Macro Analysis /

Political risks weigh on Kenyan assets, Egypt pays down $24bn in foreign debt

  • Forex: Ethiopian Birr weakens on dollar squeeze and surging inflation

  • Fixed Income: Kenyan Eurobond yields surge to fresh highs as political and fiscal risks intensify

  • Macroeconomic: Fed tightening: a theme supporting the USD, but only for now

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
10 June 2022
Published byETM Analytics


Gold slipped overnight following an announcement by the ECB that they plan to raise rates in July by 25 bpts and cease its asset purchase programme. The ECB has been for the most part behind the curve and reluctant to trim stimulus given the precarious outlook for growth in the European Union. We remain sceptical of their ability to become uber hawkish, in fact, there is equal scepticism around the potential for massive monetary tightening across all the major central banks given that many forward-looking indicators are pointing to recessionary conditions on the horizon. Looking at the day ahead, all eyes are on the US CPI number, this will give further insight into the nature of US inflation and whether or not we have topped out.

The industrial metals complex has entered the final trading session under a cloud of demand fear following renewed COVID-19 restrictions in China. Both Shanghai and Beijing entered a fresh coronavirus alert yesterday and there are fears that should the virus take hold once again that we can expect rolling lockdowns, hampering economic activity in the world’s largest consumer of base metals. The benchmark 3m LME copper contract is currently trading some 0.7% lower on the session at $9547.00/tonne, and this comes after a fall of 1.20% yesterday. Aluminium is trading 0.4% down, while zinc has fallen by 0.2% in the session.


Angola: Banco BAI, Angola’s biggest lender, has begun trading on the Luanda stock exchange, the first listing in the country. BAI had 20 buy orders at AOA 21,650 ($50), the bourse known as Bolsa de Divida e Valores de Angola, or Bodiva, 5% more than the initial public offering price. But there were no sellers. The starting of trading after more than a decade of delay could potentially help bolster President Lourenco’s image as a reformer ahead of the August poll. Furthermore, it is expected to drive as many as 20 IPOs in the coming years that aim to attract foreign investment and diversify the nation’s economy away from oil.

Egypt: Egypt reportedly paid $24bn in the first five months of the year to service foreign debt and to cover foreign investors withdrawing funds from the country. Of the amount, $10bn was spent on debt servicing, while $14bn went to foreign investment funds. Note that higher interest rates, a weak currency, and broader investor wariness of emerging markets have pushed up the government’s cost of borrowing. The Egyptian government has forecast a $30bn budget deficit for the financial year set to commence next month.

Egypt: Inflationary pressures remain robust in Egypt, with data showing that urban inflation accelerated for the sixth straight month in May, coming in at 13.5% y/y from 13.1% y/y in the month prior. This was the fastest pace of price growth in the economy in three years and was underpinned by a 24.8% increase in food and beverage costs, which account for the largest single component of the inflation basket. A weaker Egyptian Pound following the 15% devaluation in March also contributed to inflationary pressures in May. Months of accelerating inflation is detracting from Egypt’s real rate, which has recently turned negative and undercut the country’s appeal to foreign investors in domestic bonds and bills. A 200bps last month showed an effort by the central bank to regain that allure, but a continued rise in inflation suggests another rate hike could be on the cards.

South Africa: South Africa’s current account balance widened more than expected in Q1 as it came in at R143bn. The wider surplus was a result of global economic activity improving and the value of merchandise exported increasing. As a percentage of GDP, the current account surplus widened to 2.2%, from a revised 2.1% of GDP in the previous quarter. The positive balance was mainly driven by an annualized trade surplus that widened to R360bn due to gold exports rising to the highest level since 1960. There was still a shortfall on the nation’s primary-income account, which reflects outflows due to dividends payments to foreign shareholders, although it narrowed to R98bn from R116bn rand in the previous quarter. The better-than-expected current account surplus has provided support to the ZAR, and we expect this to continue through at least Q2 and Q3 this year. High global commodity prices are expected to keep SA’s trade balance positive, and subsequently, keep the current account supported in the months ahead.

Tanzania: Headline inflation in Tanzania accelerated to a 4-month high of 4.0% y/y in May from 3.8% y/y in April. On a m/m basis, consumer prices climbed 0.3%. A breakdown of the CPI report showed that upward pressure mostly stemmed from the prices of transport, housing and utilities, food and non-alcoholic beverages, and furnishings. While the Bank of Tanzania earlier this week pledged to maintain an accommodative policy stance, it did highlight that it will monitor the risks to inflation arising from high world commodity prices and take appropriate measures, including a gradual reduction of monetary policy accommodation. A continued acceleration of inflation could therefore see policymakers consider tightening its policy in the coming months.

Tanzania: The IMF yesterday announced that it had agreed with Tanzania on a medium-term program worth $1bn under the Extended Credit Facility (EFC) arrangement. The program aims to support economic recovery, preserve macroeconomic stability and support structural reform towards sustainable and inclusive growth. Moreover, the program will also focus on strengthening the fiscal space. The agreement is subject to IMF management approval and IMF Executive Board Consideration.

