Macro Analysis /

Mozambique's credit rating outlook upgraded to positive on LNG prospects

  • Forex: Widening current account deficit to further compound Kenyan Shilling weakness

  • Fixed Income: Moody’s raises Mozambique’s sovereign credit rating outlook to positive

  • Macroeconomic: Angola is set to increase its loan instalments to China to settle a $20bn debt

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
14 March 2022
Published byETM Analytics


If it's not geopolitical uncertainties, then it's a fresh wave of Covid out of China causing disruptions or it's the threat of inflation that pre-existed the War on Ukraine. In short, there is enough for investors to concern themselves with. The real question is whether investors need to start preparing for the emergence of a bear market in equities or whether this will simply be a passing phase that will blow itself off. Stated differently, could equity and commodity prices be distorted higher in a manner that would bolster risk appetite and the performance of EM currencies? At face value, this time is a little different. Asset prices already staged an impressive rally straight through the middle of the pandemic when economic growth had barely shown signs of recovering. Equity market/GDP ratios rose further to highlight the value deviation from the underlying economy. Furthermore, central banks are looking to tighten and normalise monetary policies, while fiscal authorities are also looking to rein in their excessive spending. If not for the war that saw central banks turn less hawkish, investors would've moved to price in a lot more of this than they have.

In the commodity market, Oil markets are on the defensive this morning as optimism is growing that talks between Ukraine and Russia could prove substantive. With this, the front-month Brent contract dipped back below $110 per barrel earlier this morning before paring some of the losses. Nevertheless, the bias for the commodity does appear to be to the downside for now, but it could shift in either direction depending on how the situation in Eastern Europe develops over the coming days.


Africa: A report from Germany's Kiel Institute for the World Economy has warned that African countries may be hit hard by any continuing halt to Ukraine's grain exports caused by the war. According to the institute, "the war in Ukraine could significantly worsen the supply of cereals in food production in African countries, making food more expensive if Ukraine ceases to be a grain supplier. The country supplies large quantities of grain to North African states in particular, which other sources of supply could not replace even in the long run." Among the countries hardest hit could be Tunisia, where the country's total wheat imports would decrease by over 15%. Egypt would import 17% less while South Africa would import 7% less. Grain imports would also be noticeably disrupted in countries such as Cameroon, Algeria, Libya, Ethiopia, Kenya, Uganda, Morocco, and Mozambique.

Cameroon: To combat the impact of climate change and the ongoing war in Ukraine on food prices, Cameroon is in talks about a $100mn loan from the World Bank. The funds will provide assistance to small-scale farmers. According to the Minister of Agriculture, about 2.5mn people in Cameroon are facing food insecurity.

Kenya: Health Minister Mutahi Kagwe on Friday announced that Kenya has lifted its remaining coronavirus restrictions. These included a ban on large indoor gatherings such as religious services and a requirement to present a negative COVID-19 test for arriving air passengers. Face masks are no longer mandatory in public, and all quarantine measures for confirmed COVID-19 cases are halted with immediate effect. According to Kagwe, Kenya has recorded a positivity rate of below 1% over the past month due to the rising number of Kenyans opting to get vaccinated. Note that nearly 9% of Kenyan adults are fully vaccinated, more than most countries in sub-Saharan Africa.

Nigeria: After the Central Bank of Nigeria signalled it would stop foreign-exchange sales to banks, Nigerian lenders have cut the dollar spending limits on local cards to free more resources to fund imports. The CBN said last month it will stop selling foreign currency to lenders by the end of the year to encourage them to source their own dollars and also support the government's target to lure $200bn of inflows yearly by 2025. The regulator has struggled to fulfill its dollar obligations to portfolio investors since 2020 after oil prices collapsed. The International Monetary Fund estimates that the central bank has a backlog of $1.7bn in unmet demand to investors. While oil exports account for about 90% of foreign-exchange earnings, higher prices have failed to boost foreign reserves for Nigeria due to lower than normal output even as part of the export barrels go to fund gasoline imports for local consumption at subsidised prices.

Rwanda: Rwanda is reportedly looking at charging Value Added Tax on online services consumed within the country. Information from the Rwanda Revenue Authority suggests that the proposal is currently in the Ministry of Finance and Economic Planning, from where it will undergo several procedures before it can be implemented. The concept of applying VAT on these services is one that is rapidly being adopted around the world, with many countries in the West already doing it while African countries are lately making efforts to jump onto the bandwagon.

Global supply chain: Supply chain and logistical bottlenecks have not yet disappeared, and the world is not entirely over the Covid pandemic, with China's zero-Covid policy coming back to bite them as they now experience a wave that they are locking down against. Were China not such a significant producer and a driver of global growth, this might not be a big problem. However, the global economy remains fragile.

