Macro Analysis /

SA and Uganda face rating updates, flattening bias in bonds set to persist

  • Forex: South African Rand faces the perfect storm following the MPC

  • Fixed Income: Broader flattening bias across the global bond market set to persist amid stagflation fears

  • Macroeconomic: South African Reserve Bank hikes 25bps but normalisation path to be gradual

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
19 November 2021
Published by


Although the USD has pulled off its intra-week highs, it will remain well supported by the strong economic data that will promote speculation that the Fed needs to bring forward the timing of a rate hike. The trend remains overwhelmingly in favour of further USD gains, with the monetary policy differential between the US and its major trading partners also expected to support the USD for a little longer. That being said, there is a lot priced in, and the USD is no longer looking attractive. However, so long as US data remains strong, it will likely remain well bid.


Uganda: S&P is scheduled to provide a sovereign credit rating update on Uganda this evening. Recall that in June, S&P affirmed Uganda's B/B rating with a stable outlook. The agency said that the stable outlook balances risks associated with Uganda's high fiscal and external deficits over the next year against our expectation that the country will maintain access to official financing on preferential terms. Heading into tonight's decision, we expect another unchanged rating but do see some risk of the outlook being revised to negative.

Egypt: Data from the Central Bank of Egypt showed that remittances of Egyptians working abroad climbed to $21.4bn in the period Jan-Aug 2021, a $2bn increase from the same period a year earlier. Meanwhile, August worker remittances came in at $2.7bn vs $2.4bn in the comparable month a year ago. Looking ahead, increasing remittance inflows in addition to record-high levels of gross reserves and prudent monetary policy translating into a high positive real rate has bolstered the Egyptian Pound's resilience.

Ghana: Minister of State at the Finance Ministry, Charles Adu Boahen, yesterday said that external financing for the country's budget will be through syndicated loans and borrowing from bilateral sources to avoid the high cost premium it currently faces on international capital markets. The minister was quoted as saying, "our spreads have widened, and for that reason, nobody will go to the market as a country to borrow because the rate will be too high. If next year these conditions remain, we will not go to the market because the market is not really reflecting what we believe is the true cost of capital for Ghana." In next year's budget, Ghana plans to raise as much as $750mn from international sources. The comments saw Ghana Eurobonds rebound yesterday after having come under pressure on Wednesday on the back of news that Ghana's overall 2021 fiscal gap will be wider than forecasts.

Kenya: CEO of Kenya's biggest bank by assets, Joshua Oigara, said that KCB plans to issue the country's first green bond by a commercial lender next year. According to Oigara, "a green bond is one of the key actions we are looking at in our market. We are probably the most ready institution to move in that direction in the coming year." According to the United Nations, KCB is one of three lenders in the Middle East and Africa that are part of the Net-Zero Banking Alliance, an initiative by global banks to ensure their investments and lending practices help cut emissions by 2050. Oigara added that KCB expects loans for climate-friendly projects to account for 25% of its total loan book by the end of 2024, from 7% with the lender giving loans to projects in energy, agriculture, infrastructure, and housing developments.

Nigeria: The pace of recovery in Nigeria's economy slowed in Q3. Specifically, economic activity rose by 4.03% y/y in Q3, compared with 5.01% in Q2. The slower pace of recovery was driven by a fall in crude production by 6% in Q3 to 1.57mn barrels per day, compared with a year earlier, resulting in a 10.7% contraction in the oil sector. The non-oil economy expanded by 5.4% from a year earlier, largely driven by the trade and telecommunication industries. That compares with 6.7% growth in the second quarter. The slower pace of economic growth and slowing inflation may convince the Central Bank of Nigeria to maintain its benchmark rate at 11.5% at next week's meeting. Policymakers have left the gauge unchanged for six consecutive meetings to build growth momentum in Africa's largest economy. That said, we still view that it would be prudent to hike rates, given that inflation is still well above the upper band of the central bank’s inflation target.

Rwanda: In its concluding statement following an official mission to the country, the International Monetary Fund said that Rwanda's vaccination rate had reached 21%, one of the highest in sub-Saharan Africa. The IMF expects economic growth in Rwanda to rebound in 2021 to 10.2%. Rwanda aims to reach 60% fully vaccinated by the end of 2022, while in Kigali, almost 90% of the adult population is already fully vaccinated. The IMF added that Rwanda's economic outlook was benefitting from positive spillovers from the global recovery. Rwanda is one of the shining lights in the Central and East Africa region for economic and government stability. Rwanda has experienced good economic growth in recent years and has been one of the most resilient countries in the region during the COVID-19 pandemic.

Zimbabwe: In a bid to lessen the impact on inflation, Zimbabwe's Treasury reduced levies by as much as 63% to effect a fuel-price freeze for the rest of the year. Finance Minister Mthuli Ncube said that the price of fuel will remain unchanged in November and December. Inflation in Zimbabwe rose to a 3-month high of 54.5% y/y in October, driven mainly by a resurgence in the volatility of the parallel market exchange rate.

