guy report africa

8/6/2019 Guy Report Africa

1/34

Please refer to the disclaimer at the end of this document.

African FX outlook: lagging the EUR/USD upside correction

Last months rather sanguine expectation of African FX performance against the USDproved justified, even though we got the extension of the EUR/USD upside correction we

had been looking for. Average returns against the USD where up very modestly but

because of rate differentials rather than FX appreciation. Nearly all our 14 African cur-

rencies were down against the EUR over the last month.

The rebound in the EURs fortunes has not been cleanly associated with a rebound in

global risk appetite, which probably weighed negatively on Africas currencies. We see a

similar situation prevailing over the next month, although we expect that several of Afri-

can higher-beta currencies have room for some catch-up, with ZMK shaping up better

than most.

In terms of trades, we continue to favour the heavily managed currencies with high inter-

est rates such as Egypt and Ghana and even Angola and DRC, although access re-mains highly restricted.

The MUR deserves a mention as the star outperformer over the last month, but the lack

of interest rate protection and intervention to prevent further USD/MUR downside implies

that the best of this trade is behind us.

African bond outlook: squeezing out the last of the juice

Having been reasonably constructive on Kenyan bonds, the fantastic additional yield

compression seen in recent weeks implies that the risk/reward equation is tilting back

towards lightening up duration.

We still see further room for mild yield compression in both Ghana and Zambia and pos-

sibly even Uganda, South Africa and Egypt.

Our expectation for a back-up in yields in Nigeria played out over the last month, and we

still believe the risk/reward is modestly biased to being long duration.

We remain relatively neutral on rates in Mauritius, but see the risk bias towards higher

yields.

Index Page

Angola (AOA) 6

Botswana (BWP) 8

DRC (CDF) 10

Egypt (EGP) 12

Ghana (GHS) 14

Kenya (KES) 16

Malawi (MWK) 18

Mauritius (MUR) 20

Mozambique (MZN) 22

Nigeria (NGN) 24

South Africa (ZAR) 26

Tanzania (TZS) 28

Uganda (UGX) 30

Zambia (ZMK) 32

EU/US (EUR/USD) 3

FICCResearchAfrica:LocalMarkets:Monthly

Stillsomejuiceinthebonds

15July2010StephenBaileySmith*[email protected]

StevenBarrow*[email protected]

HenryFlint*[email protected]

MichaelKeenan*[email protected]

PhumeleleMbiyo*[email protected]

AtusayeMughogho*[email protected]

DmitryShishkin*[email protected]

SeamusVasey*[email protected]


2/34

Africa Local Markets Monthly 15 July 2010

2

FX & Rates Research

African FX returns: 1-month versus the USD

African FX returns: 1-month versus the EUR

African FX returns: 3-month versus the USD

African FX returns: 3-month versus the EUR

Sources: Bloomberg; Global Markets Research

-6.0

-3.0

0.0

3.0

6.0

Angola

Botswana

DRC

Egypt

Ghana

Kenya

Malawi

Mauritius

Mozambique

Nigeria

South

Africa

Tanzania

Uganda

Zambia

1m FX return (USD) 1m IR return (USD)

-6.0

-3.0

0.0

3.0

6.0

Angola

Botswana

DRC

Egypt

Ghana

Kenya

Malawi

Mauritius

Mozambique

Nigeria

South

Africa

Tanzania

Uganda

Zambia

1m FX return (EUR) 1m IR return (EUR)

-16.0

-8.0

0.0

8.0

16.0

Angola

Botswana

DRC

Egypt

Ghana

Kenya

Malawi

Mauritius

Mozambique

Nigeria

South

Africa

Tanzania

Uganda

Zambia

3m FX return (USD) 3m IR return (USD)

-8.0

0.0

8.0

16.0

24.0

Angola

Bot

swana

DRC

Egypt

Ghana

Kenya

Malawi

M

auritius

Moza

mbique

Nigeria

South

Africa

Ta

nzania

U

ganda

Zambia

3m FX return (EUR) 3m IR return (EUR)


3/34


3

FX & Rates Research

Eurozone/United States

EUR/USD has recovered after its plunge in May and

early Jun. We see this as a short-term recovery that is

unlikely to see EUR/USD break much above 1.30. A

longer-term slide to parity is still on the cards.

EUR/USD seems to have been helped by the weaker

trend in US economic data, which has ignited fears of

a double-dip in the US economy. We do not believe

that this will happen. In fact, the greater risks seem tolie in the Eurozone, given the significant fiscal consoli-

dation which is being undertaken.

With fiscal policy in the Eurozone being tightened and

monetary policy unable to cushion the blow to the

economy, given very low rates already, we believe it

is the exchange rate that must come to the regions

aid by falling.

Eurozone policymakers are unlikely to stand in the

way of a weaker EUR/USD even if it falls to parity.

The Swiss National Bank has already shown that

intervening to save EUR/CHF is a forlorn task, and

we doubt it will be any different if the ECB tries to

save EUR/USD.

Another factor that might have offered EUR/USD

some support recently is the decision by the Chinese

authorities to grant USD/CNY some freedom. This

will, almost certainly result in a fall in USD/CNY over

time and might possibly serve to re-focus the markets

on the fact that the huge trade deficit means that the

US needs a weaker currency.

But even here we believe that the Change to Chinas

currency regime can only help lift EUR/USD for a

finite time. It is the same story for the bank stresstests that the EU is planning for Jul; any relief for

EUR/USD is likely to prove short-lived. US stress

tests in May 2009 interrupted the EUR/USD uptrend

that was in place at the time, but only temporarily.

Whats more, US stress tests addressed the very

things that the market was concerned about at the

time, which was the strain in the US banking system.

