Macro Analysis /

Kenya proposes a new fiscal rule following backlash from fiscal hawks

  • Forex: Weaker Zambian Kwacha poses an upside risk to the inflation outlook

  • Fixed Income: Lawmakers in Kenya propose a new fiscal rule following calls from the IMF

  • Macroeconomic: African central banks are turning more hawkish

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
17 February 2022
Published byETM Analytics


There were no surprises in yesterday's FOMC minutes, with the central bank still pointing to a measured tightening in monetary policy. The FOMC is likely to decide on a rate hike in March, although it is not evident that the rest of the FOMC feels as strongly as Fed President Bullard that a 50bp rate hike is needed. The risk for the Fed is that they move too aggressively too quickly and impose unnecessary headwinds on an economy when inflation will naturally reverse over time in any event.

The USD remains on the defensive. The VIX has dropped further, and overall risk appetite has improved considerably. The safe-haven bid has lifted, and the USD is struggling to hold on to its gains now that the FOMC alluded to a measured approach to tightening. EM currencies appear to be on the front foot this morning, and equity markets look a little more stable. All eyes remain on Ukraine, but for now, there is no definitive news to trade on, and investors continue to believe that the geopolitical tensions will eventually be resolved.


Egypt: Prime Minister Mostafa Madbouly yesterday reported that Egypt's economy grew 8.3% in Q2 of the fiscal year and 8% in the first half. The PM further forecast economic growth to exceed 6% for the whole fiscal year that ends on June 30. Note that the central bank forecast the economy to record positive growth rates in the near-term backed by domestic demand, particularly gross domestic investments. Regarding inflation, Madbouly said that inflation had returned to levels that prevailed before the pandemic and that the country was on track to keep annual increases in the consumer price index contained at 7% plus or minus 2ppts.

Morocco: King Mohammed VI has ordered a $1.1bn anti-drought relief plan. The plan aims to ensure that the domestic market gets adequate wheat and livestock feed supplies and grants insurance compensation to farmers. The relief plan also includes measures to confront the scarcity of water resources. The move comes after the central bank recently called for speedier reforms and the founding of a state investment fund as the economy faces the prospect of a damaging drought.

Namibia: Namibia's central bank delivered its first rate hike in six years yesterday. The monetary policy committee lifted the rate by 25bps to 4.00%. The move follows a decision by the South African Reserve Bank last month to raise borrowing costs by the same amount, also to 4%. Namibia forms part of a common monetary area with South Africa, in which the Rand is legal tender, and monetary policy and foreign-exchange rules are often guided by the actions of the South African Reserve Bank. Although inflation has not accelerated at the same pace as in SA, it reached a 3-year high in January and is forecast to average 4.4% this year and 4.5% in 2023. The rate hike unwinds some of the 2.5ppts of easing announced since 2020 to support an economy hampered by the coronavirus pandemic.

Nigeria: In a bid to end fuel shortages that have caused long gas queues in Nigeria, the country's state-owned oil company has ordered emergency imports of fuel. According to the Nigerian National Petroleum Co., more than 2.3bn litres of gasoline will be delivered by the end of February to restore stocks to a national target of 30 days of supply. Nigeria has run short gasoline after the NNPC rejected some cargoes because of their elevated methanol content. That's led to surging transport costs and, according to the Statistician-General caused an "unnecessary shock" to the economy that could lead to a spike in inflation and slower economic growth.

Tanzania: As part of plans to end electricity outages, Tanzania will spend around $1.9bn to upgrade its power transmission and distribution network. According to the Energy Ministry, the project will "upgrade power sub-stations and transmission lines across the country to stabilise power supply." The ministry, however, stopped short of saying how the government would finance the project. Tanzania has struggled with an inconsistent power supply which the ministry has attributed to a legacy failure to invest at least 10% of the utility's annual revenues in repair and maintenance.

South Africa: Matching expectations, consumer prices moderated in January, coming in at 5.7% y/y from 5.9% y/y in December. Inflation moderated for the first time in three months, according to Stats SA, due to lower prices for food and non-alcoholic beverages, housing and utilities, transportation, and other goods and services. However, quickening core inflation will continue to be a source of concern for policymakers, having risen from 3.4% y/y in December to 3.5% y/y in January. While inflation is expected to remain contained on the back of relatively tight monetary dynamics, given expectations for food and energy prices to remain elevated, there is a possibility that inflation breaches 6% in Q1. Note that this will partly be determined by the Rand's performance in the coming weeks.  

