Macro Analysis /

Policymakers in South Africa and Egypt to deliver interest rate verdicts

  • Forex: Devaluation risks for the Nigerian Naira mount

  • FI: Ghanaian Eurobond yields surge to fresh highs despite some signs of fiscal consolidation

  • Macroeconomic: South African Reserve Bank to hike rates, the question is do they hike by 25bps or 50bps

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
19 May 2022
Published byETM Analytics


China also remains a stumbling block at the moment. Reuters reported the US Treasury Secretary Janet Yellen as saying that COVID-19 lockdowns in China appear to be impeding supply chain recovery and a broader slowdown in growth in the world's No. 2 economy could have global spillover effects. This morning we have copper recovering slightly following yesterday’s 1.15% loss.


Egypt: Policymakers at the Bank of Egypt will today meet to decide on their benchmark rate. In March Egypt hiked the benchmark rate for the first time in more than five years and let its currency weaken sharply as it moved to absorb shocks from global inflationary pressures. With inflation soaring to the highest level in almost three years and an aggressive tightening of monetary policy by the Federal Reserve affecting capital flows, risks exist that Egypt’s central bank could tighten monetary further. Note that Egypt’s policy rate when adjusted for inflation has turned negative for the first time since 2018, undercutting a high differential that had made the country a favourite for foreign investors.

Kenya: Data from the Kenya National Bureau of Statistics showed that agricultural export earnings fell by 17% in Q1 pulled down by flowers, fruits, and vegetables. Horticulture export income dropped 44% to KES 26bn and cut flower export receipts wilted by a third to KES 21.8bn. Meanwhile, fruit earnings dipped by nearly two-thirds to KES 2.01bn. On a positive note, black tea export earnings grew by 10% y/y to KES 39.4bn in the three months through March, despite a dip in shipments by 11%. Given that agricultural exports are an important source of much need foreign exchange in Kenya, the drop is likely to compound its dollar shortages and weigh further on the Kenyan Shilling.

Kenya: In the latest opinion poll conducted by Nairobi-based pollster Tifa Research involving 1719 respondents, opposition leader Raila Odinga who is running for president for the fifth time has drawn ahead of rival candidate and Deputy President William Ruto. 39% of the voters back Odinga, compared with 35% for Ruto. Around 14% of respondents have yet to decide on their choice, and another 9% are unwilling to say who their preferred candidate is. The latest polls results marked a notable change after the April survey showed that Ruto the was the favourite to win the election with 39% support, compared with 32% for Odinga. The most recent poll was conducted after Odinga and Ruto in recent days named Martha Karua and Rigathi Gachagua as their running mates respectively. Marth Karua could become the first woman in Kenya’s history to occupy the office of deputy president.

Zambia: The Bank of Zambia held pat on its policy rate for a second straight meeting, citing easing inflationary pressure. Governor Kalyalya said that a recovering Zambian Kwacha which has gained by almost 25% against the dollar, aided by improved metal prices and better domestic food production have helped slow inflation. Speaking to reporters Kalyalya said that “it was appropriate for us to maintain the policy rate at 9% due to the sharp decline of inflation that may tend towards 6-8% at the end of the year.” Kaalyalya added that the Monetary Policy Committee also took the decision to hold due to the positive effects in implementing fiscal consolidation and relatively weaker growth prospects in the medium-term. The Monetary Policy Committee sees economic growth remaining below 4% for the next three years. Inflation is forecast at 12.5% in 2022, compared with 13.2% previously forecast. The decision by the central bank is likely to provide some support to the economy at a time global growth is under pressure and price pressures are mounting due to the war in Ukraine, extreme weather, and tightening financial conditions.

Uganda: Yesterday, Uganda sold UGX 159.7877bn ($43.782mn) of bonds due September 7, 2023, and UGX 120.86115bn ($33.116mn) of bonds due March 4, 2032. The 2023 bond attracted a cover ratio of 1.67 and cleared at a yield of 9.9% which compares to 10.49% the last time it cleared on February 23. The 2032 was oversubscribed 2.99 times and cleared at a yield of 13.75%, higher than the prior clearing yield of 13.5% on February 23.

Botswana: Mining is once again top of mind when it comes to local news flow. MiningWeekly reported the following - Grindrod’s Matola terminal at the Port of Maputo says it has welcomed its second coal train from Botswana. The terminal also managed to successfully discharge the 50 wagons using the terminal’s tipplers. The first train arrived at the port in April, marking a milestone for Grindrod’s Mozambican drybulk terminal. This rail consignment of 40 wagons each carried around 2 000 t of mineral coal. The train originated from Palapye, in Botswana, transiting through Zimbabwe via the Chicualacuala rail network, to the final destination in Maputo.

Forex: Devaluation risks for the Nigerian Naira mount

With Nigeria’s primary elections fast approaching, increased political spending has weighed on the Nigerian Naira. Politicians are purchasing dollars to fund vote hunting in the primary elections at the start of the weekend, driving the Naira to fresh lows in the parallel market. According to an official from a bureau de change, there is a huge demand for dollars in cash from politicians competing for support from delegates in the party primaries, and “demand is not going to abate soon, which means more pressure for the naira, and also because dollar supply is low.”

