Macro Analysis /

Kenya surprises markets with a 50bps rate hike, Angola's rate decision in focus

  • Forex: Zambian Kwacha is lagging its regional peers in 2022

  • Fixed Income: Kenyan bonds start the week on the front foot even as the central bank delivers a surprise rate hike

  • Macroeconomic: Rising oil prices come as a dichotomy for Africa

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
31 May 2022
Published byETM Analytics


With the exception of the Asian continent, several currencies rallied against the USD yesterday, with the main catalyst being the USD's weakness. The EUR has recorded the strongest monthly gain in a year, Bitcoin has surged 8%, the GBP is at a one-month high, and the commodity currencies also performed well. Emerging market currencies extended their winning streak as investors continued to moderate their expectations of US rate hikes. In other news affecting currencies, equity markets have performed extremely well to unwind most, if not all, of the losses sustained through May. Risk appetite has improved considerably as news that China will lift its curbs bolsters global growth sentiment.

The optimism around the opening of Shanghai has buoyed the price of copper which is looking to retest yesterday’s high of $9579.00/tonne as we enter the start of the EU session. Market participants are wagering that the reopening of China will quickly restart the demand side of the equation which will underpin the prices going forward. We think that it may take some time for the Chinese economic juggernaut to return to pre-lockdown levels, potentially longer than the market anticipates, however the bias is certainly up for now. Iron ore has remains bid as the Chinese reopen their economy. Iron Ore futures in Singapore have touched a high of $135.10/tonne and if the momentum is maintained, we can expect to see levels closer to $140.00/tonne in due course.


Angola: The National Bank of Angola will deliver its latest verdict on its policy rate today. Expectations are for the Monetary Policy Committee to keep borrowing costs unchanged as a rally in the Angolan Kwanza is helping to rein in inflation. Note Governor Jose de Lima Massano earlier this month forecast inflation which peaked in January, to slow further. While consensus expectations are for the Bank of Angola to keep rates on hold, we once again caution that there is a notable risk of the central bank’s hiking rates to ensure Angola maintains its monetary policy differential with major economies such as the US.

Egypt: Data from the Central Bank of Egypt showed that the country’s net external debt increased by $8.1bn during the last quarter of 2021. Specifically, external debt rose to $145.5bn at the end of December from $137.4bn at the end of Q3, an increase of about 5.8%. Moreover, the external debt is equivalent to 33.2% of GDP, up from 32.6% of GDP in Q3. Despite the rise in total foreign debt, Finance Minister Mohamed Mait has indicated that the government is preparing to issue the first foreign Sukuk offering soon.

Egypt: Egypt sold bonds maturing in 2027 and 2032 yesterday. Specifically, Egypt sold EGP 1.35mn ($72,495) of bonds due May 17, 2032. The bonds attracted a cover ratio of 2.35 and cleared at a yield of 14.675%, which was higher than the last time it cleared at 14.372% on May 16. Egypt also sold EGP 36.125mn ($1.94mn) of bonds due April 5, 2027. The bonds were oversubscribed 1.86 times and cleared at a yield of 14.22%, fractionally lower than 14.25% on May 16.

South Africa: The government's monthly budget deficit widened further to -R45.2bn in April from -R37.2bn in the month prior, keeping with a seasonal trend. For context, the median budget balance over the past five years has been a deficit of -R51bn. The current balance was the widest deficit since the start of the year, although it was less than half the shortfall of -R80.4bn recorded in the same month a year earlier, a period of large fiscal support measures aimed at supporting the economy through the pandemic. Even with sticking with the seasonal trend, the figures still show SA's weak fiscal position, which is expected to worsen due to increased financing costs and the failure of the government's fiscal consolidation attempts to deliver any meaningful results. The combination of the above factors, coupled with funding for repairing KZN after the floods and the threat of declining revenue, suggests that SA's public finances are at risk of further deterioration. Therefore, we can expect to see a weaker fiscal deficit and debt-to-GDP ratio than previously forecast if drastic action is not taken.

