Macro Analysis /

US rate path will continue to dictate movements in African Eurobonds

  • Forex: Egypt's foreign currency gap narrows in July

  • Fixed Income: African Eurobonds continue to take direction from the path of US interest rates

  • Macroeconomic: Zambia’s maize production is expected to decline this season

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
15 August 2022
Published byETM Analytics


US Treasury futures are bid this morning in early trade as angst over the economic outlook remains. Friday saw a return of the flattening trend for the UST curve as some stronger than expected US data drove a sell-off at the front-end of the curve, while tenors from the belly to back-end rallied. The 2v10 spread, therefore, widened further in inversion to more than -40bp once again, continuing to signal that recessionary conditions are expected to persist for some time to come.

The week ahead, meanwhile, could be another volatile one for rates traders. The Fed will release the minutes of its last FOMC meeting on Wednesday, while we will also have retail sales and several regional activity indexes to assess. Currently, the market is pricing in around 60bp worth of rate hikes at the September meeting, but things could change quickly depending on what happens this week.

The Eurozone could also see some volatility in the rates markets this week, given the upcoming releases of the ZEW’s economic sentiment index, as well as GDP and CPI data for the common bloc. The market has started to price in an easing of inflation in the EU, with the data this week potentially going to upset this view. Risks to inflation remain skewed to the upside, while the growth outlook continues to weaken.

After initially suffering a correction following the weaker than anticipated inflation data just over a week ago, the USD has now consolidated and does not reflect any clear direction. It has offered investors an opportunity to reassess their positions. Both the EUR and the GBP have found themselves on the defensive against the USD, but some emerging markets have held their own or recorded modest gains. Weak data out of the UK and the EZ have kept the GBP and the EUR on the defensive, and while rate hikes are still expected, the Fed could do more. Therefore, there is unlikely to be a significant rally in either the EUR or the GBP without something triggering a big rotation out of the USD. For now, the EUR is consolidating around the 1.0250 mark, while the GBP is consolidating just above 1.2100.


Uganda: The Bank of Uganda (BoU) delivered its third straight hike this year on Friday and signalled its willingness to tighten monetary policy further should price pressures not ease. The BoU raised its benchmark rate to 9.0% from 8.5%, taking the increase in borrowing costs to 250bp since June. Deputy Governor Michael Atingi-Ego was quoted as saying that "the inflationary pressures are still with us, and there's a need to do everything possible to bring inflation back to the target of 5%." Atingi-Ego added that "going forward, the MPC considers that the monetary policy stance will have to be tightened even further if inflationary pressures persist to ensure that inflation reverts to its medium target of 5%." The rate hike means that Uganda has one of the highest differentials between inflation and policy rates among more than 50 economies tracked by Bloomberg, making its carry appeal more attractive to investors.

Nigeria: In a bid to improve its revenue flows and ease a mounting fiscal crisis, Finance Minister Zainab Ahmed announced the implementation of a 5% tax on voice calls, mobile data, and text messages. The implementation of the tax highlights the government's strained financial picture. For context, Nigeria is spending more on its debt servicing than it brings in revenue. The statement by Ahmed, however, did not say when the collections of the levy, which is in addition to a 7.5% value added tax on calls and data, will begin. While the tax may improve revenue flows to some degree, there are concerns it could slow the expansion of one of the fastest-growing sectors. A similar tax introduced by West African neighbour Ghana was blamed for a slowdown in mobile-money revenue by MTN Ghana in its first half results.

Mali: The Finance Ministry on Friday reported that Mali had honoured all its missed debt payments following the lifting of economic and financial sanctions in July. Mali had missed more than $300mn in bond payments after the Economic Community of West African States had prevented the country from accessing the region's financial markets and the regional central bank in January over a delay in holding elections following a 2020 military coup.

Ethiopia: On Friday, the Ethiopian government said it had completed the third phase of filling the reservoir for its dam on the Blue Nile river. Ethiopia's continued unilateral approach to filling the Grand Ethiopian Renaissance Dam reservoir is set to prevent any thawing of relations with Egypt and Sudan. While the GERD, a $4bn hydro project, is crucial to powering its economic development Egypt and Sudan consider it a serious threat to their vital water supplies.

Egypt: The Egyptian Cabinet last week approved a plan to ration electricity to save natural gas that it will instead divert to the export market to generate foreign currency. Under the plan, shops and malls will have to limit their use of strong lights and keep their air conditioning at no cooler than 25 degrees Celsius. Meanwhile, ministries and government facilities will have to turn off lighting at the end of working hours. The belt-tightening is a sign of the lengths Egypt is going to earn more hard currency as it copes with the effects of the war in Ukraine.

Kenya: The fuel cost was left unchanged for a second straight month, beginning August 15. According to the Energy & Petroleum Regulatory Authority, the retail price of gasoline will remain at KES159.12 ($1.33) per litre in Nairobi, while the price of diesel stays at KES140 and that of kerosene at KES127.94. The rates are effective till September 14. The unchanged fuel prices are likely to provide some relief at the margin to Kenyan citizens who have experienced an increase in the cost of living, driven by energy and food prices.