If we fast-forward to today, there are clearly concerns

about banks in the Eurozone but the major worry is

over the sovereign debt crisis. This is not going to go

away, even if the banks pass the stress tests withflying colours. By the same token, EUR/USD weak-

ness is not going to go away either.

Daily EUR/USD: head-and-shoulders bottom forming

Source: Reuters

EUR/USD outlook

-1-mPrevious +1-m fore-

castActual current

spotNew +1-m

forecast

EUR/USD 1.245 1.20 1.239 1.17

Steven Barrow

Price

USD

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

01 16 01 16 02 16 01 16 01 18 01 16 01 16 01 16 03 17 01 16 01 16 02

Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10


4/34


4

FX & Rates Research

Fears of a double-dip in the US economy are over-

done in our view. But growth is likely to be lacklustre,helping to keep the Fed on hold for the rest of the

year at least, and keeping 10-year treasury yields

around the 3% mark for some time.

Growth fears have sprung up for a number of rea-

sons: some fiscal incentives have ended with devas-

tating consequences (in housing, for instance), a

number of leading indicators have turned sharply

lower and financial fears have been fanned again by

the euro zone debt crisis.

On the first of these, the government still has signifi-cant funds left to spend from past legislation and we

dont doubt that more would be forthcoming in new

legislation if needed. Concerning leading indicators,

like the weekly ECRI (Economic Cycle Research In-

stitute), theres no doubt that theres been some

weakness recently but their ability to predict reces-

sions, let alone double-dips, are questionable.

The idea that financial strains in the euro zone could

create contagion risks in the US is a red herring in our

view. The upward pressure on USD libor rates seems

to be from Europes banking strains and nothing to dowith tensions in the US banks. And, with US treasur-

ies and the USD acting as the safe-haven in the face

of euro zone tensions, it seems unlikely that the

treasury market could go though its own confidence

crisis. The biggest risk to the treasury market is that

inflation moves significantly higher; not that the rest of

the world suddenly decides to reverse its treasury

purchases.

With inflationary pressure currently low and likely to

stay low, treasury yields should not unwind recent

strength too quickly. In fact, 10-year yields could still

reach 2.75%. The test will come when the Fed re-

moves its commitment to keep rates low for an

extended period of time. We think this is likely in the

autumn at the earliest with the first rate hike not fol-

lowing for at least another six months after the com-

mitment change.

As the double-dip fears recede and as the Fed gears

itself up to hike rates next year, so treasury yields

should rise. In a years time, for instance, wed expect

10-year yields to be over 4% and the yield curve to be

considerably flatter than it is right now.

Theres no doubt, in our mind that the risks to these

forecasts is that the Fed has to hold rates low for

longer with similar longevity for low yields in the treas-

ury market. We dont need to see a double-dip to

bring this about, just lacklustre growth, high unem-

ployment and low inflation.

Sources: Standard CIB Global Research

US rates market outlook

Changes in the yield curve Inflation developments

Source: Ecowin

-3.0

-0.5

2.0

4.5

7.0

Oct-04 Mar-06 Jul-07 Nov-08 Mar-10

CPI (YoY) Core CPI (YoY) Fed funds target

-1.0

0.5

2.0

3.5

5.0

1-m 3-m 6-m 2-y 5-y 10-y 30-y

14/07/2010 14/06/2010 1-m forecast


5/34


5

FX & Rates Research

The ECB is attempting to normalise liquidity condi-

tions in the region as a probable precursor to higher

policy rates in the future. However, the strains of the

Eurozone debt crisis have not departed. Not only will

this slow the banks plans to normalise liquidity con-

ditions, it could even cause the bank to reverse com-

pletely and sanction lower policy rates.

A double-dip for the Eurozone economy is a very real

threat. The debt crisis has forced countries to tighten

fiscal policy, quite considerably in some cases. This

will damage growth in the region for three reasons:

The first is that the impact of tighter fiscal policy on

the economy is usually cushioned by falling interest

rates. But rates are already very low and cannot fall

much further.

Secondly, even if private sector credit demand does

respond, banks are not in a strong position to lend.

They continue to park huge amounts of liquidity with

the ECB, rather than risk lending it to the private sec-

tor.

Thirdly, the detrimental effect of tighter fiscal policy

on the economy is usually cushioned by a falling

exchange rate as well. But while the euro has fallen and can fall further most Eurozone trade is

conducted between countries within the region who

share one currency.

We doubt that a double-dip in the Eurozone economy

will be deep; it will probably be much shallower than

the credit-crunch-induced 0.9% fall in GDP in 2009.

Nonetheless, it should help to keep core Eurozone

bond yields low. Ten-year German bund yields, for

instance, could easily fall to the 2% level.

But while bond yields in Germany seem set to stay

low, we envisage more spread pressure in the region

as yields in countries like Spain, Greece, Portugal

and Ireland rise further. We do not believe that the

regions debt crisis will just go away. Instead, it is

likely to come to a very messy end, probably involving

debt restructuring and, at worst, EMU withdrawals or

expulsions.

At the front-end of the yield curve, the ECB has had

to cope with the problems of the debt crisis while try-

ing to draw down the huge amounts of liquidity that it

has supplied to the banks. These liquidity withdrawals

may help maintain the gentle uptrend in Euribor rates

but, in our view, do not rule out easier policy from the

ECB.

So far during this debt crisis, the ECBs easing has

come via the bank supplying fixed rate liquidity to

banks. But we believe that if the double-dip scenario

proves a reality, rate cuts, to 0.5% for the key rate,could become a likelihood.

