Macro Analysis /

Will SA bonds continue to outperform? The answer lies in today's budget

  • Forex: Kenyan Shilling plunges to a fresh low, balance of risks suggest that there is more depreciation on the way

  • Fixed Income: SA bonds outperforming peers, today’s budget to determine if the outperformance will be sustained

  • Macroeconomic: Low vaccine rates and persistently strong inflation constraining frontier market recovery

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
23 February 2022
Published byETM Analytics


There is nothing new concerning where the bulk of the focus will rest this morning, with developments in Ukraine still taking centre stage. However, economic data is being released, and yesterday saw the latest consumer confidence data slip again in Feb to reach a 5-month low. Fewer consumers were planning to buy a home, go on vacation or purchase a car. The savings built through Covid gradually unwound, so the underlying desire to spend will also dissipate. Confidence might be further dented by the prospect of tighter monetary policy, the persistent rise in inflation that has eroded disposable income and the current developments in Ukraine. 

The USD has drifted back into its familiar trading range and adopting very little directional momentum. Although a safe-haven bid will backstop the USD, it is notable that this has not been enough to propel the USD into a new bull run. Investors' focus will now turn to the Fed, and the possibility that it may turn less hawkish on developments in Ukraine. The Fed will be concerned about the impact of geopolitical tensions. Sanctions on Russia could generate some retaliation and induce more financial market volatility and another headwind to global growth.

In the commodity space, scalpers have booked profits on short term speculative long positions taken in gold as Russia invaded Ukraine’s eastern provinces, stating that it was to keep the peace and secure those loyal to Russia. The yellow metal has consolidated its position around the $1900.00/oz mark however volatility is still evident and we expect the headlines to drive the price action for now.


South Africa: The major event for today will be the Finance Minister's delivery of the annual budget. It has become an important event on the SA economic events calendar because it sets out the government's plans on managing the economy and whether much-needed reforms will be forthcoming. This holds the potential to fuel even more optimism in SA's outlook and the attraction of its bond market or plunge it into greater difficulty. It appears as though the optimism is winning and that the ZAR is primed to surge stronger if the budget is reformist and well-received.

Ethiopia: PM Abiy Ahmed has indicated that the government is open to talks with the rebel Tigray Liberation Front to end a 15-month conflict in the country. While the government has yet to negotiate with the TPLF, Ahmed said that “this does not rule out the possibility of discussion.” Abiy’s comments come days after United Nations Secretary-General Antonio Guterres said there was progress in efforts to end the civil war. Note the African Union and neighbouring Kenya have been encouraging both sides to negotiate and on Monday, Ethiopia’s parliament announced the formation of an 11-member National Dialogue Commission. The commission has been tasked with presenting proposals aimed at ending simmering tensions between the nation’s ethnic and political groups and conflict that has destabilized the country.

Ethiopia: Flagging reforms of one of the last major sectors of the economy to be liberalized, PM Abiy Ahmed said that Ethiopia is considering opening up its banking industry to foreign competition as soon as parliament passes policies permitting it. Abiy told lawmakers that while the closure of doors on foreign banks had benefited the sector until now, “bans need to prepare themselves with modern ways and information technologies. Regarding this, the government is now preparing…a policy amendment. Once preconditions are met and banks are prepared, we will implement that.” Note that when Abiy took office in 2018, he pledged to overhaul sectors like telecoms and financial services. Currently, Ethiopia has 18 commercial lenders, two of which are state-owned, according to the central bank.

Ethiopia: Speaking to lawmakers yesterday, PM Abiy Ahmed forecast Ethiopia’s budget deficit to widen this year but stopped short of providing numbers. Ethiopia had budgeted a spending shortfall of ETB 125.7bn, or 2.7% of GDP, for the fiscal year that began on July 8. Meanwhile, Ethiopia will finance 80% of the wider budget with T-bills.

Mozambique: Mozambique has joined the Gas Exporting Countries Forum, a global platform of leading exporters of fuel. Though Mozambique is not a large-scale exporter of natural gas at present, the latest data from the GECF’s Global Gas Outlook 2050 places the country as the fifth largest exporter in the world by mid-century.

Kenya: Data from the Kenya National Bureau of Statistics showed that Kenya’s horticulture earnings rose 5% in 2021 from the previous year. Specifically, horticulture earnings rose from KES 158.1bn ($1.39bn) last year from KES 150.2bn in 2020. Given that horticulture is a major source of foreign exchange for Kenya alongside tea, tourism, and remittances, the improvement in earnings will provide a boost to Kenya, which has faced a shortage of dollars in recent times.