Oil: Oil markets are on the back foot as we kick off the new week, keeping up Friday’s momentum as concerns over demand are resurfacing, while traders also weigh up the possibility of a return of Iranian supply. The demand concerns have come as China unexpectedly cut interest rates this morning, signalling that the authorities are worried about the notable slowdown in economic activity in the world’s second-largest economy. The country’s oil demand is around 10% lower on a y/y basis, and unless the authorities provide more support, we could see a further drop in demand for fuels out of China.

Forex: Egypt's foreign currency gap narrows in July

Over the weekend, Deputy Governor of the Central Bank of Egypt (CBE) Gamal Negm reported that Egypt's foreign currency gap had narrowed sharply to $400mn in July from $3.9bn in February. Negm noted that the foreign currency gap, the difference between the country's foreign currency needs and its current holdings, had narrowed last month due to the CBE's decisions regarding "import regulation." Prior to the July data, Egypt had seen billions of dollars leave its markets since the onset of the war in Ukraine.

Negm also ruled out any considerable devaluation of the local currency soon. In recent weeks, a greater flexibility in the Egyptian pound has emerged as an issue for Egyptian authorities who are seeking to secure a new loan from the International Monetary Fund. The pound remains overvalued on a real effective exchange rate basis, and the IMF recently said that "greater exchange rate variability during the SBA could have been entrenched to avoid a buildup of external imbalances and facilitate adjustment to shocks."

With reserves continuing to fall and Egypt requiring more funds for imports and debt payments in the coming months, risks for the foreign currency gap to widen exist. As mentioned in last's week's commentary, risks for another devaluation as a means to narrow the chronic current account deficit therefore exist. It is worth pointing out that the forwards market is pricing for a significant deprecation in the pound when looking at the 12-month NDF. The 12-month EGP non-deliverable forward is currently pricing in deprecation of the EGP of over 22% in the next 12 months.    

Fixed Income: African Eurobonds continue to take direction from the path of US interest rates

Given the outcome of our recent study that showed that African Eurobonds have a strong positive correlation (0.97) with US Fed Fund Futures, African Eurobond traders should be watching developments surrounding US monetary policy closely. This week we have the release of the much anticipated US FOMC meeting minutes, which should provide valuable insight into the direction of interest rates in the US and whether the Fed will deliver another outsized rate hike in September.

Recall that the FOMC raised its benchmark policy rate by 75bps for a second consecutive month in July, marking the fastest pace of tightening in four decades. Since the July FOMC meeting, bets in financial markets on the size of the next move in September have swung between 50bps and 75bps amid mixed signs from incoming data, which includes stronger than expected labour market data and softer than expected inflation data.

While the FOMC minutes may offer some insight into the FOMC’s thinking, it probably won't settle the debate over whether the Fed delivers a 50bps or 75bps rate hike at its September meeting and the magnitude of rate hikes in the Fed’s subsequent rate setting meetings. Currently, the market is pricing in the probability of a 75bps rate hike of 79%.

At the last meeting press conference, Fed Chair Jerome Powell implied he was leaning towards 50bp in September, but he did keep his options wide open with the words "another usually large increase could be appropriate," depending on that data. Although the July CPI figure was softer than expected, consumer price growth is still at a 40-year high. It may continue to contribute to a hawkish tone from the US Federal Reserve, especially given the strong July jobs report that suggests that wage growth could catch up with inflation in the months ahead. This suggests that headwinds for African Eurobonds are likely to remain stern in the near term. That said, we expect that there will be a material shift in global monetary policy in the months ahead as inflation pressures subside and global recession risks become a reality, which should offer African bonds some much-needed reprieve.

Macroeconomic: Zambia’s maize production is expected to decline this season 

The two main maize-producing countries in Sub-Saharan Africa are South Africa and Zambia. Both of these countries are expected to face double-digit declines in their 2021/22 maize harvests. SA’s 2021/22 maize harvest is down by 10% from the previous season, estimated at 14.7 million tonnes. This is mainly due to excessive rain during the season, which has weighed on the harvest.

In the case of Zambia, the 2021/22 maize harvest is down by 25% from the prior season to 2.7 million tonnes. Zambia has struggled with delayed rains and prolonged dryness. However, the harvest drop is likely to have less of an effect on Zambia, as 80% of the maize produced in South Africa is genetically modified.

There are likely to be some limitations in imports because of regulations on genetically modified maize. Zambia stands to benefit, as a significant portion of the country’s maize is not genetically modified. While Zambia’s maize production could fall notably this year, the country will remain a significant player in export activity in the Sub-Saharan region.

It must be noted that the limits on genetically modified crops are expected to be eased. Therefore, Africa also needs to consider reviewing its limits on growing and importing genetically modified maize. If Zambia starts to use genetically modified technology, they will be able to increase the amount they grow and will be able to increase exports. The current high maize prices are enough reason for Zambia to invest in their maize production abilities in the coming years.