The USD surged on Friday and remained bid this morning, although it has retreated off its best levels. Although the Fed is still expected to hike given last week's stronger than expected non-farm payrolls numbers, the Fed will carefully assess the GDP growth impact that the war is having to decide just how aggressively to tighten. This morning, the USD has retreated from its best levels and looks a touch expensive. Much will depend on the unfolding war in Ukraine and how much longer it lasts.
The latest US jobs report continues to signal that underlying momentum in the US labour market remains strong, adding more pressure on the Federal Reserve to hike interest rates. According to the Labour Department, the February non-farm payrolls report showed that 678k jobs were added to the US economy, notably higher than consensus expectations of 423k. The unexpected rise compares with an upwardly revised 481k gain in January (prior: 467k). The advance in payrolls was broad-based and came as Omicron cases retreated further in the weeks since the last jobs report. Meanwhile, the unemployment rate fell more than expected, from 4.0% in January to 3.8% in February, the lowest level in two years. Average hourly earnings fell from a downwardly revised 5.5% y/y to 5.1% y/y. Despite the recent drop, earnings growth remains elevated, further fanning concerns about the persistence of inflation.
Geopolitically, the US remains heavily involved in helping Russia obtain military hardware including fighter jets. Furthermore, it is leading discussions with oil producers in a bid to reduce the dependence on Russian oil supplies and further strangle the supply of USDs into Russia in a bid to tighten the financial noose.
Angola: Finance Minister Vera Daves de Sousa told lawmakers that the country has begun paying more in instalments to China to settle its more than $20bn debt. The country also sends crude shipments as debt repayment. The countries signed a "flexibility payment agreement" that exempted Angola from paying capital instalments during the peak of the pandemic. The agreement required Angola to start paying the difference once the oil price rose above $60 per barrel.
Ethiopia: Ethiopia has asked the International Monetary Fund (IMF) to exclude loans taken by the state-run telecoms operator from its assessment of the country's debt. Ethiopian Telecommunications Corp. owes $765mn, the remainder of a $2.3bn loan it received from Chinese telecommunications giant Huawei Technologies Co. in 2013 as part of a vendor financing deal for an expansion project. The IMF country representative confirmed the fund has received the request and is still considering it. According to Finance Minister Ahmed Shide, "If we succeed, it will help our debt-sustainability analysis and improve our standing as telecoms debt will be removed from the stock and related debt-service analysis." The request is being made a year after Ethiopia announced plans to reorganize some of its $30.4bn of external debt under a Group of 20 program.
Gabon: Fitch on Friday affirmed Gabon's Long-Term-Foreign-Currency Issuer Default Rating (IDR) at 'B-with a stable outlook. According to Fitch, the B- rating balances Gabon's high GDP per capita and improved near-term fiscal metrics due to higher oil prices against weak public finance management, recurring difficulties to secure expected funding, and Gabon's dependence on oil revenues. Factors that could lead to a positive rating include a sustained narrowing of the fiscal deficit, improvement in building fiscal buffers, and clearance of arrears alongside improvements in public finance management sufficient to bolster confidence in Gabon's ability to prevent the accumulation of external arrears and obtain planned external funding. Meanwhile, factors that could lead to a downgrade include renewed upward trends in debt/ GDP ratio and renewed external financing pressures, which may be evident from new external arrears.
Democratic Republic of Congo: Ratings agency S&P on Friday affirmed Congo’s CCC+/C long-and short-term foreign and local currency sovereign credit ratings with a stable outlook. According to S&P, the stable outlook balances expected improvement in liquidity conditions against Congo-Brazzaville's vulnerability to oil sector shocks, persisting debt sustainability concerns, low government buffers, and weak institutional profile. S&P could lower the ratings or revise the outlook to negative if there are indications that the government might include its commercial-debt obligations in any planned debt restructuring or if renewed liquidity stress severely impairs the government's ability to service commercial debt obligations. Conversely, S&P could raise the rating or revise the outlook to positive if Congo-Brazzaville manages to catalyze sufficient official creditor financing to sustainably ease liquidity conditions against a backdrop of stronger growth or if they see stronger evidence that commercial-debt obligations would be excluded from any potential new restructurings.
Tanzania: In a move that could help quell tensions in Tanzania, authorities freed the main opposition party leader from prison eight months after he was jailed on terrorism and economic sabotage charges. A high court judge ordered Freeman Mbowe, the chairman of the Chama cha Demokrasia na Maendeleo party, to be freed after the director of public prosecutions said they would discontinue the case against him. Note that President Samia Suluhu Hassan, who has pledged to respect human rights and been on a drive to court foreign investment, has faced mounting pressure to secure Mbowe's release.
Forex: Central Bank of Nigeria introduces further measures to curb forex demand
In its latest attempt to curb forex demand, the Central Bank of Nigeria (CBN) has introduced a digital invoicing system for importers and exporters to curb overpricing. The new system that became operational at the beginning of February seeks to “save more foreign exchange earnings that will be channelled to the most productive sectors of the economy,” according to Deputy Governor Kingsley Obiora.