Source: Global Markets Research

EUR rates market outlook

Changes in the yield curve Inflation developments

Source: Ecowin

0.0

1.0

2.0

3.0

4.0

3-m 1-y 3-y 5-y 7-y 9-y 15-y 30-y

14/07/2010 14/06/2010 1-m forecast

-1.0

0.5

2.0

3.5

5.0

Sep-04 Feb-06 Jul-07 Nov-08 Apr-10

CPI (YoY) Core CPI (YoY) ECB ref i rate


6/34


6

FX & Rates Research

Angola

Our outlook for USD/AOA to remain stable around the

new 92.5 level proved fairly accurate over the last

month. We see this level continuing in coming months

as confidence in the AOA continues to be restored,

supported by ongoing strong fundamentals and a new

policy direction.

If anything, we would now argue that the balance ofrisk has shifted to the downside as the authorities

start to cope with intransigent inflation pressure and

increasingly ample FX inflows.

Although the May FX reserves are not yet published

by the BNA, we have the IMFs figures, which have

averaged USD721.4m higher than the headline net

BNA over the last 12-m. These show that the BNA

accumulated another USD274m in May after building

FX reserves by USD1.57bn in Apr 10. The BNA net

FX reserve figure for May should be around

USD15.624bn, which is up from USD12.0bn at end-Jan 10.

Key to the improving external position remains the

price and production of oil. Also underpinning the

growing confidence in the AOA are the external fun-

damentals. We estimate that oil export earnings were

in the region of USD26.0bn in H1:10, which is broadly

in line with our forecast for 2010. This assumes oil

production of 1.9m bpd and an average price of

USD80 pb and delivers a C/A surplus of USD9.4bn

(12.5% of GDP) in 2010.

The growing confidence in the AOA is also reflected

in declining BNA T-bill rates, which had been hike to

mid-20% along the cash curve in order to sponsor

some of the local USD holdings back into the BNAs

reserves and the FX market.

Perception of an improving policy environment is also

assisting AOA confidence. Part of this is associated

with the adoption of a ST IMF standby arrangement

for USD1.3bn on 23 Nov 09. The IMF are due in

Luanda for their half-year review toward end-Jul.

Another part of the story is Angolas recent sovereign

Foreign Currency LT B+ credit rating from both S&P

and Fitch and a B1 rating from Moodys. The eventual

debut Eurobond issuance will further post positive

sentiment, although we suspect this will not be until

Q4:10. First we would need the results of the end-Jul

fiscal review and an audit of outstanding government

arrears.

WeeklyUSD/AOA: 92.5 mid looks like the new normal

Source: Reuters

USD/AOA outlook

-1-m

Previous +1-m

forecast

New +1-m

forecast

USD/AOA 92.5 92.5 92.5

1.0Short USD % return (including interest rate difference)

Actual current

spot

92.5

1.4

Stephen Bailey-Smith

95.393

91.808

Price

/USD

72

76

80

84

88

92

96

O N D J F M A M J J A S O N D J F M A M J J A

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 10


7/34


7

FX & Rates Research

We have argued for some time that Angolan interest

rate yields would come down aggressively once confi-

dence in the AOA returned. It now appears that this

has taken place in recent weeks. The cash curve has

re-priced lower along most of its length out to 1y, with

the greatest compression in the 3-6m portion. While

we see the short dates remaining relatively stable, we

see room for further bull flattening along the curve in

coming weeks/months.

Most of the move is premised on a continuation of the

USD/AOA stability seen in recent months, giving the

authorities room to reduce their funding and arguably,

more importantly, their sterilisation costs.

Certainly, the authorities are now talking up a mone-

tary easing bias. Indeed, the reduction in the bank

reserve requirement to 25% from 30% in late Jun 10

was intended as a monetary loosening mechanism.

The sharp decline in interest rates would appear to

reiterate the loosening bias.

The picture is complicated somewhat by the changes

which occurred along with the reserve requirement

adjustments. In particular, the authorities now allowbanks to hold around half of their reserves in FX and

are no longer allowed to hold government debt as

reserves: a measure introduced earlier in the year to

expand liquidity.

The authorities loosening monetary bias will be given

an additional boost from the relatively sanguine infla-tion environment which has remained extremely flat

at between 13.0-14.0% y/y for the last several years.

Headline inflation again drifted own to 13.7% y/y in

Jun 10, from 13.8% y/y in May 10.

Clearly we are looking for the BNA to reduce its refer-

ence discount rate (presently 30%) in coming months,

although we suspect that the move will wait until we

have greater clarity on the mid-year budget amend-

ments and the reconciliation of the arrears, which

should be announced in late Jul 10 or early Aug 10.

We would not be surprised to see the discount ratedown to 20% or even below by end 2010.

Sources: BNA; Global Markets Research

AOA rates market outlook

Changes in yield curve Inflation developments

Source: BNA

Auctions

Date Auction Amount (AOA m) Yield (%)

8-Jul-10 63-d T-bill 976.21 15.0

8-Jul-10 91-d T-bill 963.72 17.0

8-Jul-10 365-d T-bill 835.83 20.0

8-Jul-10 182-d T-bill 923.48 17.84

8-Jul-10 28-d T-bill 990.71 14.0

10.0

15.0

20.0

25.0

30.0

28-d 63-d 91-d 182-d 364-d

YTM %

3m forecast mid-Jun 10 mid-Jul 10

%

0

8

16

24

32

Nov-06 Oct-07 Sep-08 Jul-09 Jun-10

CPI y/y 91-d T-bill Rediscount


8/34


8

FX & Rates Research

Botswana

Our USD/BWP forecast last month proved too bear-

ish. We have lowered our forecast over the next

month we now expect USD/BWP at 7.10, given its

policy link with the ZAR.