Most attention will be on the ruling party candidate, the All Progressives Congress (APC), and the prominent opposition People's Democratic Party (PDP), given their dominance in the political space. They plan to hold their primary elections for legislative, governorship, and presidential candidates from the weekend to early June. Some contestants reportedly campaign by gifting dollars to delegates as an incentive to vote.

Yesterday, the Naira in the parallel market plunged, to NGN 603 per dollar, its weakest this year. Meanwhile, the Naira in the official market, where supplies are low, ended Wednesday at just below NGN 416. That represents a premium of around 45%. Aside from political developments, dollar rationing by the Central Bank of Nigeria (CBN), low foreign exchange inflows, increased speculation and falling external reserves are some of the factors that have driven the plunge in the parallel market. Note, as of May 16, Nigeria’s foreign reserves stood at $38.91bn. The last time reserves fell below $39bn in August 2021.

Continued weakness in the parallel market could force the Central Bank of Nigeria to once again devalue the currency. Since 2020 the CBN has done so in a bid to narrow the spread between the official and parallel market rates. Note our in-house models suggest that the Naira is overvalued by over 8% on a real effective exchange rate basis, suggesting room for depreciation exists.

Fixed Income: Ghanaian Eurobond yields surge to fresh highs

Ghana is back in focus this morning as the country's Eurobonds yields continue to blowout. Ghanian bonds are facing a double-edged sword of soaring inflation and mounting fiscal risks, both of which have resulted in a broad-based rotation out of Ghanaian Eurobonds. This is reflected by the sharp rise in Eurobond yields over the past couple of weeks. For context, the 2032 Eurobond yield legged 31bps higher on Wednesday to 17.49%, its highest level since its issuance in 2019.

The deterioration in domestic factors comes on the back of worsening external conditions amid the broader risk-off conditions and aggressive tightening in monetary policy around the world, which is drying up global dollar liquidity. The combination of this is weighing on demand for frontier bonds as investors flock to haven assets. The gloomy domestic and external backdrop has resulted in an unwavering sell-off in Ghanaian bonds in recent months. The 2032 Eurobond yield for instance has more than doubled over the past 8 months.

While we still assess fiscal to be skewed firmly to the upside, there have been some signs of progress recently. Ghana’s Q1 budget deficit came in at -2.6% of GDP, better than many had expected. While this is encouraging, investors will need more evidence that fiscal consolidation is underway before the market turns bullish on Ghanaian bonds. As highlighted in our latest strategy note, while we expect the sell-off to persist in the near term, at these levels, we do see value going long Ghanaian bonds in the next 6-9 months. However this view hinges on the fact that the government remains committed to its reform and fiscal consolidation agenda.

Macroeconomic: South African Reserve Bank to hike rates, the question is do they hike by 25bps or 50bps

Decision Day has finally arrived, and the SARB will take centre stage. In question is not whether the SARB will hike or not but by how much. Consensus expectations have the SARB hiking 50bp in response to the guidance from the Fed that it will be raising interest rates by 50bp increments over the next two meetings. Fearing that a more modest 25bp might leave the ZAR vulnerable to negative speculation, the SARB might oblige to ensure that any carry attractiveness is restored and that SA builds a buffer to an appreciating USD.

That certainly sounds logical, and if the SARB wanted to justify the strong rate hike, that would be one defendable way of doing so. However, it is not the full picture. SA is a very different economy from that of the US, and the SARB was more pre-emptive than the Fed. Not only did the SARB not embark on full-blown QE through the pandemic that needs to unwind, but they also started hiking pre-emptively and raised interest rates when inflation was still well within the target range. The Fed, by comparison, is behind the curve and playing catch up. So the first point to debate is whether the SARB is in a desperate enough position to become more aggressive simply because the Fed is playing catch up.

The second point to make is that the SA economy is weak, extremely weak and faces numerous structural deficiencies that cannot be resolved for years to come. These include the burden on growth by the SOEs such as Eskom, Transnet, the Ports and others. SA has no demand-side drivers of inflation. Unemployment is at a record high, consumptive demand weak, fixed investment just as soft, and the credit cycle heavily constrained. Any supply-side energy shocks could be more recessionary than inflationary. Furthermore, core inflation is trading below the mid-point of the 3-6% inflation target range, while headline inflation remains within the band, albeit at the margin. By comparison, the US is fighting an extremely tight labour market, a more robust economy that is consuming more than it is producing, a strong credit cycle and inflation that is multiples of its target.

The contrast is extreme, so a strong argument could and should be made for the SARB to persist with its more gradual, measured and conservative approach to tightening that the private sector can adjust to more easily. It could prove counterproductive to choose to be more aggressive at such a fragile time in the SA economy when pre-covid economic activity levels have not yet been achieved. Finally, one needs to question why the SARB needs to hike rates more aggressively when it is supply-side shocks that are causing the inflation, over which the SARB has no control. If one were convinced that those would lead to a sharp and stubborn rise in inflation expectations, one might have an argument to make. However, that is unlikely to be the case in a weak economy where money supply growth remains weak. However, given what the markets have already priced in, a 25bp hike could generate some volatility for the ZAR.