Macro Analysis /

Slow vaccine progress, new variants weigh on Africa’s economic recovery hopes

  • Forex: Bearish bias in the Angolan Kwanza fades in May

  • Fixed Income: Moody’s leaves Kenya’s sovereign credit rating at B2, maintains its negative outlook

  • Macroeconomic: Slow progress on the vaccine front and new variants weigh on Africa’s economic recovery hopes

Kieran Siney
Kieran Siney

Head of African Markets

ETM Analytics
14 May 2021
Published byETM Analytics


The threat of tightening credit and price caps in China have dampened demand for industrial metals into the weekend. Data out of China on Wednesday showed that new bank loans fell more than expected in April, this coupled with slowing money supply has raised some red flags on the Chinese economic front. The reason touted for the slowing money supply was weak demand for financing, not tightening liquidity supply.

Oil prices are heading for their largest weekly drop since the start of April today, as inflation concerns and rising COVID cases in Asia weigh. Both the front-month Brent and WTI contracts are down more than 2% on the week so far, following some sharp declines yesterday, which saw the Brent contract converge on its 50DMA support level at $66.15. The weekly drop comes despite inventory levels in the US declining, and both the EIA and OPEC suggesting that the demand outlook going forward remains strong. This suggests that the market rallied too far too quickly, and that prices near $70 per barrel for Brent are still unsustainable

Shifting the focus to the US, Fed speak at the moment is generally upbeat, but FOMC board members are cautious in giving the impression that monetary stimulus is about to be withdrawn. On the contrary, they are making sure that investors understand that the Fed will do all that it can to ensure a full-scale economic recovery. It is against this backdrop that Biden's first full budget will come into focus on the 27th of May. It will offer more detailed evidence on how he plans on managing the economy and what the country's debt profile will look like. If the US is to remove stimulus and rely more squarely on the government funding itself through traditional means, fiscal reforms and cutting rampant fiscal stimulus need to be considered.

After initially jumping on the higher than anticipated inflation numbers, the USD has paused its bull-run to some degree. The Fed has tried to ease concerns about rising inflation, calling it temporary, but investors are not completely sold yet. This might put the brakes on the USD losing a lot more ground in the short to medium-term, although given the strength of the credit cycle that has been created and the impact it is likely to have on the trade and current account deficits, this will likely translate into an underlying pressure on the USD which remains intact.


Angola: Angola’s health ministry yesterday approved the use of Russia’s single-dose Sputnik Light COVID-19 virus vaccine. The move to support the use of this vaccine comes after Angola last month reimposed movement restrictions and increased fines for people breaking the restrictions to limit the second wave of coronavirus infections. Despite the tightening of virus containment measures, new daily coronavirus infections and deaths have risen notably this month.

Zimbabwe: The Zimbabwean government and the Commercial Farmers’ Union of Zimbabwe signed amendments to a deal allowing the state to delay compensating former white producers who were evicted from their land two decades ago. The agreement comes after the government failed to meet its first payment of $ 1.75bn last month due to the lack of funds. The Union’s President Andrew Pascoe told a local newspaper that a public announcement to confirm when the first instalments under the $3.5bn Global Compensation Deed, which were due in July, will be made.

Uganda: Lawmakers in Uganda approved the government’s request to borrow UGX 481bn to fund initial investment in a planned pipeline connecting the country’s oil fields to Tanzania’s Coast. The project, which is expected to start in Q3 this year, is crucial for Uganda as it will help generate a fresh revenue stream for the government when production kicks off. However, with the country’s debt surging last year due to COVID related spending, further borrowing will put pressure on the government fiscus, adding to fiscal concerns.

Kenya: President Uhuru Kenyatta’s plan to restructure the government to make it more inclusive and avert political violence met a setback after Kenya’s High Court ruled against the plan. According to the High Court verdict, the entire process promoted by the Building Bridges Initiative was “unconstitutional, null and void.” The steering committee appointed by President Kenyatta to implement the change was an unlawful entity, and the president violated the constitution, adds the court. The ruling comes days after the parliament approved the so-called Building Bridges Initiative. It is worth noting that the ruling can be seen as a win for the critics of the Building Bridges Initiative that argued that it would undermine the judiciary’s independence and increase the size of the government.

South Africa: SA's mining production output expanded at a rapid pace in March, outpacing market expectations to touch a seven-year high following an increase of 21.3% y/y. This compares with a consensus estimate of 17.3% y/y and a downwardly revised contraction of 2.3% y/y in February. The rebound has benefited from a strong rise in commodity prices, increased global demand and a low base comparison from last year when lockdown restrictions were imposed. However, this recovery is not sustainable, with base effects notwithstanding, as the sector continues to face risks in the absence of structural reforms, which are detracting from investors' confidence and the longer-term recovery. Going forward, base effects will be a key feature in the monthly prints until H2 of 2021. After that, investors will get a better gauge of the health of the sector. In the interim, the mining sector will continue to benefit from the global rally in commodity prices.

Forex: Bearish bias in the Angolan Kwanza fades in May

While the Angolan Kwanza (AOA) is amongst the worst performing African currencies on a quarter-to-date basis, the bearish bias in the AOA appears to have come to a halt in May. After depreciating sharply in April, the AOA has traded in a relatively tight range against the USD in May, hovering around the 653 mark. Note that the AOA weakened by 3.21% against the USD in April.