A return to robust growth remains the highest priority

for the government. Thus, we still believe the authori-

ties welcome the weaker currency bias in their bid tostimulate aggregate demand through exports. Indeed,

the trade deficit continued to widen. In Apr 10, the

trade deficit widened to BWP1.44bn, from

BWP1.24bn in Mar 10.

Some headway is indeed being made regarding GDP

growth. The contraction for 2009 was upwardly re-

vised to -3.7% y/y, from -6.0% y/y. Furthermore,

Q1:10 saw growth increase to 36.4% y/y, from

10.7% y/y in Q4:09. The rebound was led by the min-

ing sector which grew a whopping 135.1% y/y in

Q1:10, from 21.0% y/y in Q4:09. We expect the re-bound in mining to be sustained and to drive growth

in 2010.

Non-mining GDP growth remains robust, accelerating

to 8.2% y/y in Q1:10, from an average of 6.2% y/y in

2009. Business confidence reflects the improving

domestic economic conditions and should further

support non-mining GDP. Business confidence im-

proved to 55% from 47% as businesses find the pre-

vailing conditions more favourable. Businesses are

also more optimistic about future prospects as confi-

dence regarding future business conditions rose to

71%, from 59% in the Mar/Apr 10 survey.

In May 10, diamond exports increased to

USD255.1m, from USD233.6m in Apr 10, on the back

of increased diamond prices and export volumes. By

May 10, the diamond price index had increased 3.5%

since the beginning of the year. Diamond export vol-

umes are likely to have benefited from the weaker

BWP and improved global demand.

Parliament has been considering drafting its own

regulations to govern the beef industry and the man-

agement of foot and mouth disease. We agree with

the minister of agriculture that not abiding by interna-

tional standards would prove detrimental to beef ex-

ports and place further pressure on the trade deficit.

WeeklyUSD/BWP: to benefit from ZAR

Source: Reuters

USD/BWP outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/BWP 6.964 7.2 7.10

-1.0Short USD % return (including interest rate difference)

Actual current

spot

6.98

0.1

Atusaye Mughogho

Price

BWP

5.5

6

6.5

7

7.5

8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009 2010


9/34


9

FX & Rates Research

Following the early-Jul decision by the Bank of Bot-

swana to maintain its policy rate at 10% despite rising

inflation, we expect yield across the curve to remain

fairly static over a 1-m horizon. Given the immaturity

of Botswanas capital market, yields tend to be more

responsive to the bank rate as opposed to inflation

expectations.

The monetary policy decision at the beginning of this

month came as no surprise to us. As we have men-

tioned in the past, growth remains the main focus for

the authorities. Thus, inflation will not be the authori-

ties focus until such time as they are convinced thatgrowth has developed a firm footing in the economy.

Inflation increased to 7.8% y/y in May 10, from 7.1%

in Apr 10. We expect inflation to continue pushing

higher in months ahead and shoot well past our ear-

lier end of year forecast of 8.0% y/y, and in all likeli-

hood end the year above 9.0% y/y.

The increase in VAT and electricity tariffs in H1:10 will

be the main driving forces behind rising inflation in

coming months. Our expectation for higher oil prices,

coupled with a weaker BWP, is likely to exacerbate

the rise in inflation.

The expected weaker BWP is likely to push imported

tradeables inflation (45.2% weighting) higher. In May

10, imported tradeables inflation increased to 10.4%

y/y, from 10.1% in Apr 10.

We had expected the government to present its new

bond issuance programme this month, as indicated in

the FY2010/11 budget speech in Feb 10. However, it

would seem that the government is likely to postpone

the presentation to the Nov 10 sitting of parliament.

The new issuance programme follows the completion

of the BWP5.0bn programme in Mar 10, and is ex-

pected to fund part of the FY2010/11 BWP12.1bn

budget deficit. Government under spending thus far

this year, the expectation of the second tranche

(USD500m) of the African Development Bank loan

and accumulated government savings (BWP20.7 as

of Apr 10) have likely slowed the urgency of the new

programme. Furthermore, the government and cen-

tral bank remain in discussions over the size of the

issuance and its composition. Government has, how-

ever, stressed that an issuance programme is still

necessary, given the prevailing fiscal pressures.

Sources: BOB; Global Markets Research

BWP rates market outlook


Sources: BOB; Global Markets Research

Auctions

Date Auction Amount (BWP m) Yield (%)

05-Mar-10 182-d T-bill 800 6.50

05-Mar-10 BW006 200 7.10

05-Mar-10 BW007 195 9.14

05-Mar-10 BW003 192 7.32

6.00

7.00

8.00

9.00

10.00

91-d 182-d 2-y 5-y 8-y 15-y

1-m f orecast 13-Jul-10 23-Jun-10

0.0

6.3

12.5

18.8

25.0

Jan-07 Oct-07 Aug-08 Jun-09 Apr-10

Headine Non-tradeable Tradeable

%, y/y


10/34


10

FX & Rates Research

DRC

USD/CDF remained relatively flat over the past

month, in line with our expectations. We target 900for

USD/CDF over the next month.

In line with our expectations, and in spite of some last

minute concerns, creditors agreed to granting the

DRC USD12.3bn of much needed debt relief at the

beginning of Jul 10. Debt relief from the IMF and theWorld Bank amounted to USD491m and USD1.83bn

respectively. The remaining USD9.98bn of debt relief

will come from bilateral and commercial creditors.

We expect debt service savings (USD70m per month)

to be channelled to development and social spending

to address the destruction following years of civil war.

Our core view is that the government will retain its

prudent macroeconomic policies after debt relief. We

believe that the governments three-year IMF Poverty

Reduction and Growth Facility, signed in Dec 09, will

provide the necessary policy anchor.

