Macro Analysis /

Nigeria’s oil output rises to an 11-month high, Kenya’s foreign reserves fall

  • Forex: Kenya implements new oil tender system to reduce FX pressure

  • Fixed Income: Risk vs reward, where do African countries rank?

  • Macroeconomic: Oil production in Nigeria rises to an 11-month high in February

Alexa Archibald
Alexa Archibald

Commodities Analyst

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

Asian equity markets are broadly higher this morning

There has been a significant fallout across asset markets over the past couple of days as a result of the banking crisis which hit the United States following the collapse of Silicon Valley Bank and Signature Bank. Fears of contagion dominated the narrative and policymakers across the globe stepped up saying that we would not see a repeat of the 2008 Great Financial Crisis.

The flight to safety has settled, and the Asian equity markets are broadly up this morning with bargain-hunting the order of the day. Equities have also reacted positively to the news that the Peoples’s Bank of China injecting the largest amount of cash into the system in more than two years.

The PBoC injected $41bn via its medium-term facility this month as the demand for credit rose resulting in a threat of a liquidity squeeze. The need for cash comes as the Chinese economy reopens and rebuilds its demand base following the COVID-19 lockdowns.

The volatility within global bond markets continued yesterday, with the rush into the safety of government debt reversing yesterday to drive yields off their lows reached the day before. The US 2yr yield has climbed back toward 4.325% after dropping below 4.00% earlier this week, posting its largest daily gain in six months. Yields for German bunds and UK gilts followed suit as the market stabilized and turned its focus back toward upcoming central bank meetings, which are still expected to deliver rate hikes. The market has priced in 20bp worth of rate hikes from the Fed for next week, while the OIS market sees 44bp worth of hikes coming from the ECB this week.

Africa Talking Points

Angola: Consumer price inflation in Angola slowed further in February, coming in at 11.54% y/y from 12.55% y/y in January. The February reading marked the 13th consecutive month that inflation has slowed. On a m/m basis, consumer prices climbed 0.83% in February. A solid harvest, fuel subsidies, and a stable currency drove the continued slowdown in the year-on-year reading. The continued slowdown in inflation will provide further room for the Bank of Angola to remain accommodative in its approach to monetary policy. Note that the Bank of Angola was the first central bank globally to cut its benchmark rate at the beginning of the year.

Kenya: President William Ruto on Tuesday said that Italy had agreed to renegotiate a controversial loan that Kenya took to construct three key dams to boost the water security for people in the country’s rift valley region. Ruto said, “we have now agreed on a framework to settle all the outstanding court cases and have agreed that the facilities that had been provided for the construction of these dams will be renegotiated.” The projects stalled after the national prosecutor said that the cost of parts of the projects was inflated and that the contracts were awarded without regard to procurement laws. The announcement to revive the projects comes at a time when Kenya is suffering its worst drought in more than 40 years and has diverted resources to help millions of people in need of food aid.

Ghana: On Tuesday, the Ghana Individual Bondholders Forum said that Ghana had failed to pay investors who did not tender their bonds during the domestic exchange program despite the government’s promise to resume paying the old bonds from March 13. The group, which brings together individual investors in government securities, didn’t disclose how much of their investments have fallen due. The group gave the finance ministry a 48-hour ultimatum to pay them, without saying what they would do if the deadline was missed, and called on the Securities and Exchange Commission and the Ghana Stock Exchange to enforce the rules governing the securities.

Nigeria: The Central Bank of Nigeria, in a statement, said that it will allow old bank notes to continue as legal tender until year-end to comply with a court order earlier this month, raising hopes this would ease acute shortages in the economy. The CBN added that it was complying with the law and that the old notes would circulate with new ones of equivalent value. In a country where most citizens rely on cash for every, the shortages of naira bills have caused widespread anger and hardship.

Mozambique: According to state-owned Electricidade de Mocambique, two international consortia have bid to become a strategic partner for the Mphanda Nkuwa hydroelectric project. The two groups comprise ETC Holdings, Zesco of Zambia, a Mota-Engil unit, and South Africa’s state-owned PetroSA. The other group consists of Electricité de France, TotalEnergies, and Sumitomo. The strategic partner will be responsible for investing $500m and $700mn, and the Ministry of Mineral Resources and Energy will chair the committee evaluating the proposals. Mphanda Nkuwa hydropower dam will be one of the biggest in the Southern Africa region, and in addition to exporting power, the project will offer electricity access to Mozambicans.

Senegal: Following a staff-level visit, IMF mission chief Edward Gemayel forecast growth in Senegal’s economy to accelerate this year but still come in lower than expected. In November Gemayel forecast Senegal’s economy to grow 8.3% in 2023 on the back of a temporary boost from oil and gas production. Gemayel now forecasts growth to be around 8% if oil production starts at the end of the year as expected. However, if it is delayed until next year, growth is projected at 5% or 5.3%. Meanwhile, the growth forecast for 2022 has been lowered to 4% from 4.7% due to a fall in agriculture and industrial output. While no formal talks on a new IMF program have occurred, Gemayel said that the lender and the government of Senegal had exchanged ideas around a three-year program that would focus on three key areas, including strengthening the country’s finances.