Forex: South African Rand faces the perfect storm following the MPC

The South Africa Rand (ZAR ) came under severe selling pressure in the wake of the MPC decision yesterday. For context, the USD-ZAR reacted by surging to levels north of 15.7500, before retreating slightly and closing at a year-to-date high. The ZAR was the worst-performing African currency on the session, down 0.90%. The realisation that rate hikes could be more gradual than first anticipated was a key factor that dented sentiment towards the ZAR. Investors had been over-zealous, based on the SARB's Quarterly Projection Model, and those expectations will now need to be scaled back. Secondly, this unfolds against the backdrop of a USD that has found support amid a shift in expectations towards a more rapid tightening of monetary policy.

The combination leaves the ZAR vulnerable, especially as the stronger USD also detracts from the performance of commodity prices, which have had a difficult week. Therefore, the ZAR's performance is not out of kilter with underlying fundamentals ahead of Moody's and S&P's sovereign debt rating reviews this evening. Although the improvement in SA's debt metrics could help generate improved reviews, this is already known and will be largely priced into the market.

Only an extremely positive review could see the ZAR respond favourably. But even then, that is unlikely given that rating agencies are traditionally quite conservative in their assessments and will likely still draw attention to the many structural headwinds that the SA economy faces, including but not limited to low growth, unemployment and the budget deficit. They are all too troubling to promote fiscal consolidation and sustainability, and the rating agencies will likely raise that as a concern, the improved fiscal ratios notwithstanding. Therefore, heading into the weekend, it seems unlikely that the ZAR will stage a recovery just yet.

Fixed Income: Broader flattening bias across the global bond market set to persist amid stagflation fears

In recent months, bond yields across developed and emerging markets have risen notably on the growing expectation that inflation will become a factor that central banks will have to deal with. As inflation expectations rise, so central banks are being forced to tighten despite slow growth. It is worth pointing out that while the bearish bias in shorter-dated bonds remains intact, generally speaking, there has been some reprieve for longer date bonds on the back of renewed growth concerns.

Forecasters across the globe have downwardly revised their growth expectations amid persistent supply chain disruptions and inflation pressures. In particular, the outlook for the global manufacturing sector has declined markedly due to supply-demand mismatches and shortages of key components, including semiconductors, clogged ports and a lack of cargo containers, and a labour crunch as global supply chains optimised for efficiency remains in disarray after pandemic-induced shutdowns last year.

Given that global inflation is expected to remain robust due to soaring supply-side costs such as food and fuel, we expect central banks across the world to continue tightening monetary policy. This will continue to prop up shorter-dated bond yields. Meanwhile, while elevated fiscal risks may keep longer-dated bond yields buoyed in some countries, the emergence of fresh economic growth concerns is expected to continue to drag longer-dated bond yields lower in the months ahead. Therefore, we expect the broader flattening bias across the global bond market to persist through into 2022. Note that in countries such as Brazil, where stagflation fears are acute, the flattening bias has been so strong that its bond curve has inverted.

Macroeconomic: South African Reserve Bank hikes 25bps but normalisation path to be gradual

Matching market expectations and aligned with ETM's view and the central bank's quarterly projection model (QPM), the MPC opted to take preventative measures by delivering a 25bps rate hike. This takes the benchmark Repo Rate to 3.75%, bringing an end to the record low rate of 3.50% and pre-pandemic stimulus measures. The vote, however, was not unanimous, with the board split 3-2 in favour of tightening. The tone of Governor Lesetja Kganyago was slightly hawkish, even though risks to economic growth remain firmly to the downside.

The most notable takeaway from the statement was the QPM model now pencilling in an interest increase in each of the upcoming quarters through 2022, 2023 and 2024. The board used the final MPC meeting for the year to anchor inflation expectations, alleviate pressure on the Rand and restore some balance. In our view, the hawkish rhetoric is appropriate and will enhance the effectiveness of monetary policy and its transmission to the broader economy.

Policymakers view the risks to the short-term inflation outlook as tilted to the upside, with a weaker currency, higher imported inflation, and escalating wage demands posing further challenges to the longer-term outlook. While the QPM suggests that rate hikes will continue over the next four years, we expect the tightening to be gradual. Supporting this narrative is SA's weak credit growth, tight monetary environment, coupled with anaemic economic growth, which suggests that SARB will remain heavily data dependent going forward amid the uncertain climate.

In conclusion, the SARB tightened its monetary policy settings as they look to avoid falling behind the inflation curve and inflation becoming embedded in the economy, which would require more aggressive rate hikes further down the line. Policymakers could no longer kick the can further the road and needed to ensure it met its primary mandate of keeping consumer prices in check. Despite the SARB's efforts, SA's real policy rate remains deep in negative territory at negative 1.25%. We believe that the normalisation of policy will be gradual going forward and will move in lockstep with the nation's economic recovery, which is expected to slow over the coming years.