We expect improved sentiment towards CDF, follow-

ing debt relief and the associated budget implications,

and current USD weakness to prove supportive of

USD/CDF over coming weeks. However, a return of

broad-based USD strength, on the back of height-

ened risk aversion, is likely to outweigh this positive

sentiment towards CDF. Lower interest rates, follow-

ing a cut in the policy rate by the central bank this

month, poses additional upside risk for USD/CDF.

Debt relief is likely to ease pressure on FX reserves.

FX reserves decreased to USD1.06bn (1.46 months

of import cover) as of 11 Jun 10 from USD1.08bn(1.50 months off import cover) on 28 May 10.

This month, the World Bank granted the government

USD50m to improve efficiency and transparency re-

garding contracts in the mining sector. This should

benefit current transfers in the BOP. The standoff

between government and First Quantum regarding

the expropriation of the latters assets took centre

stage at the G8 summit and threatened to delay debt

relief. We expect the government to restore its image

in the investor community to ensure that the country

remains a favourable mining investment destination.

Weekly USD/CDF: sideways range persisting

Source: Reuters

USD/CDF outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/CDF 903.3 900 900


Actual current

spot

903.8

2.4

Atusaye Mughogho

Price

/USD

640

680

720

760

800

840

880

O N D J F M A M J J A S O N D J F M A M J J A

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 10


11/34


11

FX & Rates Research

The reduction in the bank rate, and expectations forfurther cuts, by the Banque Centrale du Congo (BCC)

from 42.0% to 29.5% in Jul 10, is likely to drive mar-

ket interest rates lower in coming months. However,

the likely ensuing reduced offshore interest in holding

BTR, coupled with downwardly sticky inflation, will

probably place a floor (we believe 25%) on how low

the BCC can reduce the bank rate.

The reduction in the bank rate was under the recom-

mendation of the IMF. Currently all BTR issuance

costs are incurred by the BCC, which drives up the

banks operational costs, thus compromising the

BCCs independence. The IMF, in a bid to ensure the

BCCs autonomy, would like to see the bank rate

lower in order to minimise the BCCs operational

costs. Thus, we see the authorities pushing the bank

rate lower in coming months.

The decision to lower the bank rate was also sup-

ported by YTD inflation in the second week of Jun 10,

standing at 4.58%, from 4.62% as at the end of

May 10.

Despite YTD inflation dipping below 5.0% in Jun 10,y/y inflation is proving downwardly sticky in recent

months. Inflation increased to 28.33% y/y in the sec-

ond week of Jun 10 from 27.27% y/y as of May 10.

The central bank is targeting inflation of 15.0% y/y at

year-end.

The possibility of increased military expenditure fol-lowing the partial withdrawal of United Nations (UN)

peacekeepers poses upside risk for inflation. Jun 10

saw the withdrawal of 2,000 UN peacekeepers at the

behest of the government. With the threat of conflict

ever-present, the withdrawal may necessitate an in-

crease in government military expenditure to quell the

threat of conflict. This upside inflation risk is likely to

persist as the government seeks a further withdrawal

of peacekeepers by Jun 11.

Sources: BCC; Global Markets Research

DRC rates market outlook


Source: BCC

Auctions

Date Auction Amount (CDF bn) Yield (%)

02-Jul-10 7-d BTR 76.241 39.18

02-Jul-10 28-d BTR 16.785 39.73

23-Jun-10 7-d BTR 91.200 38.50

30-Jun-10 7-d BTR 76.241 39.18

25.0

30.0

35.0

40.0

45.0

7-day 28-day

1-m f orecast 02-Jun-10 02-Jul-10

YTM

0.0

22.5

45.0

67.5

90.0

Jan-06 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10

Headline inflation Policy rate

Treasury bills 28-d

% y/y


12/34


12

FX & Rates Research

Egypt

USD/EGP price action surprised a little over the last

month. We had been looking for USD/EGP to decline

to 5.64 from around 5.674 a month or so ago, in line

with expected upside in EUR/USD. Although the

EUR/USD move materialised nicely, we saw further

upside in USD/EGP, implying a continuation in the

trend trade-weighted depreciation seen since 5 Jun

10: the trade-weighted move from the low is nowaround 3.6%.

We suspect the move is now a little overdone and

that despite the authorities wishing to allow a little

more flexibility in the trade-weighted EGP, we expect

to see the upside capped around present levels and

possibly reversed. It has been our understanding that

the direction of the trade-weighted EGP was broadly

determined by monetary policy objectives. So after

being allowed to depreciate 10% during 2009, it had

been allowed to appreciate 7.3% from the lows in

early Dec 09 to early Jun highs. Interestingly, these

highs were close to those seen in both late 2005 and

late 2008, implying that the authorities may well have

an implicit floor around these levels. Certainly, there

is limited evidence that additional economic stimulus

is needed.

We suspect that we will return to a situation where

USD/EGP becomes much more a function of EUR/

USD once again. Our core scenario is for EUR/USD

to drift higher towards 1.30 in coming weeks before

completing the multi-month trend down to parity.

While we are pencilling in USD/EGP trading 5.70 over

the next month, the risks are thus probably to the

downside.

Certainly, there are few signs that the BOP funda-

mentals are under pressure. Indeed, the CBE added

another USD122m to FX reserves in Jun 10 taking

them to USD35.22bn.

Interestingly, the highest 20d rolling correlations for

USD/EGP has been the Egyptian equity market,

which is down some 8.3% from its highs in mid-Jun.

Not surprisingly, the other high correlations were with

S&P500, MSCI EM index and UST10y yields. EUR/

USD showed relatively little correlations having beenmuch more closely associated over a 100d or 200d

time frame. Egyptian equities have bucked the recent

multi-day rally in global equities, implying that if it per-

sists, there would be some potential for them to out-

perform and thus support the EGP.

