Macro Analysis /

William Ruto wins the tightly contested Kenyan election

  • Forex: Naira slide drives inflation in Nigeria to a multi-year high in July

  • Fixed Income: Kenyan bonds underperform as election risks weigh

  • Macroeconomic: Interest rates continue to rise across Africa

Kieran Siney
Kieran Siney

Head of African Markets

Takudzwa Ndawona
Takudzwa Ndawona

Financial Markets Analyst

ETM Analytics
16 August 2022
Published byETM Analytics


Core bond markets rallied yesterday on global slowdown concerns, with USTs, bunds and gilts all gaining on the session. This bullish bias has extended into early morning trade today, with UST futures rising and JGBs on the front foot as investors opt for the safety of fixed income in this turbulent period. US swap spreads also tightened on the session, indicating that there was extra support from receiving flows even as equity markets managed to post some gains, likely a result of a reduction in rate hike risk being priced into the market. In Asia-Pacific, meanwhile, Aussie bonds have rallied while the New Zealand yield curve has inverted once again

This bid tone could extend through the day ahead, given the economic data releases scheduled, which include UK employment, German sentiment, and US industrial output. All of these have downside risks embedded, and with all the hawkishness still priced into the market, the risk is that we see a continued shift into capital preservation assets.

Once again, the USD is surging and driving the USD-ZAR back above 16.4100 at the time of writing. Global growth fears are again coming to the fore, and the recent upbeat US non-farm payroll numbers are becoming a distant memory. Recall that wage data is often a lagging indicator, and the interest rate sensitive data is almost always a better proxy for economic activity in the near term.

There really is very little in the way of domestic news for investors to trade on at the moment, and direction in the main continues to be driven by developments abroad. As recession fears escalate, so too will concern in the financial markets, and that volatility will almost certainly translate into a rotation towards safety. The USD retains that safety status and, for now, will benefit. However, it will raise questions about the Fed’s policy stance, whether it is appropriate to announce another 75bp rate hike, and whether to continue offering such hawkish guidance.


Nigeria: The biggest development finance institution in Nigeria, the Bank of Industry, has raised a EUR 1bn syndicated loan from banks to support small, medium, and large businesses in Nigeria. According to the Lagos-based lender, the loan will help companies "with bankable transactions at affordable naira interest rates." The lender added that the facility brokered by lead arrangers Africa Finance Corporation and Standard Chartered Bank could be increased to EUR 1.5bn by the banks if needed. Since the Central Bank of Nigeria has increased the benchmark interest rate by 250bp from May to 14%, Nigeria's authorities have encouraged state-owned financial institutions to provide low-interest credit to manufacturers and small businesses to boost output.

Angola: Headline inflation in Angola slowed further in July, coming in at 21.40% y/y from 22.96% y/y in the month prior. The July print marked the slowest pace of price growth in the economy since April 2022, and the sixth straight month consumer price inflation has eased. On a m/m basis, consumer prices were up 0.81%. The continued slowdown in inflation in Angola has resulted from persisting currency strength. For context, the Angola kwanza has gained over 23% since the start of the year against the dollar on the back of elevated oil prices and credit-rating upgrades. The slowdown in inflation could further ease the pressure for the Bank of Angola to tighten its policy at the September meeting.

Botswana: Consumer price inflation in Botswana accelerated to 14.3% y/y in July, from 12.7% y/y in June. Contributing to the faster pace of price growth were increasing prices for major CPI components such as transport, food and non-alcoholic beverages, housing, water, electricity gas, and other fuels, and miscellaneous goods and services. On a m/m basis, consumer prices climbed 2.3%. A weaker Botswana pula also added topside pressure to the July inflation reading. The reduction in the VAT rate from 14% to 12% announced at the end of July might ease inflation pressures going forward. That said, inflation remains notably above the upper band of the central bank’s 3-6% target range, suggesting that policymakers may continue to tighten monetary policy at the meeting next week.

Uganda: The Bank of Uganda (BoU) has forecast inflation to peak at 11.8% in the first quarter of 2023. Meanwhile, core inflation is expected to peak at 11% in Q2 before stabilizing at the medium-term target of 5%. The BoU also said that the economy is facing strong cost-push inflation pressures from the external environment, dry weather, and currency deprecation amid weak domestic demand. Headline inflation is projected to accelerate largely on account of the depreciation of the shilling. Buoyant inflation pressures will likely see the BoU maintain its aggressive monetary policy stance for the foreseeable future.

Zimbabwe: The CEO of the Chamber of Mines Zimbabwe yesterday said that gold miners in the country could only invest the $1bn required for development over the next five years if they can retain a greater share of their foreign exchange earnings. The central bank in January last year announced that exporters must hand over 40% of their foreign currency earnings, which are then paid out in the local currency. According to the CEO, the government should ease those rules as local financial markets have limited capacity to finance such large capital requirements. The official added that “there is a need for government to relax the marketing arrangement and allow gold producers to export their gold and use it for capital raising.”

