Macro Analysis /

Moody's lowers Egypt's outlook to negative, Angola is looking attractive

  • Forex: Currency strength pass-through effect still driving inflation lower in Zambia

  • Fixed Income: Moody’s downgrades Egypt’s sovereign credit rating outlook to negative

  • Macroeconomic: Angola is becoming increasingly attractive for investors

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
27 May 2022
Published byETM Analytics


Oil prices rallied quite a bit yesterday, with the front-month Brent contract finally breaking above the $115 per barrel resistance level. The European benchmark oil price is currently trading at around $117 per barrel, heading for its fifth straight weekly gain as global fuel markets continue to tighten. This has reportedly prompted the Biden administration to begin reaching out to oil companies, requesting them to restart some of their refineries in order to boost the supply of key products such as gasoline and diesel. In the US, around 1mn barrels per day of refinery capacity has been shut since the start of the pandemic, while globally, that number amounts to around 2.13mn barrels per day.

Refiners are currently reaping massive profits, owing to surging crack spreads or refining margins on products such as diesel. However, capacity growth has remained stagnant. As highlighted recently by key members of OPEC, this lack of refining capacity is actually what is driving up oil and fuel prices at the moment. Unfortunately, restarting a refinery is not an overnight process and getting back to pre-COVID levels will take some time, especially as oil companies are no longer looking to invest, but rather return profits to shareholders following years of deferring this.


Egypt: The Egyptian government has granted the “golden license” to several projects in a bid to attract foreign investments as part of a series of initiatives to confront the prevailing economic crisis in the economy. According to PM Mostafa Madbouly, “the golden license is granted the license to some projects. These projects include green hydrogen, electric cars, infrastructure, and seawater desalination and renewable energy projects.” Companies that obtain this license are granted a one-time approval to establish, operate and manage a specific project, as well as receive the needed licenses and build the necessary facilities, without the need for multiple approvals and procedures required by government agencies.

Mozambique: In a copy of the planned legislation circulated by the country’s biggest business association, the Mozambican government has proposed a new law that prohibits residents from using foreign exchange in domestic transactions. The legislation tabled would reportedly require residents to declare values of assets held abroad, and a failure to do so would attract criminal penalties. Moreover, it will require oil and gas producers to submit projections of export earnings and annual investment budget for the following year to the Bank of Mozambique.

MENA: S&P Global has warned that food and energy price shocks on the back of the war in Ukraine could increase income inequality and pose risks in some North African countries. S&P said that Egypt, Morocco, and Tunisia will be among the hardest hit by economic spillovers from the conflict because their net food and energy imports account for between 4% and 17% of their GDP and they source a large part of their cereal supply from Russia and Ukraine.” The agency added that rising food and energy prices and supply insecurities, alongside high youth unemployment in these countries, could lead to higher income inequality and pose risks to existing sociopolitical dynamics. While temporary fiscal measures will soften the blow on consumers and producers, S&P says this will place pressure on post-pandemic fiscal consolidation.

Morocco: Speaking to reporters yesterday, the minister-delegate in charge of budget Fouzi Lekjaa said that the subsidy spending is forecast to be near double the budgeted sum. According to Lekjaa, subsidy spending is projected to rise to MAD 32bn this year, MAD 15bn above the sum budgeted before the war in Ukraine. Meanwhile, tax receipts this year are expected to mitigate the impact of rising commodity costs on the budget, and the government projections do not factor in the negative impact of war on the finances of power utility ONEE. Finally, the government has no plans to remove the transport subsidy introduced two months ago, which lets bus, truck, and taxi-owners redeem some of the cost of fuel.

Nigeria: Ratings agency Fitch has warned that global stagflation risk banks in Nigeria, like those in other emerging and frontier markets, could face a deteriorating operating environment in 2022/23 as adverse global economic conditions feed through the local economy and operating environment. This is despite the sharp rise in oil price in 2022, boosting Nigeria’s economy. Fitch added that it could be difficult for the banks to maintain their performance momentum from 2021 when strong profitability was shaped by low credit costs and strong loan growth as the economy rebounded after the pandemic shock. Meanwhile, high inflation and a potential economic slowdown could put pressure on borrowers, to the detriment of the banks’ asset quality.

Nigeria: Speaking yesterday, Finance Minister Zainab Ahmed said that low crude oil production means Nigeria can barely cover the cost of imported petrol from its oil and gas revenue. Ahmed added that she hoped Nigeria's oil production would average 1.6mn barrels per day this year, up from around 1.5mn bpd in Q1 but lower than the budgeted 1.8mn bpd. The shortfall is due to crude theft and attacks on oil infrastructure, according to Ahmed. The minister further said that "we are not seeing the revenues that we had planned for," adding "when the production is low, it means we're barely able to cover the volumes that are required for the (petrol) that we need to import." Note that Nigeria exports crude oil and imports refined petrol, suffering intermittent fuel shortages.

Forex: Currency strength pass-through effect still driving inflation lower in Zambia

Although the Zambian Kwacha has come under some pressure in May, the currency has recorded a strong performance over the past eleven months. For context, since the end of June's record high of 22.6400, 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. Note that in 2021, the Kwacha recorded its best annual performance since 2005. More recently, some support has emanated from central bank intervention and positive sentiment amid rising investor confidence in the economy. Ongoing credit talks, improved metal prices, and a promising mining sector outlook have provided a boost to sentiment. Zambia is becoming a more attractive investment proposition for mining companies since the election of President Hichilema and a subsequent mining tax reform, while the finance minister has expressed confidence that debt talks should be concluded by June.