Weekly USD/EGP: looking overbought

Source: Reuters

USD/EGP outlook

-1-mPrevious +1-m

forecast

New +1-m fore-

cast

USD/EGP 5.674 5.64 5.70


Actual current

spot

5.70

0.5


5.6982

Price

/USD

5.56

5.58

5.6

5.62

5.64

5.66

5.68

5.7

19 26 03 10 17 24 31 07 14 21 28 05 12 19

April 2010 May 2010 June 2010 July 2010


13/34


13

FX & Rates Research

Yields have remained fairly flat along the length of the

curve over the last few months. We see the risks as

reasonably well balanced, but with the risk probably

having shifted towards further yield compression and

arguably some bull flattening at least over the short

term. Key to our view is an expectation that inflation

will accelerate along its disinflation path after a mod-

est up-tick in Jun 10. Headline inflation increased to

10.7% y/y in Jun 10 from 10.5% y/y in May 10. The

increase was 0.6% m/m, which was broadly in line

with the average for 2010 to date. However, the in-

crease in Jun 09 was a more modest 0.5% m/m.

However, in the 4m between Jul and Oct 09, m/minflation averaged 1.8%, and we suspect this will be

nearer 1.0% over the same period in 2010. The re-

sulting will base influences will take the headline rate

down to an expected low of around 6.9% in Oct 10

before picking up again. Importantly, the decline will

bring the headline rate back in line with the CBEs

core inflation measure which was around 6.7% in

May.

Our prognosis appears to sit reasonably comfortably

with the CBEs rather sanguine prognosis of inflation

going forward. Indeed, although the tone of the

17 Jun 10 MPC comment was broadly neutral, it did

mention the potential risk from lower demand and

investment should the EU undermine the nascent

global economic recovery.

On the other hand, GDP growth of 5.8% y/y in Q1:10

points to a strong recovery in the domestic economy

and growth above 6.0% in 2010 is now expected.

Meanwhile, while private sector credit is gradually

picking up, at 9.3% y/y in Jun 10, it remains extremely

modest by recent historic levels.

Perhaps the largest constraint on the curve flattening

is the present fiscal policy bias to extend the amount

of maturities in longer-dated bonds in order to bring

down short-term debt-servicing costs. The deficit for

FY2009/10 looks like it will come in just below the

8.4% of GDP target set by the government. However,

going into elections, we do not see the deficit con-

tracting substantially in FY2010/11.

On a more positive structural note, the pension re-

forms presently before parliament are likely to give a

significant boost to the domestic bond market as pri-

vate sector pension funds become much larger par-

ticipants in the market.

Sources: CBE; Global Markets Research

EGP rates market outlook


Source: CAPMAS

Auctions

Date Auction Amount (EGP m) Yield (%)

6-Jul-10 364-d T-bill 3,000 10.84

6-Jul-10 6 Jun 2013 3,000 11.55

15-Jun-10 16 Feb 2017 1,000 12.60

15-Jun-10 2 Mar 2015 1,000 12.25

6-Jul-1091-d T-bill 1,000 10.15

6-Jul-10 182-d T-bill 2,000 10.50

10.0

11.0

12.0

13.0

14.0

1-m 3-m 6-m 1-yr 2-yr 3-yr 5-yr 7-yr

1-m forecast 09/07/2010 21/06/2010

0.0

7.5

15.0

22.5

30.0

Mar-05 Mar-06 Feb-07 Feb-08 Feb-09 Feb-10

%

CBE lending rate CPI y/y CPI y/y (ex-food)


14/34


14

FX & Rates Research

Ghana

Despite turning more cautious on GHS last month, we

had felt USD/GHS would see some downside correc-

tion, especially given our expectation for some

EUR/USD upside. The GHS once again underper-

formed our expectation, meandering up to 1.45/1.46

from around 1.438, despite the EUR/USD upside ma-

terialising. The upward pressure in the USD/GHS

market still appears in place, but we certainly expect

the authorities to step in a create a ceiling before the

market gets disorderly, and we would not be sur-

prised to see the BOG place a ceiling around present

levels.

Our discussions with policy maker suggest they are

not unduly concerned by the present upward pressure

on USD/GHS seeing it as a temporary issue. Cer-

tainly, there is no evidence that they have materially

changed their FX policy, which remains the key driver

of USD/GHS. Indeed, official forecast upon which

fiscal planning is based has USD/GHS averaging

1.43 in 2010 coming down to 1.40 in 2012. Moreover,

GHS stability is still very much seen as the key to the

BOG delivering on its inflation mandate.

The key issue then remains whether the BOG has the

FX resources to achieve its desired stability. We be-

lieve it probably does. While oil production will start in

Q4:10, the flows will only gradually impact the BOP

while production increases to capacity of around

120,000 bpd by mid-10. We are looking for production

of around 40m bbls, which at an average of around

USD75/bbl provides revenue in the region of

USD3.0bn. We conservatively forecast the net FX

take from this (mainly to the government) to be

around USD1.0bn, which is broadly in line with the

deficit we expect in 2010 (5.6% of non-revised GDP

in 2010). Moreover, we suspect that FDI will be

broadly sufficient to meet the deficit.

The key driver of FX flow in coming months will

probably be portfolio flows, especially net positioning

in the bond market. There has been some moderate

unwinding of foreign bond holdings in recent months

as global risk aversion raised the premium placed on

illiquid assets. There are also some large bond servic-

ing costs (USD120m) falling due in Q3:10, especiallya USD70m amortisation payment due in Aug. We

suspect that there will be further bond issuance

(aimed at foreign investors) as global risk appetite

strengthens towards end Q3.

