Macro Analysis /

Rising interest rates are compounding fiscal risks in Africa

  • Forex: Weakness in the Kenyan shilling is driving debt servicing costs higher

  • Fixed Income: The spotlight remains on Zambia as the country desperately tries to secure an IMF deal

  • Macroeconomic: Contagion risks for emerging markets are muted for now but could heat up in the months ahead

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
20 June 2022
Published by


The USD has kicked off the new week on the back foot after the Fed’s Mester said on Sunday that the risk of a recession in the US economy is increasing. The modest pullback in the USD has provided some reprieve for G10 and emerging market currencies, which are, for the most part, trading in the green ahead of the European open. Commodity currencies such as the Australian dollar and the Russian ruble are leading the gains this morning. Cryptocurrencies have also managed to take advantage of the weaker USD this morning, with the likes of Bitcoin regaining some lost ground in the Asian session. While the USD is weaker this morning, the broader bias remains decisively bullish, with the trade-weighted dollar buoyed near its highest level since the early 2000s. The monetary policy differential between the US and other major economies suggests that the USD strength is set to persist in the second half of the year or until the path for monetary policy in the US turns dovish.

The start of the week has been choppy as investors jostle with the lack of price discovery inherent with the first trading session in Asia coupled with the lower liquidity expected as the United States stays out for a public holiday. Gold is currently marking time just below the $1845.00/oz mark as we head into the EU open tracking the dollar for short-term direction. Investors now have all the Central Bank decisions in the rear mirror and will once again focus on the outlook for growth and inflation, both of these remain the core macro drivers of markets at present. We expect buyers to emerge on dips towards $1800.00/oz, while $1880.00/oz will provide the first major hurdle for gold bulls in the next couple of days.


Angola: Price pressures in the Angola economy continued to ease in May. Specifically, inflation slowed to 24.42% y/y from 25.79% y/y in April, marking the fourth straight month that price growth has slowed. A stronger Angolan Kwanza that is up by over 22% on a year-to-date basis against the USD and prudent monetary policy by the central bank has helped slow inflation. The central bank Governor Jose de Lima Massano recently said that while inflation has been falling due to a stronger Kwanza and prudent monetary policy, it is still “relatively high,” and the central bank is totally centred on ensuring the stability of prices.

Egypt: In a bid to help end power shortages in crisis-ridden Lebanon, Egypt will this week sign a natural gas deal after the two countries have approved technical and commercial issues. According to the Egyptian oil minister, the pact is pending an exemption from Caesar Act sanctions targeting Syria and a World Bank funds guarantee. Egypt’s gas will be delivered to Lebanon through Jordan and Syria.

Ghana: Deputy Finance Minister John Kumah has indicated that the Ghanaian government may consider approaching the IMF if current homegrown solutions fail to turn the economy around and restore investor confidence, against the backdrop of surging inflation, public debt challenges and several rating downgrades. Kumah was quoted as saying, “if our programmes fail us and we are not able to get the confidence and the results in the fiscal space discipline, which we have to impose on ourselves, then we don’t have a choice.” The Ghanaian government is relying on measures such as an electronic tax level of 1.5% to generate $900mn annually and the government-owned Development Bank of Ghana, which officially began operations on June 14 with some $750mn committed capital and the lofty goal of lending to some 10K small and medium-sized enterprises (SMEs) over the next 1-2 years and boosting economic growth.

Ivory Coast: Upon the completion of the Article IV consultation, the IMF said that it expects the impact of the war in Ukraine and regional security challenges to weigh on the economic outlook this year. The IMF forecasts growth to slow to 6% this year due to subdued global demand, worsening terms of trade, and increased uncertainty. The medium-term outlook, however, remains robust according to the IMF. The IMF sees a swift implementation of the National Development reforms as boosting medium-term growth. According to the Washington-based lender, “a swift implementation of the NDP reforms would help, and a strong involvement of the private sector is key to ensure efforts are focused where they are needed the most, as well as to contain fiscal cost.”

Nigeria: To make available export guarantees that will help reduce the credit risk to exporters, the Central Bank of Nigeria plans to start a partnership with the Nigerian Export-Import Bank. According to CBN Governor Emefiele, the export guarantee will bring “credit risk-sharing” with the regulator and encourage banks to lend more. Meanwhile, Nigeria is also taking measures to ease logistics at ports for exporters, including plans to build a second deep seaport in Bonny, Rivers State, to reduce pressure on ports in Lagos.

Nigeria: The World Bank said in a report that Nigeria requires an eye-watering $100bn in the next ten years to tackle the erratic power supply, which has defied all efforts by administrations since 1999. As part of efforts to address the challenge in the power sector, the Nigerian Electricity Regulatory Commission said last week that effective from July 1, 2022, there would be a remarkable improvement in the nation's power sector as market participants have committed in contracts to ensure the generation, transmission and distribution of 5000 megawatts of electricity in the country. Commenting on the $100bn needed by the country over the next 10 years, World Bank's Regional Director for Infrastructure, Africa West and East of the global bank, Ashish Khanna, stated that a large chunk of the investment was expected to come from the private sector. Khanna added that Nigeria has the highest number of people without electricity worldwide, which has led to about a 4% loss of GDP.

