports Zambia’s push to secure a deal with the International Monetary Fund. The agreement between official creditors paves the way for the much-needed IMF bailout and indirectly sets a precedent for how China could work with other lenders to tackle the threat of a wave of defaults across emerging markets.

As highlighted in previous commentary, China is a significant lender to Africa and, as such, has massive exposure to debt in Africa and wouldn’t want to risk a broad-based fiscal crisis. Therefore, the Zambian debt restructuring will be watched closely as it will set an example for many highly indebted African countries. So far, the Zambian government has proved to investors that it is committed to the process of rolling out prudent fiscal reforms as it looks to return to a sustainable fiscal path. While risks remain acute given how indebted the country is, Zambia is regaining the trust of investors and has shown creditors that it is willing to do what is necessary to restructure its debts. This has resulted in a marked decline in Zambia Eurobonds in recent days. Zambia’s 2027 Eurobond yield shed an additional 57bps yesterday to close the session at 21.32%, according to Bloomberg data.

Macroeconomic: Economic conditions in Nigeria’s private sector improved in July

Operating conditions within Nigeria’s private sector improved in July. Nigeria’s headline PMI reading came in at 53.2 in July compared to 50.9 in June. The improvement in the figure is due to the strong output levels which have been driven by improved demand in the period. This illustrates that sentiment within the private sector is slowly recovering, and the hope is that investments will increase as a result. Sentiment improved from June, and firms reported hopes of securing greater business investments.

S&P noted in the report that agriculture recorded the strongest uplift in output during July, followed closely by manufacturing. Services and wholesale & retail followed, where rates of growth quickened from those seen in June.

However, it wasn’t all rosy. Due to persistently high input costs, businesses were forced to pass on a large part of the burden by raising their selling prices at the fastest rate in 4 months. Input costs have been soaring amid elevated international commodity prices and ongoing supply chain issues. Meanwhile, oil production within Nigeria has recently collapsed, which means that the country may become more reliant on oil imports and will feel the effects of the high global fuel prices.

While risks to the outlook have intensified with global growth concerns on the rise, it must be noted that firms remained optimistic about output growth in the year ahead amid hopes of acquiring greater investment and expanding business operations.