The dollar index cleared the 104.50 mark overnight and this resulted in the short term longs being put to the sword as they hoped for a rebound with gold starting the Thursday session clear of the $1850.00/oz mark. The yellow metal closed below the $1825.00/oz mark overnight and investors are wary in the Asian session given the movements of late. As mentioned in previous comments, short term direction for bullion will be primarily from movements in the US Treasury markets and the dollar itself, which in turn is being driven by the hawkish outlook on US monetary policy.
Taking a look at the noble metals, we have both platinum and palladium up this morning. Palladium has had a torrid time of late with the metal slipping to fresh May lows of $1867.00/oz yesterday as investors questioned global growth dynamics and thus demand. This morning we have palladium rebounding, adding some 2.22% on the session at the time of writing. Up one day, down the next. 3m LME copper finished 2.71% lower yesterday with the fears of a global economic slowdown favouring the bears once again. The metal is currently trading marginally lower in the Asian session which sets it up for its 6th consecutive weekly decline. A strong dollar and weakening Chinese demand as a result of the COVID-19 lockdowns have resulted in the price of base metals returning to pre Russian/Ukraine conflict levels. There is a risk of further weakening in the short term however some stability is expected to return in the second half of 2022.
Africa: To aid the recovery of institutions on the continent from the coronavirus pandemic and overcome the challenges posed by the Ukraine war, Africa Finance Corporation is setting up a $2bn fund. The AFC said that it would provide as much as 50% of the funding and mobilise the rest from investors and development financiers. It added that it would disburse loans to commercial lenders, regional development institutions, and central banks to provide foreign currency lending to companies for trade and other economic activities.
Egypt: Finance Minister Mohammed Maait has indicated that Egypt plans to enter the Chinese market by issuing yuan-denominated bonds to diversify financing tools and sources and attract new investors. Maait added that China is an important trading partner for Egypt and that they are keen to expand the scope of the existing cooperation between the two countries to include the financial fields. The yuan bond market is the second-largest bond market in the world.
Ghana: Finance Minister Ken Ofori-Atta yesterday reiterated that Ghana will not seek assistance from the IMF and that Ghana is committed to managing its debt. Ofori-Atta also expressed confidence that government measures were moving in the right direction. Recall the government in March announced a raft of spending cuts to combat inflation, reduce the budget deficit, restore a depreciating currency and placate investor fears. Ofori-Atta said, “we have committed to not going back to the fund because the fund knows we are in the right direction. It’s about validating the programme we have in place and finding other ways of handling our debt.” Ofori-Atta added that the priority would be to solve the country’s domestic debt, which has interest rates that are three to four times higher than foreign debt. Whether the recent reforms are enough to address Ghana’s fiscal outlook remains to be seen. At present, the market continues to price in a substantial risk premium on Ghana’s debt.
Rwanda: The Bank of Rwanda kept its policy rate unchanged at 5.0% yesterday. Policymakers highlighted accelerating inflation and risks to economic growth. Governor John Rwangombwa forecasts economic growth this year to come in lower than the earlier projection of 7.2%. Inflation is estimated to average 9.2% this year, above the central bank’s upper limit of 8.0%.
Tanzania: President Samia Suluhu Hassan’s spokeswoman yesterday said that an IMF team is in the country for talks on Tanzania’s request for a three-year financing package of $1.1bn. The President is seeking the funds to support the nation’s recovery from the coronavirus pandemic. Recall in March, Hassan said her administration was seeking at least $700mn from the Washington-based lender. Securing additional funding from multilateral lenders is part of Hassan’s wider plan to boost Tanzania’s fiscal position by taking on more concessional loans.
Zambia: Speaking in an interview, Mines Minister Paul Kabuswe reiterated that Glencore must renegotiate the “bad deal” the previous administration struck when Glencore bought Mopani Copper Mines last year. Kabuswe said, “we have to renegotiate. The details are so bad, I can’t even talk about it. They’re the only off-taker and they even charge you marketing fees for taking their copper.” Kabuswe stopped short of saying what would happen if Glencore refused to renegotiate the deal. Recall Glencore pulled out of Zambia after clashing with former President Lungu’s administration on the future of Mopani, which has been unprofitable for years. Under the accord, cash generated by Mopani will be used to repay Zambia’s outstanding $1.5bn. Glencore will retain offtake rights to the operation’s copper output until the full amount is settled.
Zambia: Marking Anglo America’s first investment in Zambia in over two decades, Arc Minerals yesterday reported that Anglo would take majority control of its Zambia copper-cobalt exploration licences. Under the deal, Anglo will take 70% of a joint venture with Arc that will own licences to explore Zambia’s copper-rich North-Western province. Moreover, Angolo will pay $3.5mn into the joint venture upon signing, and it will be able to retain its stake by spending $74mn on exploration within seven years of signing and making cash payments of $11mn to Arc. Zambia is becoming a more attractive investment proposition for mining companies since the election Hichilema and a subsequent mining tax reform.