Tunisia: Rating agency Fitch yesterday said that it believes Tunisia's government and the influential Tunisian General Labour Union (UGTT) could forge a consensus on a set of economic reforms that could unlock IMF funding and support the country's external financing position, but tensions over the future institutional setup are hampering an agreement. Fitch added that this increases risks to their base case of Tunisia entering an IMF programme by end-3Q22. Note that the UGTT's announcement on May 23 that it would not participate in a national dialogue proposed by the president to support political reforms and that it would hold a national public-sector strike has highlighted differences in vision over the reform process. A constitutional commission has also been set up to advance the reforms. A referendum on a new constitution is expected to take place in July, with parliamentary elections in late 2022.

Botswana: The mining sector remains regionally significant with coal a focal point following the escalation of the Russian/Ukrainian conflict which has seen Russian supplies of coal shunned by the market. South Africa and Botswana are strong contenders to fill this void of what was once a shunned energy source but there are as always challenges with most of these focused squarely on the logistics of getting the coal out of the ground and to the consumer. The current infrastructure across the region including rail, road and port facilities may not be able to handle the additional demands, never mind the need to increase capacity at the mines producing the coal. At the moment there is a void of some 40 million tonnes as a result of the war, the question is how long will this void last.

Forex: Zambian Kwacha is lagging its regional peers in 2022

As May draws close to an end, it is worth taking stock of the performance of currencies in the Southern Africa FX complex tracked by ETM. It has been a mixed year so far for Southern African currencies with the Zambian Kwacha (ZMW) and the Botswana Pula (BWP) trading in the red while the South African Rand (ZAR), and Mozambican Metical (MZN) have recorded gains. Aside from some positive idiosyncratic developments, a weaker USD on the back of some weaker than expected data, Fed speakers somewhat softening the Fed's communication, and growth concerns raising doubts about the ability of the Fed to hike to their full extent have supported the ZAR and MZN. 

It is not difficult to argue for ZAR depreciation. SA's economy faces so many challenges that it seems logical to expect it, yet the ZAR's performance in recent years says otherwise. Again, investors are reminded of the USD's overvaluation, which forms the backdrop against which all the other challenges will detract from SA's ability to grow. A weak economy translates into a trade and current account surplus as both consumption and investment in SA's future are scaled back. Add to that SA's carry attractiveness and its exposure to commodities that might perform well in a weaker USD environment, and one can appreciate that the outlook for the ZAR is much more nuanced than simply focusing on all the bad economic developments that are unfolding.

Meanwhile, the MZN has found further support from factors such as an improvement in the security situation in the mineral-rich province of Cabo Delgado and better economic and fiscal prospects. An agreement on a $456mn deal with the IMF earlier this month will enhance the government's economic recovery efforts and also provide broader support to address some of Mozambique's long-term structural challenges, particularly the management of public resources and governance.  While fiscal risks in Mozambique remain elevated, we expect to see continued positive policy reform, prudent fiscal policy, and management from the government in the coming months. In addition to the LNG sector, which is set to provide a massive boost to the country's fiscus, we expect the MZN  to remain supported in the near term.     

While the ZMW has underperformed its peers, the currency has recorded a strong performance over the past eleven months. For context, since the early July record low north of 22.6000, the Kwacha has strengthened by around 24% against the USD. The notable strength has come on the back of several factors, including improved FX reserve levels, buoyant copper prices, and optimism over the August election victory of Hakainde Hichilema last year. More recently, some support has emanated from central bank intervention and positive sentiment amid rising investor confidence in the economy. The Kwacha is expected to be stable in the near term on the back of continued central bank support and positive sentiment. While talks regarding debt restructuring are ongoing, it remains to be seen whether the ambitious timelines set by the government will be met. Delays in the process could prevent the Kwacha from meaningfully appreciating in the months to come.

