Macro Analysis /

Markets expect the ECB to hike by 50bps even as banking crisis deepens

  • Forex: Easing dollar demand provides some relief for the Ghanaian cedi

  • Fixed Income: Surging inflation and risk-off conditions come as headwinds for Ghanaian and Nigerian Eurobonds

  • Macroeconomic: Inflation in Southern Africa remains elevated but is showing signs of easing

Alexa Archibald
Alexa Archibald

Commodities Analyst

Takudzwa Ndawona
Kieran Siney
ETM Analytics
16 March 2023
Published byETM Analytics

Africa Talking Points

Egypt: Amid concerns Saudi Arabia is holding back on assistance partly due to the plunging Egyptian pound, Finance Minister Mohammed Al-Jaadan assured Egypt that Saudi Arabia is following through on financial pledges made to Egypt. Saudi Arabia deposited $5bn in Egypt’s central bank last year and, alongside Qatar, has earmarked more than $10bn for Egypt. But so far, only $1.3bn has come to fruition when a unit of Saudi Arabia’s Public Investment Fund acquired state-owned stakes in four Egyptian companies. Gulf countries are reportedly waiting for more certainty on Egypt’s currency and proof it’s making reforms. Talks with Saudi Arabia’s PIF over the purchase of Cairo-based United Bank have stalled over a disagreement about how to value the transaction.

Egypt: As authorities finally move ahead with an ambitious plan to revamp the economy, Egypt is considering further expanding the list of state-owned companies it will offer to investors, with some to be pitched to the market in April. In February, Egypt said it would offer stakes in 32 firms over a month, but that number could grow to 40, according to Finance Minister Mohammed Maait. On Wednesday, Maait said that “the implementation has already started, and some of these assets are going to the market next month.” The sales, either in the form of public offerings, block sales to strategic investors, or a combination of the two, are a key part of a program the government has launched to help shore up an economy battered by the fallout war in Ukraine.

Ethiopia: Following his meeting with U.S. Secretary of State Antony Blinken, Prime Minister Abiy Ahmed said that Ethiopia and the U.S. had agreed to strengthen their relations and mend the diplomatic damage caused by the Tigray war. Blinken, visiting the Ethiopian capital Addis Ababa, also met Foreign Minister Demeke Mekonnen and was due to meet leaders of the Tigray forces. According to the Ethiopian Foreign Affairs ministry, the talks included discussions on the formation of an interim administration in Tigray and transitional justice policy that would seek accountability and redress for victims of the war. The visit comes amid a flurry of trips by U.S. delegations to Africa amid concerns about the influence of China and Russian Wagner Group mercenaries on the continent.

Nigeria: Nigeria is reportedly blocking foreign airlines from repatriating at least $744mn as it rations dollars. According to a local report citing a letter written by the International Air Transport Association, Nigeria has been the country with the highest amount of airline-blocked funds in the world for over a year. The amount has risen from $464mn in July last year. The Central Bank of Nigeria has been rationing dollars to preserve its foreign exchange reserves, which have come under pressure from slumping oil production. Foreign airlines sell tickets in local currency but are unable to get the dollar equivalent through the central bank.

Zambia: Finance Minister Situmbeko Musokotwane on Wednesday said that Zambia is working hard with creditors, including China, so that a debt restructuring can be agreed upon by the end of March or shortly afterward. According to Musokotwane, “We have done everything on our side to get the debt restructured. Unfortunately, the process where so many interested groups are involved on the creditor side, there has been a delay.” The Minister added that China, Zambia’s largest bilateral creditor, was being engaged on the debt restructuring with bilateral engagements on an almost weekly basis. China has publicly expressed its support for Zambia in dealing with its debts while also calling for multilateral lenders like the World Bank to offer struggling countries debt relief, something not currently done. Meanwhile, U.S. Treasury Secretary Janet Yellen and other Group of Seven countries have grown increasingly frustrated about what they see as foot-dragging by China in negotiations for countries seeking debt relief.

Easing dollar demand provides some relief for the Ghanaian cedi

While the Ghanaian cedi has come under some pressure since the end of last week, it has been a positive month for the currency so far. The cedi is up by more than 4% on a month-to-date basis against USD and is ranked the best-performing African currency tracked by Bloomberg in March. The rebound in the cedi comes on the back of monthly losses in January and February and has been driven by reduced dollar demand in the local foreign exchange market following the government's decision to suspend external debt payments. Ghana unilaterally stopped payments on Eurobonds and other external debt in December, pending an agreement with creditors that is needed to unlock an International Monetary Fund bailout.

