GLOBAL
It remains the case that EM currencies are enjoying improved levels of global risk appetite and are responding to the solid earnings results released out of the US, which continue to justify high valuations. A more robust global growth outlook implies that commodity prices continue to enjoy solid support, and this combination will leave the commodity currencies resilient.
Specifically, the bullion market remains underpinned with the focus to the topside as we enter the start of the EU session. As mentioned yesterday, gold is currently ignoring the movements in the dollar and treasuries instead choosing to focus on the geopolitical tensions in the Ukraine and building inflationary risks. There is also talk of a whale buying up gold below the $1800.00/oz mark, given that this has yet to show up in either the ETF holdings or vault holdings reported the LBMA, it suggests that the buyer is potentially sovereign in nature. Base metals rallied hard yesterday with dwindling inventory levels and supply fears dictating the mood and underpinning the bid tone. Copper cleared the $10000/tonne mark yesterday and we have seen the market cement this position in the Asian session today, the 3m LME benchmark is currently quoted at $10072.00/tonne as we head into the start of the EU session.
AFRICA
Angola: Net reserves in Angola rose to $10.54bn at the start of the year from $9.86bn in December. This was the highest level of reserves since April 2020. Note that increasing international reserves in addition to improving fiscal dynamics and higher global oil prices are some of the factors that have underpinned the continued resilience of the Angolan Kwanza at the start of 2022. For context, the Kwanza has appreciated by 5.23% against the USD on a year-to-date basis, making it Africa’s best-performing currency.
Angola: The finance ministry has indicated that Angola plans to raise as much as $2.8bn from the sale of Eurobonds in international markets this year, affirming minister Vera Daves de Sousa’s comments from last year that the country will issue Eurobonds in 2022. Angola is looking to take advantage of improving fiscal dynamics, higher oil prices, and somewhat still favourable global financial conditions. According to a presentation on the finance ministry’s website, Angola aims to sell the debt in the first quarter of 2022. Angola may use the proceeds from the debt sale to repay existing debt and diversify its energy-dependent economy.
Kenya: The International Monetary Fund (IMF) has called Kenya’s fuel subsidy regressive and indicated that it has a negative impact on economic efficiency. According to the fund’s representative in Kenya, they are typically poorly targeted and lead to inefficient allocation of resources because the main beneficiaries are the better off. Note that consumers in Kenya pay KES 5.40 ($0.05) per litre of gasoline and diesel towards a stabilization fund which has been used to tame prices and keep inflation within the central bank’s targeted range of 2.5% to 7.5%. Lawmakers plan to halve this subsidy to KES 2.90 per litre and reduce other taxes and retailers’ margins as part of efforts to lower the cost of fuel.
Mozambique: Headline inflation in Mozambique accelerated to 7.80% y/y in January from 6.74% y/y in the month prior. This was the fastest pace of price growth in the economy since October 2017. On a month-on-month basis, prices climbed 2.18%. According to the inflation report, food and beverages and transport prices were the main contributors to the headline reading. While the Bank of Mozambique downgraded the inflation forecast and cited an improved outlook, it is worth noting that risks remain. These include fiscal pressure, climate shocks, and increased oil and food prices on the market.
Zambia: The Bank of Zambia (BoZ) is exploring digital currency. The BoZ expects to complete research on forming a digital currency that could reduce transaction costs and boost participation in the formal financial system by Q4 2022. According to the acting assistant director of communications at the BoZ Nkatya Kabwe, “the results of the research will form part of the input in the policy considerations on whether to introduce a central bank digital currency in Zambia.” Kabwe added the central bank is researching GovCoins as they have the potential to expand financial inclusion improve traceability, safety, and efficiency of payment systems. Note Zambia joins nations such as Israel, Ghana, the Bahamas, Nigeria, China, and the US that are toying with the idea or have issued a digital version of their currencies to keep up with technological advances that have spurred the rise of Bitcoin and other private initiatives.
South Africa: President Cyril Ramaphosa is set to deliver the State of the Nation Address today. Ahead of the SONA, the USD-ZAR briefly traded below 15.2000. More positive talk of reforms could lay the foundation for the ZAR to appreciate a little further, especially if the dynamics highlighted above extend. That being said, the appreciation in the ZAR in recent trading sessions has had precious little to do with SA's data or with the SONA.
Forex: Near term outlook for the Ghanaian Cedi remains gloomy
Inflation data out Ghana yesterday affirmed that inflationary pressures remained entrenched in the economy and placed renewed pressure on the central bank to act. Headline inflation in Ghana accelerated to an almost 6-year high in January, coming in at 13.9% y/y from 12.6% y/y in the month prior and surpassed consensus expectations of a rise to 13.1%. On a month-on-month basis, prices climbed 2.1%. Food price growth quickened to 13.7% from 12.8% in December, and non-food inflation accelerated to 14.1% from 12.5% the previous month, fanned by housing, water, electricity, and gas costs.
