Macro Analysis /

Thursday was a bloodbath for African bonds as twin risks hit

  • Forex: Zambia inflation slows to a two-year low, but currency weakness poses an upside risk

  • Fixed Income: Twin risks of a hawkish Fed and conflict in Ukraine trigger a mass exodus from EM bonds

  • Macroeconomic: Bank of Botswana holds even as global inflation pressures remain acute

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
25 February 2022
Published byETM Analytics


US President Biden yesterday announced the imposition of sanctions on Russia in retaliation for its invasion of Ukraine. The sanctions restrict Russia's trade in foreign currency and will target state-owned enterprises and Russia's banks directly. The objective is to plunge the Russian economy into a deep recession and hardship. Doing so will test the Russian electorate's tolerance for Vladimir Putin and his administration and act as a deterrent to other countries taking inspiration from Russia's aggressive geopolitical stance. It remains difficult to anticipate the longer-term consequences of all of this. Suffice to say, that it will likely be a catalyst for some significant structural changes in the global economy concerning energy independence, military spending, and strategic alliances.

Yesterday's surge in the USD reversed overnight and has brought into question whether current developments will be enough to trigger the next leg stronger in the USD. At face value, it appears as though there is still some apprehension to back the USD wholesale when the developments in Ukraine is not enough to derail the global economic recovery or financial markets more broadly. The effects of all the stimulation applied in the past two years has yet to manifest across financial markets fully, and any rise in risk aversion will likely prove temporary.

In the commodity space, Brent crude touched a high of $105.79 per barrel yesterday as the world reacted to the shock invasion of Ukraine by Russia. The commodity gave back some of these gains towards the end of the day as the US announced new sanctions on Russia but stopped short of disrupting energy supplies. Nevertheless, the markets are still looking tetchy and this has seen Brent return to north of $100 per barrel this morning. There have been some reports from traders that steep discounts on Russian crude are not catching any bids, as traders do not want to be caught on the wrong end of a trade that that cannot be completed due to any new sanctions or as banks refuse to facilitate trades involving Russian assets. This suggests that even though Russian energy exports were spared from sanctions, supply issues will persist and inventories outside of Russia will continue to be depleted. 


Egypt: Data from the central bank of Egypt showed that remittances from Egyptians living abroad declined 3.9% y/y in November to reach $2.5bn, falling from $2.6bn the year before. However, remittances from Egyptian workers abroad amounted to $28.9bn in the period January 2021 to November 2021, representing a 6.6% y/y increase. Given the remittance flows are a major foreign currency earner for Egypt, the broader rising trend will be a positive for the country. Remittance inflows in Egypt play a crucial role in helping narrow the country's chronic current account deficit.

Cameroon: Cameroon will receive $116m following the first reviews of the extended credit facility and extended fund facility arranged with the International Monetary Fund. This brings the total disbursement to about $293.2mn. Note that the three-year ECF-EFF arrangements were approved in July 2021. According to the IMF, growth has started to recover from the slowdown of the second quarter of 2020, reflecting stronger domestic demand and supported by the global economic recovery. Medium-term economic prospects are positive but with considerable uncertainty. The IMF added that while macroeconomic performance is broadly satisfactory and efforts to promote good governance and transparency are gaining momentum, progress on structural reforms is slow.

Namibia: TotalEnergies yesterday announced "a significant discovery" of light oil and associated gas off the coast of Namibia, saying it would start assessing potential exploration. In a statement, TotalEnergies said that it had "encountered approximately 84meters of net oil pay in a good quality Lower Cretaceous reservoir." Senior Vice-President for exploration Kevin McLachlan added that "the discovery offshore Namibia and the very promising initial results prove the potential of this play in the Orange Basin" and that there will be soon "appraisal operations designed to assess the commerciality of this discovery." The discovery comes the International Energy Agency (IEA) warned last year that all fossil fuel exploration projects must cease immediately if the world is to keep global warming under control.

South Africa: The National Energy Regulator yesterday announced that it would allow Eskom to increase its tariffs by an average of 9.61% for 2022-23. However, the tariff hike is far below the 20.5% tariff increase Eskom had applied for in its revenue application. The power utility argued that the hike was necessary to help it service its R392bn of debt and pay for the maintenance needed to adequately supply the country. While the tariff hike is lower than expected and will likely provide some downside to inflation expectations, rising electricity costs in addition to a potential record high petrol price in March suggests that inflationary pressures are likely to persist over the coming months.

South Africa: Financial markets will be difficult to trade until the dust has settled on global geopolitics that for now remain fraught with uncertainty. Strong cross winds dominate, as the fear of war in Europe contrasts starkly with the buying opportunities a sharp sell-off in assets offers investors, brave enough to believe that the world will recover, and the effects of all the stimulation applied in previous months will eventually manifest in higher asset prices. The ZAR has been caught up in these crosswinds in the past few trading sessions, and if one can avoid trading such a wild market, one should. It is clear that volatility will be with us for a while to come and that such volatility makes directional momentum difficult to identify. What is unfolding has precious little to do with anything fundamental, and applying traditional analysis is not helpful. Therefore, position-taking has become a lottery, and trading is nothing more than speculative.