South Africa: Technically, the USD-ZAR now looks set to run a little higher and succumb to the USD pressure. However, we would warn against anticipating a full-scale blow-off and exporters are reminded that current levels are offering value through the forward rates. At these levels, the ZAR is comfortably undervalued against the USD, and such opportunities should be taken advantage of.

Oil: Oil remains under pressure this morning after a notable decline yesterday, driven by economic growth concerns and the prospect of more supply coming online from Iran. The front-month Brent contract has slid back below $95 per barrel, while WTI is trading below $90 per barrel, taking both contracts to six-month lows. The growth concerns were sparked by weak Chinese data yesterday and exacerbated by bearish US releases, which included the sharpest slump for the Empire manufacturing activity index since 2020.

Forex: Naira slide drives inflation in Nigeria to a multi-year high in July

Data from the National Bureau of Statistics showed that headline inflation in Nigeria accelerated further in July, coming in at 19.6% y/y from 18.6% y/y and surpassed consensus expectations of a rise to 19.4%. The July reading marked the fastest pace of price growth in the economy since September 2005 and was driven by price increases for food, fuel, and clothing. Annual food-price growth quickened to 22% from 20.6% in June, and core inflation rose to 16.26% in July from 15.75%.

A slump in the Nigerian naira also contributed to the acceleration in inflation in June. The naira on the parallel market has plummeted to successive lows due to worsening dollar scarcity. Dollar rationing implemented by the Central Bank of Nigeria (CBN) has forced individuals and companies to turn to the parallel market where the currency is freely traded. While Nigeria’s anti-graft agency has to intervene and stem the last month’s downfall in the parallel market, the currency continues to trade at a significant premium of around 58% to the official rate.

Overall inflation accelerated for the sixth straight month in July and is now more than double the 9% ceiling of the CBN’s target band. With risks tilted to the upside amid persisting security issues in the country’s food production regions, high fuel costs, and currency weakness, policymakers could vote to increase the main policy rate for a third straight meeting in September. The CBN has hiked its policy rate by 250bp since May and Governor Emefiele at last month’s meeting said that if inflation continues to accelerate at an aggressive rate, it will further tighten monetary policy.    

Fixed Income: Kenyan bonds underperform as election risks weigh

Kenyan Eurobonds were the clear laggard in the African fixed income space on Monday. While most African Eurobonds traded in a consolidative manner ahead of the FOMC meeting minutes scheduled to be released on Wednesday, Kenyan Eurobonds yields legged higher, partly driven by the delayed announcement of the presidential election. For context, Kenya’s 2027 Eurobond yield rose by 10bps yesterday to close the session at 12.26%, according to Bloomberg data. The sell-off in Kenyan bonds came despite a marked correction lower in international oil prices, which would’ve helped ease inflation concerns. Given the developments on the oil front, Kenyan Eurobonds clearly underperformed on election-related risk.

The electoral commission announced that Deputy President William Ruto would become the new president of Kenya after securing victory over Raila Odinga in the presidential elections. The announcement came after the local market close and therefore wasn’t fully reflected by domestic assets. Kenyan Eurobond yields, which trade in the international market, rose sharply after the announcement, suggesting that the initial market reaction to the announcement was bearish. That said, the announcement was accompanied by reports that several electoral commission members have questioned the election's legitimacy. Ruto won by a razor-thin margin, garnering 50.5% or 7.1mn of the valid votes, while main rival Odinga had 48.9%, according to the Independent Electoral and Boundaries Commission.

At the time of writing, Odinga had yet to react to the results, although some of his campaign officials said they rejected the outcome. If he decides to challenge them, he has to petition the Supreme Court within seven days, and it must consider his objections and make a final ruling on their validity within 14 days. Should the results be nullified, as they were in 2017, fresh elections must be held within 60 days of the ruling. Ruto will be sworn in later this month if there is no court petition. Markets will remain on edge in the days ahead until the election results are finalized, and the new president is sworn into office.

Macroeconomic: Interest rates continue to rise across Africa

In line with the hawkish shift from central banks around the world, African central banks have turned aggressive in their fight against soaring inflation. The impact of two years of accommodative monetary policy, persistent currency weakness, ongoing supply chain disruptions and elevated commodity prices have driven consumer prices across the continent higher. In some instances, the rise in inflation has been so acute that it has resulted in a cost of living crisis. Note that many African countries are highly dependent on imports. The main drivers of inflation in these countries have been food and fuel prices.

To rein in inflation and inflation expectations and protect their currencies from further weakness, African central banks are hiking interest rates aggressively. Zimbabwe and Ghana have hiked their respective interest rates by 500bps and 450bps, respectively, since the start of the year. Note that more than 30 African central banks have raised rates in 2022.   

While global inflation appears to have peaked with food and oil prices correcting lower, the risks to the inflation outlook for Africa remain tilted firmly to the upside. Moreover, for the most part, real interest rates in Africa are deeply negative. Therefore, we expect African central banks to continue raising their respective policy rates in the months ahead. It must be noted that the high base effects of this year are expected to take effect in Q1 2023, which should help drag inflation across the region lower. Furthermore, we expect the hawkish bias across major central banks to moderate in the months ahead, with global inflation pressures moderating while the risk of a global recession intensifies.