Daily USD/GHS: 1.40-1.45 range remains intact, risk to the upside for a move to 1.50

Source: Reuters

USD/GHS outlook

-1-m

Previous +1-m

forecast

New +1-m

forecast

USD/GHS 1.438 1.420 1.45


Actual current

spot

1.44

-0.5


1.4511.4074

1.4994

Price

/USD

1

1.1

1.2

1.3

1.4

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2007 2008 2009 2010


15/34


15

FX & Rates Research

Rates have remained relatively flat over the last

month or so, with the front-end remaining particularly

consistent. The key move was in the 3y yields which

backed up slightly due to the underperformance of the

early Jun auction. The step up in the 3y portion of the

curve is partly due to the curves segmentation, with

the 3y bonds being held predominantly by foreigners.

The early Jun auction was poorly received because it

came at a time when international risk aversion was

placing a higher premium on relatively illiquid assets.

Going forward, we are still relatively confidence that

the curve can normalise and shift lower along thelength of the curve.

A key prerequisite for such a move will be the BOG

placing a ceiling on recent USD/GHS upside, as this

remains the key driver of foreign investor involve-

ment.

Yet perhaps the main driver for rates will be monetary

policy and we are reasonably confident that the BOG

has room to further loosen monetary policy at its

meeting on 16 Jul. We are looking for the BOG to

reduce its reference prime rate by 100 bps to 14.0%.

In particular, the latest inflation data for Jun 10

showed the headline rate falling into single digits for

the first time in years: 9.5% y/y from 10.6% registered

in May 10. That said, the figure is likely to be the low

for the year as the key base influences start to de-

cline. There is also likely to be a sharp decline in pro-ducer prices to 10.4% y/y from 16.1% y/y due to a

massive base influence of 7.4% m/m in Jun 09.

Fiscal policy is likely to have been more moderate in

Q2 and thus is likely to reduce this source of potential

price pressure.

The other strong disinflationary bias will come from

concerns doing the rounds in central bank comments

regarding the risks to global growth from the EUs

fiscal problems and the potential knock on for

Ghanas growth. Indeed, previous noted concerns

surrounding higher international oil prices will be

moderated in line with such thinking. Moreover, we

suspect that the latest evidence from the economy

will continue to show relatively lacklustre economic

growth.

Sources: BOG; Global Markets Research

GHS rates market outlook


Source: Ghana Stats Service

Auctions

Date Auction Amount (GHS m) Yield (%)

2-Jul-10 91-d T-bill 100/3 12.86

2-Jul-10 182-d T-bill 100/3 13.45

2-Jul-10 2-y note 50 13.80

2-Jul-10 1-y note 100/3 13.80

11.0

12.5

14.0

15.5

17.0

91d 182d 1y 2y 3y

28-May-10 07-Jul-10 3-m forecast

5.0

11.3

17.5

23.8

30.0

Oct-04 Feb-06 Jun-07 Oct-08 Feb-10

%

91d T-bill CPI y/y BOG Prime rate


16/34


16

FX & Rates Research

Kenya

We expect USD/KES to continue heading higher,

reaching 82.10 over the coming month. In recent

weeks the pair had stabilised in a range of 81.40

to 81.60, but upon breaking the topside the rate ac-

celerated somewhat on inter-bank trading, probably

motivated by short covering. Month end corporate

demand for FX could challenge our 1-m target to the

upside.

In our opinion the CBK is welcoming USD/KES up-

side, given that the CBK, as part of maintaining an

accommodative policy stance to stimulate the econ-

omy, has for some time now attempted to engineer

trade-weighted KES weakness. EUR weakness in the

period leading up to mid-Jun, manifesting itself in a

sharp decline in the EUR/KES cross, compelled the

CBK to intervene by switching its purchases from

USD to EUR.

The activism and determination of the CBK in manag-ing the trade-weighted KES exchange rate is un-

precedented. By our estimates, the CBK had never

successfully stabilised the trade-weighted KES over

the prior 5-y period leading to 2009. Yet between May

09 and Nov 09, the CBK not only succeeded in stabi-

lising the nominal effective exchange rate but also the

real effective exchange rate as well. Thus far in 2010,

the CBK has even managed to engineer a small de-

preciation of the REER.

Usable official FX reserves were USD3.30bn on 2 Jul

10, equivalent to 3.4 months of imports. This measure

of FX reserves has fluctuated between USD3.22bn

and USD3.34bn since Dec 09.

The improvement in remittances continues to support

the C/A. Remittances rose to USD51.1m in May 10

compared to a 12-m average rate of USD50.8m. As a

consequence the annual growth in 12-m cumulative

remittance inflows improved to 6.0% in May com-

pared to 5.8% in Apr. Recovering remittance inflows

have resulted in the gap closing between now and the

peak registered in Jun 08. 12-m cumulative remit-

tances in May 10 were a mere 5.4% lower than in Jun

08 while in Jun 09 it was 11.2% below the Jun 08

peak.

Background political noise in the lead up to the Aug

constitutional referendum is likely to keep upward

pressure on USD/KES as well. Were tensions to flare

up, donor inflows may be disrupted, putting the BOP

under pressure.

Weekly USD/KES: targeting a move back above 82.00

Source: Reuters

USD/KES outlook


cast

New +1-m

forecast

USD/KES 80.4 82.0 82.10


Actual current

spot

81.65

-1.3

Phumelele Mbiyo

82.18

80.01

Price

/USD

75

76

77

78

79

80

81

82

19 26 03 10 17 24 31 07 14 21 28 05 12 19

April 2010 May 2010 June 2010 July 2010


17/34


17

FX & Rates Research

Yields are likely to stabilise around current levels overthe coming month, with the exception of the 1-y yield

which is likely to fall further at the next auction.