Against the backdrop of a stronger Kwacha, it is unsurprising to see that inflation continued to slow in May. Specifically, headline inflation in Zambia decelerated for the 10th straight month in May, coming in at 10.2% y/y from 11.5% y/y in April. This was the slowest pace of price growth in the economy since August 2019. A breakdown of the data from ZamStats showed that annual food price growth slowed to 12.3% in May, compared with 14.1% in the month prior, and non-food inflation decelerated to 7.5% from 8.2%. In the coming months' risks to the inflation outlook are, however, tilted to the upside. This so amid increases in global energy food prices, exacerbated by the war in Ukraine, tighter global financial conditions as major DM central banks hike their policy rates, a grain deficit in neighbouring countries, and a reduced domestic surplus.

The Kwacha is expected to trade in a tight range 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: Moody’s downgrades Egypt’s sovereign credit rating outlook to negative

It is no secret that fiscal risks in Egypt have risen sharply in recent weeks due to the adverse impact of Russia’s invasion of Ukraine. Egypt is arguably the most sensitive African country to the war in Ukraine given that the country imports a large portion of its staple food and derives a significant amount of its tourism revenues from the countries at war. The fallout from the Russian invasion of Ukraine has triggered foreign capital outflows of almost $14bn as of mid-April from holdings of around $31bn in mid-February. It is against this backdrop that Moody’s announced on Thursday that it has changed its outlook on Egypt from stable to negative. Moody’s also affirmed Egypt’s credit rating at B2.

Moody’s said that the negative outlook reflects the rising downside risks to the sovereignʼs external shock absorption capacity in light of a significant narrowing in the foreign exchange reserve buffer to meet upcoming external debt service payments. Moreover, while the economyʼs external position remains supported by significant financial commitments pledged by Gulf Cooperation Council oil-exporting sovereigns and the prospect of a new IMF program, tightening global financing conditions increases the risk of weaker recurrent inflows than Moodyʼs currently anticipates to shore up Egyptʼs external position.

The global rating agency added that Egypt’s susceptibility to event risks is broad-based and includes political risk, especially in the context of a sharp increase in food price inflation which, if not mitigated, could raise social tensions. Meanwhile, rising domestic borrowing costs, if sustained, will exacerbate liquidity risks and debt affordability challenges, both long-standing weaknesses of Egyptʼs credit profile. On a positive note, Moody’s noted that Egyptʼs broad and dedicated domestic funding base helps weather tightening financing conditions. Egyptʼs strong trend GDP growth supports economic resilience and the prospect of attracting foreign direct investments in line with the governmentʼs privatization strategy.

Given the negative outlook, an upgrade is unlikely in the near future. The agency said in its report that worsening balance of payment dynamics that further erode liquid foreign exchange reserves and threaten external stability would likely prompt a downgrade, as would a persistently negative net foreign asset position in the monetary system. A sustained and material deterioration in already weak debt affordability would also be credit negative. Relatedly, an erosion in policy effectiveness and credibility or rising social and political risk that contributes to raising the cost of government debt and/or eroding competitiveness, would also exert negative pressure on the rating.

Macroeconomic: Angola is becoming increasingly attractive for investors

While Angola has been marred by a number of structural impediments in recent years, which kept the economy in recession from 2016 to 2020, the economy is showing signs of recovery with the country exiting a multi-year recession in 2021. This came on the back of a marked rebound in international oil prices and a recovery in the non-oil sector, supported by the removal of covid related lockdowns and the lagged impact of macroeconomic reforms. 

The outlook for Angola has drastically improved notwithstanding the adverse impact of the covid pandemic. Angola last year officially emerged from its economic recession, with economic activity expanding by 0.7%. The expansion in the economy is expected to be sustained in the years ahead as the positive effects of the structural reforms continue to filter through.

Angola’s agricultural sector is expected to bounce back from the worst drought in 40 years and a locust invasion in 2021. The rebound in the sector, which employs about half of the workforce, will support private consumption. Government social assistance payments should also provide support. Furthermore, President Joao Lourenco and his administration are expected to push ahead with structural reform agenda aimed at supporting medium-term growth. As can be seen in the chart above, economic activity in nominal terms is expected to return to pre-2016 recession levels in 2025.

Though many countries have slipped down the credit rating ranks during the covid era, Angola has managed to make its way up the sovereign credit rating ranks. Major global credit rating agencies including Fitch and S&P have upgraded Angola’s rating due to the significant improvement in the country’s fiscal and external metrics, rebound in the economy, higher oil prices and prudent fiscal management.

Angola has benefitted handsomely from the soaring international oil prices, given its high dependence on the oil sector. The oil sector contributes to around 34% of GDP, 56% of fiscal revenue and 96% external receipts. As such, high oil prices have led to substantial improvements in key credit metrics. According to the latest International Monetary Fund forecasts, Angola’s debt to GDP ratio is expected to plunge from a peak of 134% in 2020 to 58% in 2022. Against this backdrop, Angola has regained the attention of investors from wide and far. While risks remain significant, given the dependence of the economy on oil, we are bullish on Angola.