Forex: Premium between official NGN rate and parallel market rate widens as the latter plunges to a record low
The Nigerian Naira on the parallel market yesterday plunged to a record low of NGN 589 per dollar as increased political spending ahead of the primary elections and uncertainty over Governor Godwin Emefiele's position at the central bank, given his political ambitions, weighed on the currency. Ahead of next year's general elections, political parties are set to pick presidential candidates by June 3, with official campaigning to begin in September. Governor Emefiele's position has come into the spotlight after he, along with many other political appointees, declared their intention to participate in next year's elections. President Buhari has ordered all those officials who plan to take part to resign by May 16, but Emefiele has sought exemption from the courts on the grounds that he is not a political appointee and does not intend to resign.
While the parallel market Naira rate has been weakening since 2020, yesterday's plunge to NGN 589 drove the premium between it and the official rate, which had been trading within a range of NGN 413-417 due to dollar shortages to around 41%. With uncertainty remaining over Emefiele's position at the central bank and spending set to ramp up further ahead of the primaries, the Naira in the short-term is seen as weakening further on the parallel market and driving the premium even higher.
Aside from yesterday's developments, it is worth noting the Naira on the parallel market in recent months has been pressured by dollar scarcity. Due to dollar rationing by the Central Bank of Nigeria, individuals and firms have been forced to turn to unauthorised dealers to meet their foreign exchange requirements. This has led to a hoarding of dollars and a creation of shortages, driving the parallel rate lower. Nigeria has been unable to boost its dollar supply despite higher normal oil prices as the country is unable to fulfill its OPEC+ quotas due to crude theft and diversion of oil revenues to subsidise gasoline prices for its population.
Fixed Income: Angolan Eurobond yields surge as inflation and political risks weigh
The resilience in Angolan bonds appears to be breaking down as traders hone in on mounting inflation risks and increasing political uncertainty ahead of the August elections. While Angolan Eurobond yields are trading well below levels seen last in 2022, a decisive bearish bias has unfolded since the start of last month, with the 2029 Eurobond yield, for instance, climbing more than 220bps over the period to sit back above the 10% mark, levels not seen since November 2020.
Up until now, Angolan bonds have been amongst the most resilient African bonds, supported by windfall hard currency inflows and tax revenues from the oil sector. Angola has benefited handsomely from the surge in international oil prices, which are up almost 60% on a year-on-year basis. Most of Angola’s foreign currency and tax earnings are derived from oil.
While oil prices remain elevated amid ongoing supply concerns related to Russia’s invasion of Ukraine, Angolan bonds have become sensitive to the deterioration in global risk appetite and tightening global monetary policy with central banks across the world raising interest rates to rein in soaring inflation. Angolan Eurobond yields have begun to track global bond yield yields higher and are expected to continue rising in the weeks ahead as political uncertainty intensifies ahead of the August election.
This comes against the backdrop of heightened fiscal risks, with Angola’s debt pile still buoyed at levels that will concern investors. That said, the Angolan government must be given credit for sticking to its reform agenda, which has resulted in one of the most impressive fiscal consolidations in the world during the covid-era. Investors will be cheering for the current administration to remain in power, given its commitment to steering the country back to a sustainable fiscal position.
Macroeconomic: Trade between China and Africa rises in Q1
Trade between China and Africa surged 23% y/y to $64.8bn in the first three months of 2022, according to China's General Administration of Customs data. The marked rise in trade was underpinned by increased imports of minerals and metals from Africa. Chinese imports from Africa jumped 29.3% to $29.7bn, while exports to Africa rose by 18.2% to $35.16bn in Q1.
While the Q1 trade number between China and Africa is encouraging, the reintroduction of lockdowns in Shanghai and the closure of Chinese ports are likely to weigh on trade in the months ahead. Adding to the headwinds will be the supply disruptions linked to the flood-hit port of Durban in South Africa, where almost 20% of Africa-China trade passes through. This includes minerals from the DR Congo and Zambia.
Trade between South Africa and China in the first three months of the year stood at $12.3bn, an increase of 13.5% y/y. China's imports from South Africa consisted mainly of minerals and metals. Other top African trading partners include oil-rich Angola and the DR Congo, where China imports most of its cobalt, a component of batteries for electric vehicles, smartphones, and laptops. Meanwhile, trade with Nigeria and Egypt stood at $5.45bn and $4.9bn, respectively.
The increase in trade came on the back of GDP growth of 4.8% in China, the strongest economic growth rate among major economies in Q1. The strong GDP reading was driven in part by growth in imports and exports of 7.5% and 13.4%, respectively. Looking ahead, growth risks have intensified amid the reintroduction of lockdowns, which will undoubtedly weigh on China’s import demand. This will have a notable impact on African exports, given that China is Africa’s largest trade partner.