The impact of the move is beginning to filter through to the currency. Additional measures such as a ban on the sale of FX to importers of certain goods the government described as "non-essential items" and the gold for oil program has also eased pressure on demand for foreign exchange and foreign exchange reserves which, as of December stood at $6.2bn. That covers less than three months of imports.

Although the cedi is on the front foot this month, a more meaningful and sustained recovery likely hangs on a successful debt restructuring and authorities securing IMF board approval for the $3bn program. Were this to occur, we could see the recovery in the cedi persist in the months ahead. Given how much negative news is priced into the cedi and its deep undervaluation, some glimmer of light for the country could prompt a more meaningful rebound in the currency.

This poses the question of whether the cedi could outperform its regional peers in the months ahead if there is progress on the debt restructuring front or towards sealing a deal with the IMF. As such, it is worth exploring potential cross-currency trades such as going long the GHS/NGN.

Surging inflation and risk-off conditions come as headwinds for Ghanaian and Nigerian Eurobonds

While inflation pressures in Southern Africa are easing, inflation in West Africa remains robust. This was highlighted by the inflation reports out of Ghana and Nigeria on Wednesday. While headline inflation in Ghana came in below consensus expectations, albeit marginally, and lower than the previous month’s reading, consumer price growth remains buoyed above 50%. Significant currency weakness is one of the main factors underpinning surging consumer price growth.

Inflation in Nigeria meanwhile came in marginally higher than consensus expectations, printing at 21.9% y/y for February, the highest level in almost two decades. Details from the official report showed that the acceleration in inflation was fueled by rising food costs, partly driven by the sharp depreciation in the NGN over the past year. For context, the NGN has depreciated by almost 11% against the USD over the past year.

While there has been a significant reset lower in the implied path for global interest rates, policymakers in Ghana and Nigeria are going to have to remain uber-hawkish to prevent inflation from rising further and their currencies from coming under additional pressure. Surging inflation and the current risk-off conditions point to more challenging times ahead for Ghanaian and Nigerian bonds.

That said, there are factors that should help limit the magnitude of any further losses. In terms of Ghana, the country’s Eurobonds are already deeply undervalued. Moreover, there have been some positive developments towards securing an IMF deal. For Nigeria, the country’s oil production is rebounding, which will help to shore up the country’s coffers. That said, the rebound in Nigeria’s oil production comes against the backdrop of falling international oil prices. Lastly, the reset lower in global interest rate expectations implies that debt servicing costs won't rise as much as some had expected in the months ahead.

Inflation in Southern Africa remains elevated but is showing signs of easing

In the first few months of 2023, we have seen inflation start to ease in Southern Africa as global fuel and food prices have started to pull back. Inflation is expected to slow further in the coming months as the high-base effects from 2022 come into play from March after Russia’s invasion of Ukraine prompted a surge in international commodity prices. Falling oil and food prices add to the notion that inflation pressures in Southern Africa are likely to drop in the months ahead.

Speaking of which, Brent crude reached a low of $75/barrel yesterday, which compares to peaks of around $140/bl in March 2022. Moreover, the FAO Food Price Index, which is widely used as a global proxy for food prices, is down 18.7% since the peak in March 2022. Note that oil and food prices were the main drivers of inflation in 2022.

Data released yesterday showed that inflation in Botswana slowed to 9.10% y/y in February from the peak of 14.60% in October 2022. While inflation remains elevated, it is clear that consumer price growth in Botswana is trending lower. While food price inflation in Botswana remains elevated, transport prices have pulled back markedly.

While inflation across most of the region appears to have peaked, inflation in Namibia remains sticky. For context, headline inflation in Namibia accelerated to 7.2% y/y in February from 7.0% in January. That said, inflation is trending sideways and not upwards. As the base effects from 2022 come into play so inflation in Namibia should moderate.

Going forward, uncertainty across financial markets related to the global banking crisis, the repricing of US interest rate expectations, and rising growth concerns will help ease pressure on regional central banks to hike rates further. That said, we can't yet rule out further rate hikes in the region.