On the 18th of February, Africa recorded 100,000 COVID-19-related fatalities, a threshold breached previously in Europe in April 2020. The rise in African cases continues to slow, as total coronavirus cases reached 3.92 million at month-end, a 9.50% increase month-on-month. The historical global vaccination campaign is well underway, as more than 225 million doses have been administered across 100 countries (Bloomberg). The current rate of vaccination is approximately 6.07 million doses per day. The US estimates at their current rate, it will take 10 months to cover 75% of the population with a two-dose vaccine. The UK announced that their objective is to lift all restrictions by the 21st of June. In addition, as the EU ramps up their vaccine rollout, there may finally be light at the end of the tunnel, thus allowing capacity to be directed towards emerging markets.
China has, to date, been the driving force behind facilitating Africa’s access to the vaccines. Zimbabwe, Mozambique, Senegal, and Tunisia have secured 700,000 doses and are currently prioritising healthcare professionals. South Africa, Seychelles, and Morocco have all undertaken administering the vaccine. Mauritius is aiming for a timeline of mid-2021 for 60-70% of their population to be vaccinated and Ghana was the first recipient of vaccines from Covax, the initiative
designed to ensure equitable distribution of the vaccine.
Following on from the previous month’s subdued return, rising US Treasury yields dampened emerging markets performance for a successive negative return. The JP Morgan EMBI Global Index posted a negative -2.56% return for February following uncertainty on future US fiscal and international monetary and stimulus policy. African debt capital markets performed better than their emerging market peers. The SBAFSO (Standard Bank African Bond Index ex-SA) recorded -1.43% return for the month.
In a bid to increase foreign revenue and boost dollar supply, the CBN confirmed that the Naira official market rate was depreciated to $/₦ 410. Thus, the largest depreciation against the dollar in February was the Nigerian naira (-7.31%) followed by the Zambia kwacha (-2.00%) and the Ethiopian birr (-1.29%). On balance, the US Dollar Index remained flat through February at 90.88 (+0.33%), whilst country specific factors drove African local currencies performance. The Angolan kwanza (+3.37%), Ghanaian cedi (+1.22%) and Malagasy ariary (+1.19%) all recorded gains for the month.
A common theme across MPC’s this year has been the shared outlook of upside risks to inflation on the back of rallying international commodity prices. Policy action through 2020 was aimed at underpinning demand and anticipated supply constraints from travel and lockdown restrictions. These market disruptions filtered through during January, with inflation manifesting across multiple African countries. With the price of Brent Crude (USD66.13/bbl) continuing to be supported by OPEC, CPI baskets could remain under pressure over the upcoming months. Mauritius, Egypt, Uganda, Namibia, and Botswana all held their policy rates unchanged at their last MPC meetings. In contrast, Zambia raised their policy rate by 50 bps citing inflations concerns with a stance that suggests further tightening through 2021.
The IMF provided substantial financial support to African countries in 2021 through their rapid financing facilities. As further budget assistance is likely to be required, many African sovereigns are seeking a funded IMF program. Kenya and Ethiopia have agreed to an Extended Credit Facility and Extended Fund Facility, while Zambia and Uganda are both locked in talks for an IMF program in a bid to access concessional funding.
At the date of this report, forward rates agreements (FRAs) were pricing for interest rates in advanced economies to remain at the current low levels over the medium-term (at least 1 year). At decade low USD interest rates, many African sovereigns are looking to refinance existing debt. Egypt recently successfully issued USD3.75 billion in Eurobonds and Ivory Coast tapped its existing euro-denominated Eurobonds to the tune of EUR600 million. In the credit space, African corporate, Liquid Telecoms, redeemed their 2022 Eurobond and re-issued with a 2026 maturity.
This month we profile the current real rates and yields in Africa, while contrasting it with the developed market and emerging markets rates.
IN FOCUS: AFRICA’S SUPPORTIVE REAL RATES ENVIRONMENT
The pandemic in 2020 brought on widespread central bank rate cuts in an effort to protect fragile economic growth. The pandemic has also added to inflation risks, emerging from constraints in supply and logistics. Despite this, the majority of African sovereigns continued to provide positive real rates in 2021.
Notwithstanding a compression in Africa real rates over the past 2 years, Africa real rates have mostly remained positive, as central banks used policy tools to buffer economies. Going forward there is limited scope for policy intervention, as central banks aim to maintain an accommodative policy stance whilst containing the green shoots of rising inflation.
Country specific inflationary pressures mean that only Nigeria, Angola, and Zambia are at negative real rates fuelled by local forex pressures.
Using normalised long-term inflation and 5-YR and 10-YR sovereign bond yields, most African sovereigns have positive term structures, offering enhanced positive real rates across their respective interest rate curves and providing some offset against inflation and currency depreciation. When compared to developed markets, whose central banks have signalled rates are too likely to remain at current low levels for at least the medium-term, Africa continue to offer a significant yield pickup.
On balance, risk premia in Africa remain above emerging market peers, while developed markets continue to offer low to negative real rates.
Despite the pandemic, the majority of African sovereigns maintained positive real rates across both short and long-term debt. Significant risk premia compensate for emerging market risk, supported by local currency fundamentals particularly in Ghana, Egypt and Uganda local currencies.
In line with our view of rising global rates, the Adventis Income strategy is positioned with a short duration bias looking for value opportunities in African sovereign debt as interest rate markets recalibrate back to pre-COVID-19 levels.
Please contact Joseph Rohm (firstname.lastname@example.org) should you require any further information.