Forex: Weakness in the Kenyan shilling is driving debt servicing costs higher

In addition to driving inflation to near the upper limit of the Central Bank’s 2.5-7.5% target range, the sustained weakness in the Kenya shilling has also triggered a surge in Kenya’s debt servicing costs. A report from Kenya’s National Treasury to lawmakers showed that the shilling weakness against the dollar had increased debt servicing costs by KES 300bn ($2.6bn) in the fiscal year ending this month. Kenya’s external debt makes up half of the public borrowings. The dollar-denominated debt accounts for 66% of Kenya’s external debt, followed by the euro at 19%, Japanese yen, and Chinese yuan at 6% each.

The National Treasury report also showed that debt service costs are expected to peak at KES 1.67trn in 2023-24 due to the repayment of a $2bn Eurobond maturing in 2024. In 2022-23 debt servicing costs are forecast to be around KES 1.39trn. The Kenya shilling has depreciated by almost 4% on a year-to-date basis against the dollar as increased demand for hard currency, particularly from oil-importing countries, weighs. Meanwhile, Kenya’s rising import bill has also contributed to the deterioration of Kenya’s current and trade accounts. Additional downside pressure for the KES stemmed from the cancellation of plans to issue a Eurobond, whose proceeds were much needed to support the currency.

The outlook for the KES remains decidedly bearish at present, and we, therefore, see further upside risk to debt servicing costs. Aside from the current account imbalances, the KES could weaken further on the back of tightening global financial conditions, growing fiscal risks, and the August elections. It is worth highlighting that the non-deliverable forwards market is currently pricing in depreciation to around KES 133 per dollar in the next six months.

Fixed Income: The spotlight remains on Zambia as the country desperately tries to secure an IMF deal

The focus over the weekend remained centred on Zambia as the country edges closer to securing a much-needed program with the International Monetary Fund. China, Zambia’s single biggest creditor, has called on the International Monetary Fund to approve a $1.4bn bailout for Zambia. But the IMF has responded by telling China and other official creditors they must first agree to a relief package. While the recent developments are encouraging, the approval of the IMF deal is likely to still be months away.

Zambia has sought debt relief through the G20 Common Framework. The process allows creditors to jointly renegotiate their foreign debt. Zambia's official creditors met in Paris on Thursday to discuss a way forward for the debt restructuring and relief. At the same time as Zambia creditors met on Thursday, the Director-General of the Chinese foreign ministry's African affairs department, Wu Peng, visited Zambia to help coordinate China's response to the situation.

Following a meeting with President Hakainde Hichilema on Friday, WU said the IMF should move quickly to approve Zambia's $1.4bn program. Wu added that China appeals for the IMF's early approval and disbursement of the Extended Credit Facility to Zambia so it can move ahead with the debt restructuring and relief. Chinese lenders make up about a third or more than $6bn. The loans from China have been used to fund large infrastructure projects across the country, including airports, highways and hydropower dams.

In a move aimed at easing concerns over its planned debt restructuring, Zambia presented its plan to its creditors on Thursday on how to get its debt under control and requested creditors to give assurances that they would provide relief that could unlock the IMF funding. Although China seems to be playing a key role in the debt restructuring and relief talks, concerns are mounting that Chinese creditors do not want to be bound by a multilateral arrangement like the G20's common framework, given that it would set a precedent for other heavily indebted African countries.

Macroeconomic: Contagion risks for emerging markets are muted for now but could heat up in the months ahead

It has been a turbulent few months for emerging markets. Markets have been roiled by soaring inflation, the war in Ukraine, geopolitical tensions, risk aversion and tightening global monetary conditions, which have triggered concerns over a debt crisis in low and middle-income countries. This is evident when looking at the losses in equities and currencies and sky-high bond yields.

The rotation out of risky emerging assets to safe havens has resulted in months of capital outflows. The Bloomberg Emerging Markets Capital Flow Proxy Index, which tracks the flows into four emerging market asset classes, has fallen by 7% since the start of the year. Note that in March, the index was down by as much as 11% as markets went into shock after Russia invaded Ukraine.

While the risk-off mood persists across financial markets, the risk of emerging market contagion appears to be contained for now. However, contagion risks could heat up in the months ahead in the absence of measures to ease the fiscal burden of rising global interest rates. Tighter global monetary conditions are pushing up the lending costs for emerging markets, increasing the risk of a broad-based emerging market debt crisis.

Countries such as Zambia, Sri Lanka and Lebanon are already in default and are seeking help from the international lending community to provide debt relief or restructure their debts. Rising global interest rates come against the backdrop of worsening economic growth conditions. The World Bank slashed its growth forecast for developing economies to 3.4% this year from its previous forecast of 4.6%, citing the effects of surging food and energy prices and rapidly rising borrowing costs following the aggressive tightening in the US.

According to Bloomberg, emerging market bond issuances have collapsed, falling 43% so far this year compared with the same period in 2021. Emerging market debt is the lowest since 2016 at $264bn. Several African governments have revoked planned Eurobond issuance this year due to the deterioration in lending conditions in the international debt market. This triggered concerns over how countries such as Ghana will refinance themselves going forward, given that a large portion of their external lending has been from the issuance of Eurobonds in recent years. Countries with sound fiscal dynamics are expected to outperform as lending conditions deteriorate.