Macro Analysis /

S&P flags three African countries with heightened domestic debt distress risks

  • Forex: Currency weakness pass-through effects drive Ghana’s inflation to a near two-decade high

  • Fixed Income: S&P flags three African sovereigns with heightened domestic debt pressures     

  • Macroeconomic: US inflation print triggers fresh volatility across financial markets

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
12 May 2022
Published byETM Analytics


This week's main event turned out to be less of a "main event" when inflation in the US decelerated to 8.3% y/y vs expectations of 8.1% y/y. It represents a slight moderation from the 8.5% in March, which will satisfy some policymakers that have immediately characterised March as the peak which is now behind us. However, it is still more than four times the Fed's 2% target. Depending on how the Fed would like to frame this outcome, the markets could gain some support or be punished further.


Kenya: Chairman of the National Assembly transport committee David Pkosing yesterday said that the country plans to leverage half of the proceeds of a tax on fuel imports to flat bonds for the maintenance, development, and rehabilitation of roads. Posting added that the proposal to tap the road maintenance levy fund would help "unlock" issuance of road bonds. Kenya's road sector has a funding deficit of KES 590bn for the rehabilitation of dilapidated roads and is seeking alternatives to bridge the deficit. Fuel levy collections are forecast at KES 84bn for the year ending in June. According to a Kenya Roads Board official, leveraging 50% of the fund will help Kenya raise as much as KES 150bn.

Kenya: Kenya's KES 60bnn bond sale was 72% subscribed. The sale of the reopened 25-year debt and new 10-year securities received bids worth KES 43.1bn, and the central bank accepted bids amounting to KES 31.7bn. The weighted average rate of accepted bids was 13.49% for the 10-year debt and 13.976% for the reopened 25-year note.

Mozambique: Country Director Idah Pswarayi-Riddihough said that the World Bank would finalise $300mn of budget support for Mozambique by June 30. The amount is set to be followed by a further tranche next year and in 2024, with the value yet to be decided. In a separate agreement, the World Bank has agreed to invest almost $550mn in the northern region of the country where an Islamic State-affiliated insurgency has caused 783k people to flee their homes.

Nigeria: President Buhari has directed that any cabinet minister seeking to run in next year's elections should resign before May 16. Next year Nigerians are set to vote for a new president, state governors, senators and members of the House of Representatives. Buhari's ruling All Progressives Congress party will hold primary elections to select candidates, including that for the President, later this month. Note that under the new electoral law that was amended in February, no political appointees are allowed to contest party primaries or vote during such primaries.

Somalia: Central bank Governor Abdirahman Mohamed Abdullahi yesterday said that Somalia's request for a three-month extension for an extended credit facility arrangement to allow for presidential elections had been approved by the International Monetary Fund. Somalia's expenditure relies heavily on donor funding, and the extension provides the new government with sufficient time to put the program back on track and move it toward the completion point of the heavily indebted poor countries debt relief process.

Uganda: Results from the latest auction showed that Uganda sold UGX 132.1027bn ($36.857mn) of bills due May 11, 2022. Demand was relatively healthy, with the bid to cover ratio coming in at 1.79. The bills sold at a yield of 9.0%. With inflation pressures in Uganda on the rise against tighter global monetary conditions, we expect yields to remain elevated in the months ahead.

Zambia: In a sign of thawing relations, Vedanta Resources Ltd. confirmed that it has agreed to suspend legal action to reclaim copper mines Zambia seized three years ago, pending talks to settle the dispute. Vedanta has indicated that it wants the mines back and has pledged to invest about $1.5bn to revive the operations. CEO Sunil Duggal was quoted as saying, "Vedanta has always been of the view of resolving the  matter outside court without litigation and finding an amicable solution to protect the national asset." The Hichilema administration is seeking to repair relationships with mining companies in a bid to attract more foreign investment, and rebooting production at KCM is central to ambitions to more than triple output within a decade.

Forex: Currency weakness pass-through effects drive Ghana’s inflation to a near two-decade high

While the rate of depreciation in the Ghanaian Cedi slowed in April, the GHS recorded its seventh straight monthly loss against the USD, suggesting a broader bearish bias remains at the start of Q2. This comes despite monetary policy action and fiscal measures and strategies taken by the Bank of Ghana and the government. On a year-to-date basis, the Cedi is the second worst-performing African currency among those tracked by Bloomberg, down by 18.75%. A gloomy fiscal outlook has weighed down the Cedi with debt expected to continue rising at an alarming rate despite recent government interventions. This has triggered a rotation out of cedi bonds by foreign investors while the tightening of global financial conditions has compounded pressure.

A weaker Cedi is therefore a notable contributor to headline inflation that surged to the highest level in more than 18-years in April. Specifically, Ghana’s inflation rate accelerated to 23.6% y/y in April, the highest level since January 2004, from 19.4% in the month prior. The reading surpassed consensus expectations of 21.2% and was further stoked by higher costs of imported goods such as cooking oil and gasoline due to the war in Ukraine and Indonesia’s ban on palm oil exports. Food-price growth rose to 22.6% y/y from 22.4% y/y in March, while non-food inflation jumped to 21.3% in April from 17%. Headline inflation in Ghana has remained above the central bank’s 6-10% target range for the past eight months and highlights the challenging environment the policymakers found themselves in as they try to balance persistent inflationary pressure and economic growth.