Morocco: Data from Morocco’s planning agency showed that headline inflation in January edged marginally lower to 3.1% y/y from 3.2% y/y in the month prior. On a month-on-month basis, the index was almost flat, rising by 0.1%. Meanwhile, core inflation which excludes the prices of volatile goods, rose 0.3% on a month-on-month basis and was up 3.2% y/y. A breakdown of the data showed that food prices were up 4.3%, while non-food inflation increased by 2.3%.

Forex: Kenyan Shilling plunges to a fresh low, balance of risks suggest that there is more depreciation on the way

The Kenyan Shilling (KES) plunged to a fresh low against the USD yesterday, according to Bloomberg data going back to December 1988. Yesterday’s losses added to its year-to-date drop of 0.45%. Pulling back the lens, since May 2020, the KES has lost nearly 7.0%, weighed down by factors such as strong demand for hard currency, especially in the oil and energy sectors, and a widening current account deficit.

The weakening has come despite intervention efforts by the Central Bank of Kenya (CBK). For context, foreign reserves have declined as the CBK uses them to support the local unit. The latest weekly data showed that foreign reserves fell further to $8.13bn on February 17 from $8.2bn the week prior. Reserves, however, remain adequate according to the CBK and equate to 4.97 months of import cover.

Despite the recent weakness in the KES, the currency remains overvalued on a real effective exchange rate basis. However, the REER has been trending downwards. The overvaluation suggests that there is room for the KES to weaken further. Elevated oil prices, rising fiscal risks, tightening global financial conditions, a potential drought after a poor rainy season in Q4 2021, and the upcoming general elections are all factors that pose further downside risks to KES. CBK interventions could, however, limit the depreciation to some degree.

Fixed Income: SA bonds outperforming peers, today’s budget to determine if the outperformance will be sustained

While ongoing taper fears have roiled bonds markets across the world as inflation pressures persist, South African bonds have performed exceptionally well this year. Specifically, SA bonds are the best performing emerging market bonds so far in 2022, racking in gains of some 10% on a year-to-date basis. This compares to losses of around 5% for the broader EM Bond index and gains of just under 2% for the African Bond Index excluding SA.

The solid performance of SA bonds this year has been due to a combination of several factors, including:

  • Expectations for inflation to remain under control.

  • A more gradual tightening of monetary policy relative to other EMs.

  • Better than expected revenue collections.

  • Statistical revision to GDP and its impact on SA’s fiscal metrics.

  • Optimism surrounding the 2022 budget and expected reforms.

  • High liquidity of local currency bond market.

  • Resilient currency.

  • Elevated exported commodity prices.

The big question now is whether the outperformance of SA bonds will persist in the months ahead or whether the gains seen in the first few weeks of 2022 will be reversed. Much of this will depend on the outcome of today’s budget and whether Finance Minister Enok Godongwana will be able to convince investors that SA is heading towards a more sustainable debt path. While investors are calling for more consolidative fiscal policies, many social issues still need to be addressed.

Therefore, the Finance Minister will have to play a delicate balancing act of reining in debt through reforms and more dynamic spending while at the same time delivering reforms that boost economic growth, job development and the overall living conditions for South Africans. While we remain cautious heading into today’s budget, this is undoubtedly the most optimistic we have been going into a budget in a decade. Should Finance Minister Godongwana deliver a prudent budget, we expect the outperformance of SA bonds to persist in the months ahead.

Macroeconomic: Low vaccine rates and persistently strong inflation constraining frontier market recovery

The recovery of frontier markets continues to face severe headwinds, according to a report published by global credit rating agency Fitch. Two of the main factors constraining the economic recoveries of frontier markets are low vaccination rates and high inflation, which has prompted a global shift in monetary policy and in turn, a reversal in the global dollar liquidity tide. Fitch highlighted in its report that since the start of the year, Covid-19 cases have risen rapidly, and mobility, for the most part, has declined across frontier markets.

The global credit rating agency said that the share of fully vaccinated people among the frontier market population is significantly lower than the rest of the world and therefore puts frontier markets at a higher risk of pandemic-related disruptions to economic activity. Africa, in particular, is a concern in this regard. Fitch noted that inflation pressures rose sharply in 2021, driven by a rise in commodity prices and ongoing supply chain disruptions, which are weighing down growth across frontier markets.

Fitch added that frontier markets are more prone to fluctuations in food prices as food makes up an exceptionally high share of the overall CPI basket, exceeding 50% in some cases. Adding to inflation pressures for frontier markets is the passthrough of weaker exchange rates, with many frontier market currencies sustaining sharp losses against the USD throughout the pandemic. Going forward, while there are a number of challenges facing the economic recovery of frontier markets, for the most part, economic activity in Africa is expected to expand at a solid pace in the coming years, aided by the reopening of economies, rebound in tourism and a bullish outlook for commodity prices.