Forex: Ethiopian Birr weakens on dollar squeeze and surging inflation

While the Ethiopian Birr (ETB) traded on the front foot against the USD yesterday, it has been a difficult first half for the East African currency. The ETB has depreciated by almost 5% against the USD on a year-to-date basis, keeping the broader bearish bias from last year intact. In addition to surging global oil and food price prices weighing heavily on the trade accounts of East African countries and, by extension, their currencies, further downside pressure for the ETB has emanated from a shortage of foreign currency. It is worth noting a shortage of foreign currency has driven up the price of the greenback on the parallel market and prompted the increased use of cryptocurrencies which the National Bank of Ethiopia has warned against. A shift from formal currency trading channels would undermine the central banks’ ability to conduct monetary policy and retain its traditionally tight control of the foreign-exchange market.

At the start of the week, the ETB on the parallel market traded at 82 per dollar, down by around 26% from the start of May, representing a premium of roughly 58% over the official rate closing rate yesterday of around 52 per dollar, according to Bloomberg data. To deal with robust price pressures as the war in Ukraine persists, the Ethiopian government has implemented spending cuts and reduced foreign exchange allocations to the private sector, forcing an increased number of importers to turn to the parallel market. Moreover, a drop in donor support as a result of the conflict in the Northern Tigray region has pressured the currency.

Aside from a weaker local currency, the foreign currency squeeze has led to a shortage of basic commodities such as cooking oil, and the situation is expected to worsen as firms hoard dollars in anticipation of it becoming more challenging to import. Several firms on the African continent have reported a shortage of dollars for months amid increasing pressure on domestic currencies. To combat the issue of scarcity, Malawi recently devalued its currency by 25% against the USD. With the ETB exchange rate artificially high, we see risks of devaluation in the near-term to medium-term.

Fixed Income: Kenyan Eurobond yields surge to fresh highs as political and fiscal risks intensify

Kenyan Eurobond yields have legged higher this week as traders continue to demand a high premium for holding Kenya’s debt amid rising fiscal and political risks. The most notable move has been on the front end of Kenya’s Eurobond curve, with the 2024 yield climbing just under 300bps this week to a fresh high of 13.72%. Movements on the long end of the curve were also significant, with the 10yr yield, for instance, rising 140bps to close Thursday’s session at 11.63%. 

The sharp sell-off in Kenyan Eurobonds comes after the front runner in the presidential race pledged to restructure the country’s debt and increase government spending to support the economy. Raila Odinga, the favourite to take over from Uhuru Kenyatta later this year according to the latest polling data, said he would re-profile Kenya’s liabilities to make them more sustainable and reduce the debt burden of future generations. While this would benefit Kenyans, it would likely come at a massive cost for investors and, as such, has prompted the latest sell-off.

The bold moves in the bond market this week suggest that investors are taking the restructuring talks seriously. It remains unclear how president hopeful Odinga would restructure the debt should he be successful in August. Some options include relief from bilateral creditors or an outright debt restructuring like we saw in Mozambique.

As we head closer to the election, we expect the popularist narrative from the two favourites to win the election to intensify. As such, we expect the bearish bias in Kenyan bonds to persist, particularly if Odinga extends his lead in the presidential race or restructuring talk from the two leading candidates intensifies.

Macroeconomic: Fed tightening: a theme supporting the USD, but only for now

Using a train as a metaphor, the US is one of the global economy's biggest engines. How it performs governs how quickly the rest of the carriages can travel. Should the US economy dip into recession, other economies will follow suit. In a world faced with so many headwinds, including inflation, disruptive wars, geopolitical considerations and rate hikes, it is worth assessing the state of the US economy. After all, it is subject to the same laws of economics as any other country, even if it enjoys the exorbitant privilege of the USD as its currency and the ability to deploy enormous stimulus during times of downturn without destroying the value of the USD. The report that follows aims to offer perspective on the prospects for the US economy and paint context as to whether the Federal Reserve will find the balance between normalising monetary policy and reducing inflation without cratering the economy.

Since the start of the year, the Fed has adopted a far more aggressive stance toward its monetary policy guidance. It has given the impression that it will raise rates aggressively even if it means that the global economy will have to stomach some financial market volatility. Already there are signs that the economy is responding. According to the Citi Economic Surprise Index, recent data has surprised economic expectations to the downside, implying that the economy is already underperforming. Although the data is far from the point of distress where a recession becomes inevitable, the pressure is evident.

Against this backdrop, the Fed is hiking interest rates in the US. However, with economic data already surprising to the downside, the natural question revolves around whether the Fed will have the flexibility to be able to press ahead with all the tightening it has pencilled in or whether it will be forced to walk back some of that guidance should it appear that the headwinds are stronger than first anticipated and the economy might not withstand the rate hikes and quantitative tightening. 

In conclusion, increasingly, data being released out of the US is disappointing. The Fed has barely begun to normalise monetary policy and already there are signs that the economy will struggle to sustain current levels of economic activity. Data is starting to miss expectations more regularly, sentiment and confidence levels are waning, the yield curve is as flat and threatening to invert, while more and more business districts are concerned about future demand.

The real risk is that the Fed pushes its monetary tightening too hard and catalises a reversal of economic fortunes. It left its normalisation too late and is now playing catch-up and the effects of that will be challenging. It does however raise an important debate around the value of the USD and whether the overvaluation will last into the end of the year.