Forex: Zambia inflation slows to a two-year low, but currency weakness poses an upside risk

Headline inflation in Zambia slowed further in February, coming in at 14.2% y/y from 15.1% y/y in January. This was the seventh straight month that inflation slowed as the cost of meat and school fees eased. On a month-on-month basis, prices climbed 1.7%. A breakdown of the data from ZamStats showed that food price inflation slowed to 16% in February from 16.9% in January, while non-food price inflation decelerated to 11.8% from 12.7%.

The slowdown supports the Bank of Zambia’s view that inflation is trending downward and, if sustained, may persuade policymakers to keep the policy rate unchanged at the next meeting. Recall the BoZ last week said that inflation has slowed faster than anticipated and is forecast to average 13.2% in 2022, compared with the 15% projected at the previous MPC meeting in November. That said, it is worth noting the upside risks exist. These include adverse weather conditions, supply chain bottlenecks, surging energy prices, an anticipated increase in power tariffs, and a weaker Zambia Kwacha (ZMW).

Regarding the ZMW, it has been a difficult start to the year, with the currency ranked as the second-worst performing African currency on a year-to-date basis against the USD. The ZMW is down by nearly 6.0% amid tight FX liquidity conditions. Demand for hard currency from importers and corporates on the back of improving economic activity has outpaced available supply and thus weighed on the ZMW. Economic conditions are expected to improve further, and thus the demand for hard currency will remain strong while the ongoing dollarisation of mining taxes will keep the supply side generally stifled. This suggests that the ZMW will remain on the defensive in the near term and poses a notable risk to the inflation outlook.

Fixed Income: Twin risks of a hawkish Fed and conflict in Ukraine trigger a mass exodus from EM bonds

Global risk appetite for high yielding bonds has taken a massive blow as the twin risks of a hawkish Federal Reserve and the intensifying conflict between Russia and Ukraine drives investors towards haven assets. High-frequency data from Bloomberg shows that investors have pulled $3.6bn from high-yielding ETFs this morning, having withdrawn almost $7bn in January. It is worth noting that there has been a widening between implied and historical volatility in the world’s largest junk bond ETF, pointing to more significant price swings in the coming months.

Moreover, the gap between puts and calls on the world’s largest junk bond ETF is close to a record high, indicating that investors are preparing for more downside risk. The effect of the double-edged sword of expectations for tighter monetary policy and the risk-off trade prompted by the Russian invasion of Ukraine on high yielding debt is evident when looking at the broad-based spike in emerging market bonds yields on Thursday. For context, bond yields in South Africa, Brazil, Colombia, Mexico, and Russia surged yesterday as investors dumped risk assets and rotated towards haven assets. With the exception of Ghanaian bonds, African Eurobonds also came under significant selling pressure yesterday.

While the headwinds for high yielding bonds remain acute this morning, some risk appetite has returned overnight. Moreover, policymakers in the US have taken stock of the developments in Russia and Ukraine and its impact on the medium-term outlook for global and US economic growth. Richmond Fed President Thomas Barkin said the case for US rate increases remained "robust," but also called the invasion an "unsettling" event that would force policymakers to think through what might happen. Barkin noted that inflation pressures remain strong but added that the news out of Ukraine is unsettling and could impact the planned shift to tighter monetary policy. Several analysts and several officials have said that the developments in Russia could slow but will unlikely stop a planned tightening in US monetary policy.

Macroeconomic: Bank of Botswana holds even as global inflation pressures remain acute

The Bank of Botswana gave its verdict on interest rates yesterday and decided that remaining unchanged at 3.75% was the best course of action for the economy. The decision came even as the bank stated that risks to inflation remain skewed to the topside, although they once again affirmed that they do not expect inflation to be persistently above the medium-term objective range of 3-6%.

The BoB expects prices to fall in the second quarter of 2022 and return to the target range by the third quarter of 2022. Although the risks to inflation are to the upside, the bank pointed out that the risks are likely to be moderated by the possibility of weak domestic and global economic activity, with a likely further dampening effect on productivity due to periodic lockdowns and other forms of restrictions in response to the emergence of new COVID-19 variants.

The next MPC meeting will take place on the 28th of April 2022. It is against this backdrop that Gaborone will be coming to the debt capital markets with bonds across the curve. The problem for many local investors is that the yields on offer are deeply negative when compared to inflation. Granted, the BoB expects these to moderate, and investors by their very nature are forward looking, but it will be interesting to see whether or not there is indeed appetite for taking on government issuance under these conditions.