While AOA has traded in a relatively tight range this month, the broader bias in the currency remains decisively bearish. For context, the AOA has lost almost 18.0% against the USD since this time last year. The marked depreciation in the AOA over the past year comes on the back of a flagging economy, ructions in the oil sector, mounting fiscal risks and deeply negative real interest rates.

In terms of valuation, ETM’s PPP model shows that the AOA is undervalued by more around 37%. While the significant undervaluation in the AOA and recovery in international oil prices, which the country is heavily dependent on for foreign currency inflows and fiscal revenue, suggests that there is room for a notable recovery in the AOA, Angola’s weak fundamentals suggest that much of the undervaluation in the currency is justified.  

One of the key factors underpinning the weakness in the AOA is the country’s deep negative real interest rate. For context, consumer price inflation quickened from 27.3% y/y in March to 27.7% y/y in April, its fastest pace of growth since October 2017. The high April inflation reading saw the country’s real interest rate decline to -12.16%, one of the lowest in the world.

Fixed Income: Moody’s leaves Kenya’s sovereign credit rating at B2, maintains its negative outlook

Kenya was back in the spotlight on Thursday as Moody’s delivered its latest sovereign credit rating update on the East African nation. Moody’s affirmed Kenya's sovereign issuer and senior unsecured ratings at B2 and maintained the negative outlook. The global ratings agency said in its statement that the decision to maintain the negative outlook reflects ongoing downside risks to the government's efforts to deliver fiscal consolidation and reduce liquidity risk.

Moody’s noted that while the government has begun to implement measures to broaden its revenue base and reduce the fiscal deficit, its lacklustre track record in terms of delivering fiscal consolidation and achieving revenue targets means there are significant risks to the fiscal outlook. The agency said that failure on the government’s part to return to a path of fiscal consolidation would leave Kenya vulnerable to tightening financing conditions.

In terms of the actual credit rating, Moody’s said that the B2 rating reflected Kenya's weak fiscal dynamics, as well as considerable governance challenges. The agency added that the B2 rating also takes into account Kenya's fundamental economic strengths, including its relatively large and diversified economy with high growth potential, which it said provides the country with some resilience against exogenous shocks. Moody’s added that Kenya’s relatively deep domestic financial markets meanwhile support domestic, local currency debt issuance.

Kenya's local currency and foreign-currency country ceilings remain unchanged at Ba2 and Ba3, respectively. The one-notch gap between the foreign-currency ceiling and the local-currency ceiling reflects relatively low external debt and a moderately open capital account, which reduce the incentives to impose transfer and convertibility restrictions, according to Moody’s.

Given the precarious fiscal position that Kenya finds itself in and the country’s negative rating outlook, the risks are skewed in favour of further negative rating action going forward. Moody’s said in its statement that it would downgrade Kenya’s sovereign credit rating if the country’s debt metrics were to deteriorate more than currently expected, with the debt burden rising markedly for several years, potentially because of slower progress on fiscal reforms than currently expected or because growth prospects have diminished. In addition to this, Moody’s said that a tightening of financing conditions, which contributes to a rise in borrowing costs and challenges the government's ability to refinance maturing debt, would also place downward pressure on the rating.

Macroeconomic: Slow progress on the vaccine front and new variants weigh on Africa’s economic recovery hopes

While it can be argued that the impact of the COVID-19 pandemic has been less severe in African than in other parts of the world, the pandemic has still been devastating for Africa, both from a humanitarian and economic perspective. In addition to the thousands of lives that have been lost as a result of the coronavirus, the pandemic has seen economic activity on the continent crater, leaving many jobless and, in some cases starving.

Moreover, the pandemic has had a severe impact on fiscal dynamics in Africa with debt piles surging as governments ramped up spending to bolster their respective health care systems and provide some cushioning against the economic impact of the pandemic. This came against the backdrop of a fallout in government revenues as economic activity dwindled as a result of the virus containment measures introduced to slow the spread of the virus.

As such, the fiscal and economic trajectories of African counties will depend on how quickly governments can bring the COVID-19 pandemic on the continent under control by vaccinating their populations, which has so far significantly lagged other parts of the world. Data from the World Health Organisation shows that major African economies such as South Africa and Nigeria have only vaccinated 0.7% and 0.4% of their populations, while other emerging market countries such as Chile have already vaccinated most of their populations.

In addition to the slow progress on the vaccine front, the African Union’s health agency said on Thursday that testing dropped 21% last week. John Nkengasong, director of the Africa Centres for Disease Control and Prevention, urged African countries to increase testing for the coronavirus as more countries report different variants of the disease. Nkengasong noted that 6 African nations, including South Africa, Angola, the Democratic Republic of Congo, Morocco, Uganda and Kenya have reported the B.1.617 strain that is devastating India and which initial studies show spreads more easily.

This in addition to the 24 African nations that reported cases of the B.1.1.7 mutation found last year in the UK, with the same number of countries reporting the B.1.351 variant first identified in South Africa. Nkengasong said, “We need to increase our testing all the time to catch up with the pandemic,” adding that “these viruses tend to be transmitted very quickly and move with people.” Nkengasong also urged African nations to continue genome sequencing to identify mutations.