While the government has implemented some reforms and measures aimed at moving towards a more sustainable debt position, concerns over the credibility of the country’s fiscal targets remain. A worsening coffee harvest outlook, Ghana’s s third-biggest foreign exchange earner after gold and oil in addition to an unfavourable external backdrop amid the war in Ukraine and tightening global financial conditions, suggest the broader bearish on the Cedi will remain. This, therefore, poses further upside risks to the inflation outlook in the near term.

Fixed Income: S&P flags three African sovereigns with heightened domestic debt pressures

While much of the focus for international investors was centred on the US CPI print on Wednesday, traders in Africa honed in on fiscal dynamics following a regional report published by S&P. Adding to yesterday’s comment, S&P highlighted that declining global growth, following Russia’s invasion and a slowdown in China, is weighing on the domestic debt carrying capacity of frontier markets in Africa. The global rating agency looks at several variables that contribute to a country's capacity to manage domestic debt. These include banking sector lending capacity, real yields, debt structure, the size of non-bank financial assets, the cost of debt, debt rollover ratios and primary fiscal balances. Based on this, S&P found that three African sovereigns stand out for their relatively weak fiscal metrics.

The first country flagged by S&P was Zambia. The agency said that Zambia’s debt burden exceeds 120% of GDP, putting it among the highest in Africa. S&P noted that around 50% of Zambia’s debt is domestic, up from 30% in 2018, increasing Zambia’s local currency borrowing requirements to an estimated 22% of GDP in the current fiscal year. This is the third-highest of all the African sovereigns included in the report.

The next country pointed out by S&P for its weak fiscal metrics was Egypt. The global rating agency said that even though around three-quarters of Egypt’s debt is denominated in local currency, buffering Egypt’s sovereign balance sheet from exchange rate volatility, the relatively high reliance on non-resident creditors within local currency debt means the government is exposed to shifts in international sentiment to roll over its significant debt burden.

S&P noted that fiscal metrics in Ghana have deteriorated markedly. S&P said that for Ghana, its modest-sized banking system with a large exposure to the state of almost 40% of total financial assets implies that it has less capacity to absorb additional government debt in the wake of the pandemic. Since their lows in 2021, Ghanaian bond yields have more than doubled amid fears over the country’s ability to refinance itself in the international debt market due to tightening global financial conditions against the backdrop of deteriorating appetite.

In its closing remarks, S&P said that over its rating history, sovereigns have defaulted on local currency debt only half as often as they have on foreign currency obligations. The agency said that domestic debt carrying measures suggest that pressures on the domestic debt markets are rising, reflecting soaring global interest rates, the adverse impact of the pandemic on fiscal balances and slowing growth.

Macroeconomic: US inflation print triggers fresh volatility across financial markets

Wednesday was a mixed day for financial markets as the stronger than expected US CPI print triggered a fresh bout of volatility across asset classes. Despite coming in above consensus expectations, consumer prices in the US decelerated to 8.3% y/y in April. This suggests that the multi-decade high of 8.5% y/y in March was, in fact, the high-water mark of the current US inflationary cycle.

Notwithstanding the initial negative reaction to the stronger than expected US inflation print, the JSE All Share ended the session 2.27% stronger on Wednesday, tracking US and European stocks higher on hopes that the price surges are peaking. Financial and banking stocks outperformed on the day, while resource and mining stocks, for the most part, closed the session in the red.

European stocks continued to rebound as risk appetite returns following the significant sell-off at the start of the week on the back of concerns over China and the ongoing war in Ukraine. The Euro Stoxx 50 ended the session 2.62% higher on Wednesday. Bargain hunters are taking advantage of the attractive valuations after European stocks hit a 2-month low at the start of the week.

Across the Atlantic, US stocks were a mixed bag. The sell-off in technology stocks deepened after Fed speaker Raphael Bostic said that if inflation stays at levels that are too high, then he will support moving more on rates. The Nasdaq 100 was dragged lower by losses in giants such as Tesla and Apple. Although inflation appears to have peaked, it is likely to remain elevated for a while longer, given factors such as firm wage growth and global supply headwinds like China’s lockdowns and resilient services demand. This suggests that it may be a slow descent to the Fed’s 2% goal and therefore, more aggressive hikes remain a feature for the foreseeable future.

It was a choppy day of trade for currency markets as traders digested the US CPI print and comments from the Federal Reserve. The US Dollar whipsawed between positive and negative territory to trade relatively flat on the session at the time of writing. Improved risk conditions provided some reprieve for emerging market currencies, with commodity-exporting currencies faring well on the day. The South African Rand was amongst the top-performing currencies against the USD on Wednesday.  

In the commodity space, oil prices staged a sharp rebound on Wednesday from a two-day losing streak that saw the front-month Brent contract slump from $113 per barrel to $101.50 per barrel. The recovery in oil was underpinned by renewed supply concerns as flows of Russian gas to Europe decreased and as the EU ramped up its plan to implement an embargo on Russian oil. Adding to the tailwinds for oil were reports that China’s COVID situation seems to be improving. Shanghai reported a 51% drop in new infections on Tuesday and also passed a key metric that could lead to an end to the lockdowns that have gone on for about six weeks now. If we see the new case numbers continue to drop, oil prices may receive a further boost as Chinese demand could start returning to more normal levels.