Tanzania: In a statement published on its website, the Bank of Tanzania said that it would continue with a less accommodative monetary policy approach in March and April. According to the BoT, the policy stance will help control inflation below the target of 5.4% while supporting credit growth to various economic activities and the fulfilment of the IMF Extended Credit Facility targets for the third quarter of 2022-23. Policymakers remain optimistic that inflation will remain within target in the second half of 2022-23, as prices of global consumer goods and inflation in trading partners ease and domestic food supply increase.

Kenya implements new oil tender system to reduce FX pressure

To ease pressure on dwindling foreign exchange reserves and the exchange rate, Kenya has signed deals with United Arab Emirate's ADNOC and Saudi Aramco for the supply of petroleum products with a six-month credit period. Kenya is lengthening the payment period from settlement on delivery to curb the demand for foreign exchange that has seen importers require hundreds of millions of dollars every month.

However, the plan is being challenged by some private petitioners at the High Court, and some foreign currency traders have cast doubt on the plan's ability to stem the pressure on shilling and foreign exchange reserves, saying it merely amounts to a postponement of demand. The shilling has repeatedly plunged to record low levels this year amid strong FX demand from importers, especially in the oil sector, against a backdrop of limited supply. Meanwhile, Kenya's foreign exchange reserves have continued to fall. For context, the latest official data showed that Kenya's foreign exchange reserves fell to $6.57 bn in the week ending March 9 from $6.61bn in the week ending March 2. The current level of reserves is the lowest since October 2015 and equates to 3.67 months of import cover. That is below the central bank's requirements of four months of import cover.

Whether the Energy Ministry's plan is successful remains to be seen in the coming months. It is worth noting that other net oil-importing countries, such as Ghana, have started purchasing oil with gold in a bid to reduce the pressure on declining reserves.

Risk vs reward, where do African countries rank?

In today’s analysis, we plot the 10-year (or as close to) Eurobond yields of several African countries against their respective sovereign credit scores, which we use as a proxy for fiscal fragility. A low credit rating score implies fiscal fragility, while a high score implies fiscal resilience. Following their recent defaults, both Ghana and Zambia are rated at SD by S&P Global. As would be expected, the low credit ratings, which are reflective of the two countries' weak fiscal positions, are accompanied by the highest yields in the region.

On the other end of the scale, we have Morocco, to which S&P Global has assigned a sovereign credit rating of BB+, the highest credit score in the sample. Given Morocco’s relatively sound fundamentals, it doesn’t come as a surprise that its 10yr Eurobond yield is the lowest amongst the countries included in the analysis.

The majority of African Eurobond issuers meanwhile have a credit rating scores of between CCC+ and BB-. This is where the analysis holds the most value as it provides a graphical representation of relative value when considering fiscal risks as reflected by a country’s credit score. For example, Egypt is offering a higher return on its 10yr Eurobond than similarly rated Kenya and lower-rated Nigeria, Angola and Mozambique.

This implies that there is relative value to be found in Egyptian Eurobonds when looking at the yield on offer vs the country’s perceived fiscal risks by S&P Global. That said, it is worth highlighting that Egypt is at risk of a sovereign credit rating downgrade which suggests that fiscal risks could be more significant than what is being reflected by S&P’s B rating for the country. Nonetheless, Egyptian bonds still seem attractive on a risk-to-reward basis.

Oil production in Nigeria rises to an 11-month high in February

This morning we focus on oil as prices continued to tumble on Tuesday, which is helping to ease inflation concerns. In a report published on Tuesday, OPEC said that it is pumping around 28.92 million barrels of crude per day, equivalent to nearly 300,000 barrels a day more than what is needed to reach the expected Q2 demand. The surplus could even be larger if oil production in Russia remains resilient to international sanctions. OPEC and its partners have been restraining output in order to keep world markets in balance amid a shaky rebound in consumption and a fragile economic outlook.

We have seen brent crude prices decrease by around 36% from the peaks that were reached in June 2022. That said prices are still elevated and are around 10% above the five-year average price. Increased global supply and the expectation of a slowdown in demand skew the risks to the outlook to the downside. Note that high oil prices have been one of the major contributors to record-high inflation, therefore falling prices are helping to ease inflation concerns.

Taking a closer look at the change in crude production in Africa, OPEC reported an increase in output in Nigeria and the Congo, while production in Angola declined. Infrastructure and lack of investments are the major issues weighing on Africa’s crude production.

While interest in African oil and gas projects has risen sharply since Russia’s fallout with the Western World, given the structural impediments in most African oil producing nations, it is unlikely that we will see a spike in African oil and gas production any time soon. That said, the medium to longer term outlook is positive, notwithstanding the global shift away from fossil fuels.