News and AnalysisPan African

3 June 2024



    Fixed IncomeWe observed indications of improving GHS liquidity on the interbank market in May 2024 as banks adjusted to the high cash reserve ratio (CRR), mainly using redemptions from their holdings in BOG bills. The use of BOG bills to meet the CRR requirement broadly averted substantial weakening in demand for T-bills, enabling the Treasury to exceed its gross target for the month. In view of the less aggressive squeeze on demand for T-bills, the Treasury sustained its yield compression in May 2024, albeit at half the pace compared to pre-CRR hike. Given our forecast inflation sharply below 25.0% in May 2024, we opine that real yields remained in positive territory in the month under review.

    Currency: The depreciation pressure on the Ghanaian Cedi intensified in May 2024 as the local unit lost 7.3% m/m against the US Dollar, representing the fastest pace of depreciation in 2024 and more than 2x the loss endured in the prior month. Amidst the thin FX supply, we observed that the hike in cash reserve ratio (CRR) of banks barely squeezed GHS supply as the fiscal authorities confirmed ongoing payments of arrears to contractors. We believe the expected cumulative inflows of USD 2.3bn from various sources will be FX-supportive. However, the strong GHS supply and restrained BOG support keeps us less bullish on the FX outlook, reiterating our year-end forecast of 15.91/USD.

    Fixed Income: Yields on Kenyan Treasury bills ticked higher in May 2024 despite a stronger investor demand and firmer KES. We believe the market is pricing-in fiscal risk, given the protracted 7th review of the ongoing IMF programme with revenue under-performance as a sticky point. In the upcoming FY24/25, the Treasury proposes a 15.0% tax on coupons from infrastructure bonds (IFBs) as part of measures to boost fiscal revenue in line with IMF targets. However, we think abolishing the tax-free incentive on IFBs will dampen foreign investor appetite while bid yields could bake-in the proposed tax, potentially elevating the funding cost.

    Currency: The KES returned to winning ways in May 2024, appreciating by 2.3% m/m (+20.1% YTD) against the US Dollar as renewed upturn in domestic yields boosted the appeal of KES-denominated assets with tailwind from the approval of USD 1.2bn World Bank DPO facility. The Shilling’s gains were also aided by global softening of the US Dollar, reflected in a 1.5% m/m decline in the Dollar index. We foresee mild depreciation in June 2024 as the 1-month forward rate indicates 131.9/USD. However, we expect inflows from the World Bank facility to anchor market confidence and cap the depreciation risk.

    Fixed Income: 
    Investor demand for Nigerian Treasury bills (NTBs) was little changed with marginal decline in May 2024 as the money market continues to respond to the ongoing monetary tightening. However, the general demand condition remains robust and supportive of Treasury issuances. Yields nudged higher across the 91-day and 182-day tenors, mainly reflecting the unexpected hike in the policy rate as the authorities sustained the steady shift towards conventional monetary policy.

    Currency: The Naira endured a difficult first 2-weeks in May 2024, losing 9.3% in the official market amidst scarce FX supply. The CBN, however, offered relief by mopping up NGN liquidity via attractively-priced OMO bill at 22.5% (+100bps) and FX sales. While this helped the naira regain 14.5% in the official market in the ensuing days, depreciation re-emerged to drag the Naira to -6.5% m/m. As part of its ongoing forex market reforms, the CBN issued a directive for all existing BDCs to re-apply for new licenses according to any Tier of choice and meet the minimum capital requirement applicable to preferred Tier within six months of the directive. While we think this directive aims to sanitize the FX market, we also perceive short-term apprehension and uncertainty, which will weigh on the Naira. On FX supply, we maintain our expectation for World Bank approval of USD 2.25bn in June 2024 to sustain the recovery in forex reserves.

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