The Deputy Governor added that “this will boost local production capacity, promote inclusive growth and sustain a strong naira exchange rate.” Under the new system, importers and exporters must submit an electronic invoice authenticated by their banks. The CBN verifies all prices submitted on a global benchmark. According to Obiora, “the aim is to eliminate over-invoicing, mispricing of exports and imports, as well as activities of money laundering.” Note that the CBN has introduced various measures to curb dollar demand since 2020. Still, it has been forced to devalue the local currency three times in the last two years and has a backlog of about $1.7bn in unmet dollar demand from investors, according to the International Monetary Fund.
The official Naira has started the year on a strong footing, up by 2.25% against the dollar amid improving reserve levels on the back of the surge in the crude price of oil which has allowed the central bank to maintain its gradual intervention efforts. It is, however, worth flagging that Nigeria has lingering oil production challenges, which suggests the country might not fully benefit from the oil price rally. This could further weigh on dollar supply and trigger Naira weakness as it remains to be seen whether recent measures to curb demand are likely to have a meaningful impact.
Fixed Income: S&P leaves Kenya’s rating at B/B but warns that the country’s external financing risks are acute
While fiscal risks remain elevated, Kenya managed to come out of Friday’s S&P sovereign credit rating unscathed. S&P affirmed its B/B long- and short-term foreign and local currency sovereign credit rating on Kenya and left the outlook on hold at stable. The agency said that the stable outlook balances expectations of an economic recovery and the availability of supportive foreign donor facilities against the risk of ongoing fiscal and external pressures.
S&P highlighted in its report that the Covid-related economic shock led to a widening of Kenya’s fiscal deficits in the 2021 and 2022 fiscal years (ending June 30) and significantly raised the country’s debt pile, with public debt climbing by 12 percentage points from 2019 to 2022 to 62% of GDP. The ratings agency said that it does however expect a slow reduction in Kenya’s fiscal deficits and stabilization of debt over the medium term, partly due to a 38 month IMF program signed in April last year.
S&P expects Kenya to record a budget deficit of 8.1% of GDP in the 2022 fiscal year before falling to 6.8% in 2023 and 5.8% in 2024. Kenya’s public debt, net of liquid asses, is expected to average 64% of GDP in 2022-2025. S&P said that Kenya’s sovereign credit rating is constrained by the country’s low GDP per capita, relatively high fiscal deficits and debt stocks and a history of ethnic loyalties, which has the potential to lead to tensions across the country. The ratings are supported by Kenya’s dynamic private sector and diversified economic base, including its large and diversified agricultural and services sectors relative to peers, which should help cushion its economy and support a rebound.
The agency said planned revenue increases and expenditure rationalization may be challenging ahead of the general election in August but should be more feasible thereafter. The government is financing about 60% of the fiscal 2022 deficit via domestic financing, alongside 40% external financing. Due to high domestic market liquidity, domestic debt issuances continue to be well subscribed. Lastly, S&P noted that the fiscal 2023 budget would be tentatively presented to parliament on April 7 and in that fiscal year, Kenya will finance about 30% of the deficit via external debt (the rest domestically) and likely aim to issue Eurobonds in order to refinance a $2bn Eurobond due to be repaid in 2024.
In recent years, Kenya has enjoyed reasonably good access to international capital markets, but current global geopolitical tensions could complicate market access for frontier market issuers like Kenya. Nevertheless, the majority of fiscal financing will continue to come from the relatively deep domestic markets and external concessional financing.
Macroeconomic: Inflation expectations spike on surge in international oil prices
Inflation expectations the world over have surged in recent days as the conflict in Ukraine continues to drive oil and food prices higher. This is reflected by the spike in breakeven rates, the spread between vanilla bond yields and inflation-linked bond yields, which is effectively how much inflation risk bond traders are pricing into the market. For context, South Africa’s 5yr breakeven rate rose to more than a 3yr high of 5.67% on Friday. Since the Ukraine conflict started, South Africa’s 5yr break even rate has risen by more than 70bps.
With global commodity prices surging to new highs this morning, inflation expectations are expected to rise further unless peace is restored in Ukraine and commodity supply risks ease. The oil and gas sector in particular has been hit hard by supply risks pertaining to Russia’s invasion of Ukraine. It has been a dramatic start to the new week, with oil prices surging following discussions by the US regarding cutting off oil supply from Russia. Brent touched $139 per barrel earlier today, paring some of those gains since to currently trade around $129 per barrel as supply fears have been fanned in what was already a volatile market. US Secretary of State Blinken told news outlets over the weekend that the US and Europe are in ongoing discussions surrounding the banning of Russian oil. At such prices, the market is clearly pricing in an inability to accept Russian crude already, but there may still be some upside left if a full-on ban is implemented in the near term. The market is, therefore, expected to remain extremely volatile over the coming sessions, with any developments on the war front likely to lead to notable price swings.
Meanwhile, other OPEC+ members continue to struggle with production, with Libya stating over the weekend that its oil output fell below 1mn barrels a day given the political crisis. This is just adding to the tightness of the market and has seen timespreads widen out even further. The prompt timespread for Brent is back above $5 per barrel today after it narrowed marginally on Friday and closed the week at around $3.77 per barrel. OPEC+ clearly does not have the capacity at the moment to make up for lost Russian crude.