Headline inflation in Ghana has breached the upper limit of the 6%-10% for a fifth straight month and may prompt the central bank to reconsider its decision to hold interest rates, especially in the context of a renewed sell-off in dollar-denominated debt and a slide in the Ghanian Cedi (GHS). Weakness in the Cedi has further compounded inflationary pressures in Ghana. The Cedi has weakened on a year-to-date basis and is the third worst-performing African currency against the USD. The Cedi has weakened in eight out of the past nine months amid an increase in dollar demand and the exit of the country's bonds by some foreign investors as Ghana's fiscal outlook worsens.
While the Cedi is trading near its fair value on a real effective exchange rate basis, we see further risks for the currency to weaken in the near term. Ghana has been able to issue Eurobonds in recent years, which have in turn bolstered its reserve position and allowed it to support the local unit. However, worsening fiscal dynamics and tightening global financial conditions suggest Ghana may not be able to issue Eurobonds. This could weigh on its foreign reserves, which have fallen by nearly 15% over the past three months as the central bank tries to support the Cedi.
Fixed Income: Fiscal risks in Tanzania intensify as government ramps up infrastructure spending
While much of the focus for fixed income traders is on monetary policy at the moment, fiscal dynamics can’t be ignored. Data published by the Central Bank of Tanzania on Wednesday revealed that the country’s debt pile rose by almost 20% in 2021 as the government ramped up borrowing to fund its infrastructure projects. For context, Tanzania’s debt pile rose by $6.1bn to $37.1bn in 2021.
The central bank noted that transport and telecommunications spending accounted for the largest share of external debt. This was followed by social welfare, education and energy and mining spending. In a bid to develop a regional trade and manufacturing hub, the government has significantly increased spending on rail links, roads, ports and power plants.
In the 2022/23 fiscal year, the government plans on increasing public spending by 7.4% as it continues on its drive to bolster infrastructure in the country. Although fiscal revenue from gold exports fell by 7.2% to $2.7bn last year, other sources of revenue increased. Revenue from the tourism sector rose almost two-fold as international tourist arrivals rebounded.
Notwithstanding the expected increase in spending in the 2022/23 fiscal year, the government plans to keep the budget deficit under 3% of GDP. Moreover, while government spending is expected to remain elevated in the months ahead, fiscal risks in Tanzania remain relatively muted when compared to other African sovereigns. From an economic perspective, the infrastructure spending is expected to provide a notable boost to growth in the years ahead, especially if Tanzania can establish itself as a regional trade hub.
Macroeconomic: Oil eyeing $100, but a structural market shift is looming
Global oil supply remains constrained even though OPEC+ has continued to unwind the deep output cuts introduced during the onset of the pandemic. At its February meeting, the group stuck to its plan of increasing output at 400k bpd, despite some calls for a greater increase due to current price levels. At the current rate, we would see a return of production to pre-pandemic levels by late 2022. The issue here is that producers have been struggling to ramp up production owing to idiosyncratic issues such as conflict, ageing infrastructure, or limited investment. In general, OPEC+ has been undershooting its quotas in recent months, with the shortfalls for the likes of Angola, Guinea and Nigeria not offset by greater output from mainstays such as Saudi Arabia and the UAE. Combined output for OPEC+ came in at around 790k bpd below target in December, according to IEA calculations. The January figures are unlikely to make for better reading, suggesting that even if output is increased through February and March, it will take some time just to make up the shortfalls seen during late 2021 and early 2022.
US shale production, meanwhile, has been picking up but not at a rate that could significantly alter current market dynamics, yet. The latest Baker Hughes oil rig count showed that 613 rigs were active through to the end of last week. While this is an increase of 151% from the lows reached in September 2020, it is still some 22% below pre-pandemic levels. US producers have shifted in recent years from a produce-as-much-as-possible mindset to a more calculated and prudent approach, given rising pressure from shareholders. Now, however, it is looking likely that they could kick into a higher gear. The EIA report released yesterday forecasts that output will average 12.6mn barrels a day in the US, representing a new all-time high. Two of the largest drilling companies in the US have also recently said that they would increase production by double digits in the Permian Basin this year. With this, the timing of the market’s peak may be brought forward, and we could see a shift to oversupply sooner than previously expected
The oil market remains in a structural deficit, with this tightness being reflected in surging timespreads and higher spot prices. Analyst calls for $100 per barrel have grown louder as a result, but some recent developments have suggested that the market may not reach this level, or if it does, not sustain it for very long. US shale producers are finally coming to the party to bolster global output as many OPEC producers falter, and while the demand outlook remains stable, it is difficult to see global demand rising all that much further from current levels. It is not surprising, therefore, to see that volumes of downside protection are rising. Our view remains bullish over the near term, but a move back towards $100 per barrel will need a new catalyst, and unless this materializes, the topside will be limited, and the market will reverse through Q2 and beyond as the structural deficit shifts into oversupply.