Forex: Widening current account deficit to further compound Kenyan Shilling weakness

The current account balance plays an important role in determining a currency's resilience or lack thereof. With this in mind, it is worth looking at Kenya's latest current account data. Provisional data from the Central Bank of Kenya (CBK) showed that Kenya’s current account deficit widened to -5.6% of GDP in the 12 months to January 2022 from -4.3% of GDP in the 12 months to January 2021. According to the CBK, the wider deficit reflects a higher import bill, particularly oil, which more than offset increased receipts from agricultural and services exports, and remittances.

A widening current account deficit is likely to compound the selling pressure on the Kenyan Shilling (KES) from a currency perspective. On Friday, the KES closed at a record low north of 114, adding to year-to-date losses of around 1.03% against the USD. A surge in global oil prices has also weighed on the KES, which is now creating inflationary pressures, pushing up the cost of imports, and raising debt servicing concerns. Inflation in Kenya is forecast to average around 6% this year, though that could potentially creep higher if a lack of rain during the wet season crimps food production.

Looking to this week, the outlook for the KES remains decidedly bearish. Increased demand for dollars from companies preparing to pay dividends to their foreign shareholders and oil companies anticipating higher petroleum prices as more governments pile sanctions on Russia for its invasion of Ukraine are factors set to weigh on the local unit. However, the CBK could dip into its foreign currency reserves, which increased to $8.01bn on March 10 from $7.91bn on March 3 to reduce volatility.

Fixed Income: Moody’s raises Mozambique’s sovereign credit rating outlook to positive

Something for Mozambique investors to cheer at the start of the new week is that Moody’s raised Mozambique’s sovereign credit rating outlook from stable to positive while at the same time affirming the country’s long-term issuer and senior unsecured debt ratings at Caa2. The global credit rating agency said that the positive outlook is underpinned by prospects of broad-based improvements in Mozambique's credit profile led by Liquified Natural Gas production and the government's efforts to strengthen public governance, which may improve over time policy effectiveness from currently very weak levels.

Moody’s said that the next 12-18 months would be pivotal for the country as the agency assesses the extent to which LNG production levels and the governmnet’s management of future revenues will lead to sustainable improvements in the sovereign’s economic and fiscal strength. Moody’s highlighted that LNG production looks likely to start towards the end of 2022, albeit with the pace of ramp up in following years and extent to which that generates government revenue uncertain, implying a particularly wide range of possible outcomes. Mozambique's most advanced LNG project in Area 4 will likely start production by the end of 2022. ENI targets an average annual production of 3.4mn tonnes of LNG per year, which could generate between 0.5% and 1% of GDP in revenue for the government annually from 2023 onward.

The global rating agency said that government spending pressures would remain elevated amid consequent infrastructure needs, security costs and social demand. Starting 2023, coupon payments due under the sovereign's sole Eurobond will also step up to 9% from 5% currently. Moody’s added that lawmakers have in recent years introduced several measures to strengthen public governance and have built a track record of preserving a degree of macroeconomic stability despite multiple shocks such as two cyclones in 2019 and then the pandemic.

The authorities have introduced measures to improve the efficiency of monetary policy channels, including through the deepening of capital markets and fostering the development of the inter-bank market. Improvements have also been made on the fiscal side, including strengthening public expenditure control, modernising budget programming, and enhancing budget execution and treasury administration have all achieved significant progress.

In conclusion, while fiscal risks in Mozambique remain elevated, there is some light at the end of the tunnel, with the LNG sector expected to provide a massive boost to the country’s fiscus. This comes on the back of positive policy reform and a display of prudent fiscal policy management from the government. The focus for investors going forward will rest on the country’s LNG production and the boost it will provide to the economy and fiscus. We expect to see a continued improvement in Mozambique's public governance if recent policy developments are anything to go by.

Macroeconomic: Angola is set to increase its loan instalments to China to settle a $20bn debt

This year, Angola has been one of the main beneficiaries of the surge in international oil prices. Recall that Angola is Africa’s second-largest oil producer and therefore is reaping the benefits of an oil price north of the $100/bbl mark. That said, as oil prices rise partly driven by supply concerns related to Russia’s invasion of Ukraine, Angola will have to increase its instalments as part of debt relief agreements struck with China during the Covid-19 pandemic.

Recall that at the peak of the pandemic, when oil prices tanked, Angola struck a deal with Chinese lenders to defer debt servicing as the virus threatened to push the nation into default. According to data tracked by the China Africa Research Initiative, the China Development Bank (CDB) and the Industrial and Commercial Bank of China provided Angola with a three-year debt relief package of at least US$4.9bn from 2020 to 2023. Angola also received an undisclosed amount of debt relief from China Eximbank.

Finance Minister Daves de Sousa said Angola would progressively reduce its debt to China by refinancing the debt using multilateral and commercial arrangements. As part of its efforts to reduce its debt to China, Angola will use part of its planned Eurobond issuance. Angola has engaged banks to assess market appetite for a $2.8bn Eurobond issuance. Moreover, there are reports that Angola is looking to buy back a portion of its $1.5bn 2025 Eurobond. From a fiscal perspective, these are all encouraging developments and add to the notion that fiscal risks in Angola are moderating, suggesting that the country is heading towards a more sustainable fiscal position.