Fixed Income: Kenyan bonds start the week on the front foot even as the central bank delivers a surprise rate hike  

Kenyan bonds rallied at the start of the new week even as the Central Bank of Kenya unexpectedly raised its key interest rate for the first time in almost seven years. While consensus expectations were for the Central Bank of Kenya to leave rates on hold, we highlighted in yesterday’s note that there is a considerable risk that policymakers would hike rates. There was a need for the Central Bank of Kenya to hike rates to rein in soaring inflation expectations and restore stability in the currency market following the sustained sell-off in the Kenyan Shilling, which has compounded inflation pressures in the country.

The Monetary Policy Committee raised its benchmark policy rate by 50bps to 7.50%. The central bank said that the decision was taken because of elevated risks to the inflation outlook due to increased global commodity prices and supply chain disruptions. Recall that inflation accelerated to 6.5% y/y in April from 5.6% y/y in March amid rising food and fuel price. Headline inflation in Kenya is edging closer to the upper limit of the Central Bank of Kenya’s 2.5%-7.5% inflation target band.

The Committee highlighted that the ongoing Russia-Ukraine conflict and other global disruptions are adversely impacting the Kenyan economy through increases in commodity prices, particularly fuel, wheat, edible oils, and fertiliser.

Notwithstanding the supply shocks relating to the war in Ukraine, leading economic indicators showed that the Kenyan economy posted a strong performance in the first quarter of 2022, supported by robust activity in construction, information and communication, wholesale and retail trade, transport and storage, and manufacturing sectors. The MPC said that the economy is expected to remain resilient in 2022, with the continued strong performance of the services and manufacturing sectors despite the downside risks to global growth.

On the fiscal front, the Committee said that revenue performance to April 2022 had been particularly strong, reflecting enhanced tax collection efforts and increased economic activity. While government revenues remain healthy, fiscal risks in Kenya remain skewed firmly to the upside as expenditure ramps up ahead of the presidential election later this year. Against the backdrop of heightened fiscal risks and tightening monetary policy, the outlook for Kenyan bonds remains decisively bearish notwithstanding yesterday’s pullback in domestic bond yields.

Macroeconomic: Rising oil prices come as a dichotomy for Africa

Oil continues to push higher this morning, with Brent rising above $123 per barrel as the EU moved forward with an embargo on Russian crude. A deal was reached yesterday that would see EU member states forbidden from buying Russian oil that is delivered by sea. While this is not a full ban, as it allows crude flow through pipelines to remain, it will still have a significant impact on supply levels across Europe. Last year, Russian sea-borne shipments of crude from its Baltic, Black Sea, and Arctic ports amounted to 1.57mn barrels per day, more than twice the amount that was transported daily through pipelines. Furthermore, the majority of oil shipped through pipelines headed to Germany and Poland, both of which have agreed to wean themselves off Russian crude over the coming months.

This means that new sources of crude will need to be sourced, and given the current supply issues in the market, this will not be an easy task. As a result, we could have structurally higher oil prices embedded for months to come. OPEC+ is struggling just to meet its current output quotas, adding just 10% of the additional supply that was promised in the last two months. The US is also struggling to significantly increase its output, with shale producers able to drill for more but being set back by regulations and the need to return capital back to shareholders.

While soaring international oil prices add to elevated inflation pressures for net oil importing countries in Africa, oil-exporting countries like Nigeria and Angola benefit massively. The high oil prices are boosting exports and are resulting in increased foreign currency inflows and higher fiscal revenues. The positive impact of soaring international oil prices is most evident in Angola. Angolan bonds and the Angolan Kwanza have benefitted handsomely from the spike in international oil prices. For context, Angola’s 2029 Eurobond yields have fallen by more than 135bps over the past week, while the Angolan Kwanza has gained almost 25% against the USD on a year to date basis.