Forex: Weaker Zambian Kwacha poses an upside risk to the inflation outlook

The Bank of Zambia yesterday kept its benchmark interest rate unchanged at 9.0% to further support the economy after inflation slowed to a two-year low. According to Governor Denny Kalyalya, the decision to hold was supported by a “sharp decline in inflation since December and due to some fragility in economic growth. The Monetary Policy Committee (MPC) forecast the economy to grow 3.5% in 2022 and 3.6% in 2023.

Regarding inflation, the MPC forecast price growth will continue to trend towards its 6% to 8% target range over the next eight quarters. According to the Governor, this is “mainly due to the catalytic benefits of securing an International Monetary Fund program such as access to budget support, a reduction of external debt burden through restructuring and unlocking investment.” The MPC now forecasts inflation to average 13.2% this year versus 15% projected at the November meeting. That said, upside risks to the inflation outlook exist. These include adverse weather conditions, supply chain bottlenecks, surging energy prices, an anticipated increase in power tariffs, and a weaker Zambia Kwacha (ZMW).

Zooming in on the ZMW, it has been the worst-performing African currency on a year-to-date basis, down by almost 6.00%. Much of the ZMW weakness can be attributed to tight FX liquidity conditions. Demand for hard currency from importers and corporates on the back of improving economic activity has outpaced available supply and thus weighed on the Kwacha. As mentioned in previous commentary, the ZMW rally was in part driven by sentiment, and economic fundamentals remain the same at present. This, therefore, suggests that the current level of undervaluation of the ZMW on a real effective exchange rate basis is justified. Looking ahead, the bullish copper outlook notwithstanding, further room for appreciation will likely depend on the new government making significant headway in implementing the required economic reforms and addressing the existing structural challenges.

Fixed Income: Lawmakers in Kenya propose a new fiscal rule, following calls from the IMF

Kenya has found itself in the firing line of fiscal hawks as the outlook for the country’s debt trajectory worsened. In addition, Kenya has come under criticism from the likes of the International Monetary Fund and credit rating agencies for its lack of prudent, debt consolidative policies. That said, there was a marked shift from the Kenyan government on Wednesday following reports that the Finance Ministry plans to change the way it determines the maximum amount of debt the government can hold, or in other words, its debt ceiling.

According to reports from Bloomberg, the Finance Ministry is planning to switch the measure to a ratio of GDP instead of having an absolute or nominal debt ceiling. Treasury Secretary Ukur Yatani proposed setting the debt ceiling at 55% of GDP instead of the current KES 9trn, which equates to just under $80bn. The proposal comes in the wake of a recommendation from the IMF last year that the government shifts its debt limit to a rate instead of an absolute number.

The Treasury Secretary noted that the proposed change to the debt ceiling would be more in line with international standards and would accommodate the government’s projected deficits. Recall that prior to 2019, when the government shifted its debt ceiling rule to an absolute number, the government had breached its previous fiscal rule, which limited the maximum amount of debt the government could hold to 50% of GDP due to aggressive infrastructure spending.

While the proposed debt ceiling change is encouraging, it is worth pointing out that according to the latest IMF data, Kenya’s debt stood at KES 8.2trn or 67.9% of GDP at the end of the 2021 fiscal year. The IMF forecasts that Kenya’s debt pile will remain elevated in the years ahead, climbing to 71.2% of GDP in 2022.

Furthermore, the IMF forecasts that Kenya’s debt to GDP ratio will remain above the proposed debt ceiling of 55% of GDP over the next five fiscal years, with the country still seen running large deficits. While the proposed shift in the fiscal rule is encouraging, more needs to be done if the country is to return to a sustainable fiscal path. Therefore, in line with the in-house view and rating agencies' negative credit outlook, the IMF assesses Kenya’s overall risk of debt distress as high.

Macroeconomic: African central banks are turning more hawkish

The FOMC minutes overnight have set the tone for the trajectory of monetary policy for the world’s largest economy. We are heading for a period of tightening and Fed balance sheet reduction, which is going to result in US treasury yields rising as well as dollar funding costs.

Given that the US 10yr is the global risk-free rate, any rise here will directly influence how other markets need to respond. This will undoubtedly result in African bond yields having to rise accordingly in order to compensate investors for the risk premium associated with holding local debt and will certainly make funding for governments more expensive.

We have already seen the South African Reserve Bank hike rates this year. Following the two rate decisions yesterday, the focus shifts to Botswana. The factors mentioned above, coupled with the January inflation reading, sets the backdrop for the Bank of Botswana meeting next week and the bond auction, which follows on the 25th of February.

Our view is that the Bank of Botswana may be forced to become more hawkish in its approach to monetary policy even though it stated at the last meeting that it expects inflation to return to its target band of 3-6% by 3Q 2022. We expect this outlook to be revised as commodities remain stubbornly high, and there are additional threats to the supply chain now that the Eastern Europe tensions have magnified.