Macro Analysis /

Rwanda to leave rates on hold, Tanzania faces Moody's credit rating

  • Rwanda likely to leave rates on hold

  • Moody's to provide sovereign credit rating update for Tanzania on Friday

  • USD on the front foot this week, UGX unphased by stronger dollar

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
17 August 2021
Published byETM Analytics

East Africa Week Ahead

It is set to be a busy week in East Africa. The two key events this week are the National Bank of Rwanda rate decision and Tanzania’s sovereign debt rating by Moody’s on Friday evening.

Recall that at its previous meeting on May 12, the National Bank of Rwanda’s Monetary Policy Committee voted in favour of leaving the benchmark interest rate at 4.50%. The Committee said in its May policy statement that the decision to leave rates on hold was based on the view that inflation would remain below the medium-term benchmark of 5% over the next 4 quarters.

This comes against the backdrop of the devastating economic impact of the pandemic. The central bank said that Rwanda’s economy is expected to stage a solid economic recovery in the months ahead as the economy is reopened and the vaccine rollout gains pace.

Looking ahead, interest rates are expected to remain anchored in the months ahead, with inflation expected to remain benign. The continuing accommodative monetary policy stance is expected to support the economic recovery in the months ahead.

In its periodic review of ratings of Tanzania published in May, Moody’s said Tanzania’s B2 credit profile is supported by its ba2 economic strength, which reflects the economy's very strong growth potential balanced against low wealth levels and weak competitiveness. Tanzania’s credit rating also reflects the country’s b3 institutions and governance strength underpinned by weak performance in the Worldwide Governance Indicators and a poor track record of budget implementation. Moody’s said that Tanzania is rated at b2 in terms of fiscal strength, reflecting a moderate debt burden compared with regional peers large share of foreign currency-denominated debt. Lastly, Tanzania’s credit rating reflects the country’s ba susceptibility to event risk, driven by political risk given the government's hardened stance towards the opposition and the risks of tensions with international partners, including the IMF and the World Bank, which have in the past led to the suspension of donor aid. While there is a risk that Moody’s downgrades Tanzania’s credit rating outlook, we are unlikely to see a full rating downgrade on Friday evening.

Data from the Central Bank of Kenya showed that foreign currency holdings fell to a 7-month low last week. Specifically, foreign reserves declined to $9.296bn on August 12 from $9.352bn on August 5. According to the CBK, the forex reserves are adequate to cover 5.68 months of imports, down from 5.72 months. While the import cover is down, it remains above the CBK’s target of at least four months and the EAC region’s convergence criteria of 4.5 months import cover.

M3 money supply slowed further in June, coming in at a 17-month low of 6.30% y/y from 7.64% y/y. Note that money supply has been on a downward trend since December 2020, which suggests that monetary dynamics continue to tighten. Therefore the room for inflation to take hold is compressing and is unlikely to spiral out of control in the months ahead.

Data from the Bank of Tanzania’s quarterly report showed that the value of gold sales by Tanzania’s large-scale miners fell by 1.8% to $469mn in Q2 compared a year earlier. Furthermore, the volume of gold sales fell by 10% to 10,009.6kgs in the quarter to June compared to the prior-year quarter

International Week Ahead

International newswires in the US are awash with coverage of the developments in Afghanistan and it is fair to say that the Biden administration is coming in for some heavy criticism. President Biden addressed these developments in a televised statement last night where he defended his actions, stating that there was no good time to withdraw, that the action had to be taken, that the objectives had been a decade ago. He went on to add that it was regrettable the Afghan army did not make better use of the assistance the US had granted them, capitulating at the first sign that the Taliban were approaching and engaging. He used this as justification that if the army were not ready now, they would not have been in the future and that it was not America's place to fight the Afghan civil war. While many can sympathise with Biden in wanting to withdraw, how the US withdrew is the point of criticism. The transitional arrangements were inadequate, and the Afghan government's collapse took place in a matter of days, far quicker than anticipated. This has raised overall levels of geopolitical tensions in the region and Europe, which is bracing itself for another influx of immigrants fleeing the Taliban.


Market sentiment remains decidedly negative. Concerns are still elevated over the spread of the Delta variant, while the turmoil in Afghanistan is adding to growing geopolitical risks within the Middle-East region. Focus is also turning to the Fed again, with Powell scheduled to speak later today, which many see as a precursor to the Jackson Hole symposium, where it is still expected that the timing of tapering will be announced.

The USD has regained its mojo today, with the trade-weighted dollar recovering most of its losses suffered at the backend of last week. At the time of writing, the dollar had gained 0.28% and was trading at 92.89. Underpinning the dollar today is a shift towards safety amongst investors.

CFTC data released on Monday showed that the speculators increased their bullish exposure on the dollar, tracking the stronger greenback in the spot market during the period. This was driven by concern over the global impact of the spread of the delta variant, as well as some robust US data which kept tapering bets alive.

Looking ahead, the outlook for the USD remains favourable at the moment, and we should see this reflected in the CFTC data releases over the coming weeks. As was the case on Friday, we may see brief corrections, but overall the global growth concerns and the possibility of the Fed tapering soon will keep the USD supported.

While the dollar is on the front foot this week, East African FX is trading a mixed bag. Unsurprisingly, the gains on the week are being led by the Ugandan Shilling, which has firmed by 0.09% against the USD. Meanwhile, the losses on the week are being led by the Ethiopian Birr, which continues to be haunted by political uncertainty and heightened security risks. Adding to the headwinds for the ETB, State Minister for Finance Eyob Tekalign said that the National Bank of Ethiopia (NBE) has asked all commercial banks to temporarily suspend providing loans backed by collateral, such as land and buildings. According to Tekalign, the NBE’s directive follows findings that the money is being used on the black market, and the security authorities and the central bank are taking action as part of measures to address the issue.

The KES is relatively flat on the session. However, the broader bearish bias is expected to remain entrenched amid increased dollar demand from importers and listed companies preparing to pay dividends to their shareholders. Moreover, prospects of a fourth wave of infections will add downside pressure.

In the commodity space, oil prices have shown signs that they are steadying following three days of declines. Oil has been under pressure from rising concerns over the economic impact of the Delta variant and now slowing growth in China, the world’s largest oil importer. Helping oil steady this morning is data out of India that has shown that fuel consumption in the country has held up in August so far, a rare positive for Asian demand at the moment. The turmoil in Afghanistan, meanwhile, may not have had an immediate impact on the markets, but the rise in geopolitical risk will be bullish for oil if we start to see conditions worsen even further than what they have already.  The recent drop in oil prices is, however, most likely just a correction and we could still see prices rise over the coming months as the global economy regains some of its momentum. Market structure remains bullish with the Brent prompt time spread trading near 36 cents a barrel, still above the levels seen in April.