The CBK has allowed excess liquidity to build in the

banking system. Consequently reserve money has

been consistently above target by about KES14bn

(roughly 7.8%) since 28 May. The CBK is unlikely to

allow above target reserve money to persist for long,

and we expect some withdrawal of excess liquidity

over the next 3-m.

Hence, although the near term outlook is for low ratesto persist, we expect rates to head higher over a 6-m

horizon. Real T-bill rates are already negative but

inflation is unlikely to fall below 1.8% y/y over the

coming 6-m. In an expanding economy negative real

T-bill rates are unlikely to prove attractive to investors.

Headline inflation is likely to decline further, possibly

reaching an average of 2.8% y/y during Q3:10. The

disinflationary trend has taken headline inflation to

3.2% y/y in Jun from 3.9% y/y in May. A key disinfla-

tionary force has been food inflation, down to 4.4%

y/y in Jun from 7.2% y/y in Feb when the constituentsof the CPI were reconstituted and re-weighted.

Further food disinflation is likely near term. Good

rains, following drought conditions in many parts of

the country, has improved food supply thereby damp-

ening price pressures. But the downside momentum

of food inflation is likely to dissipate, and eventuallyreverse some time over the next 6-m. We expect in-

flation to drift higher over the course of Q4:10, reach-

ing 4.1% y/y by year-end.

Q1:10 GDP growth indicates that the accommodative

monetary stance has taken hold. GDP growth accel-

erated to 4.4% y/y and was sufficiently spread over all

sectors of the economy. Naturally, the agricultural

sector, rebounding strongly to record 4.6% y/y growth

after six consecutive quarters of contraction, reflected

the good rains experienced in the country during the

growing season.

The pressure on the CBK to stimulate growth is ex-

pected to ease. Given the strong growth recorded by

domestically-oriented sectors like construction,

wholesale and retail trade, which grew by more than

4.0% y/y, the CBK may seek to stimulate growth via

the exchange rate rather than lower interest rates.

Sources: CBK; Global Markets Research

KES rates market outlook


Source: Kenya CSO

Auctions

Date Auction Amount (KES m) Yield (%)

5-Jul-10 91-d T-bill 4,619 1.80

12-Jul-10 182-d T-bill 7,685 1.80

14-Jun-10 364-d T-bill 3,953 4.20

28-Jun-10 25-y T-bond 7,500 10.46

1.0

3.5

6.0

8.5

11.0

3-m 1-y 3-y 5-y 7-y 9-y 11-y 15-y

YTM

1-m forecast 28-Apr-10 14-Jul-10

0.0

5.5

11.0

16.5

22.0

Jan-07 Dec-07 Oct-08 Aug-09 Jun-10

%

CPI y/y 91-day T-bill rate Central bank rate


18/34


18

FX & Rates Research

Malawi

USD/MWK will most likely remain around the 150.0

level over the coming month. Despite occasional

shortages of FX, the authorities insist on sustaining a

de factopeg to the USD.

The 1-y ESF programme ended in Dec 09. Most of

the performance targets under that programme were

missed by wide margins. Although there is no IMFprogramme at present, the IMF indicated that it was in

discussions with the Malawian authorities for a 3-y

ESF programme.

Such a programme will be invaluable for BOP support

for the country. IMF programmes typically act as cata-

lysts for increased donor funding. The discussion for

the 3-y programme may also speed up the process of

devaluing the MWK. Over the past 3-y, the IMF has

been insisting that the authorities ought to allow a

more flexible exchange rate, a euphemism for de-

valuation.

The countrys external imbalance is clearly shown by

the low levels of FX reserves, and the inability of the

RBM to accumulate them on a consistent basis. Offi-

cial reserves amounted to USD177.4m in May, cover-

ing a mere 1.4 months of imports. Predictably, sales

to authorised dealer banks, due to excess demand for

foreign exchange, remains the biggest drain on FX

reserves.

Export earnings as the tobacco marketing season

progresses will most likely ease the pressure on the

FX market in the near term. Cumulative tobacco sales

volume to May 10 of the current season rose by18.5% in over the same period last year, while aver-

age prices were 22.1% higher.

Support provided to the agricultural sector has im-

proved yields. The agricultural input subsidy pro-

gramme, where the government provides subsidised

fertiliser and seeds to farmers, remains a mainstay of

government policy. Although at MWK19.4bn in

FY2010/11 the allocation is smaller than the

MWK29.4bn in FY2009/10, fertiliser prices have de-

clined.

However, the countrys problems are of a medium-

term nature. Even the ramp-up of uranium production

and exports is unlikely to eliminate the external imbal-

ance. Consequently, without a substantial devaluation

of the MWK, FX shortages are likely to be a recurring

problem for some time.

Weekly USD/MWK: trending sideways

Source: Reuters

USD/MWK outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/MWK 150.8 150.2 150.1


Actual current

spot

150.8

0.4

Phumelele Mbiyo

Price

/USD

140

142

144

146

148

150

01 18 01 16 01 16 01 16 03 17 01 16 01 16

Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10


19/34


19

FX & Rates Research

We anticipate muted movements for yields over the

coming month, with a parallel shift upwards in T-bill

yields probable.

The upside bias in rates that we anticipate is justified,

given tight liquidity in the banking system. Already

inter-bank rates have risen since the beginning of the

year, with the average rate at 14.8% in early Jul, com-

pared to 10.7% in Jan.

The tight liquidity conditions may account for the de-

cline in demand for paper in recent T-bill auctions.

The bid-cover ratio in 91-d auctions has averagedless than 0.5 since Jan, with 1.5 and 0.9 for the 182-d

and 273-d auctions respectively. In contrast, all these

bid cover ratios exceeded 1.8 during Q4:09.

Nevertheless, the 91-d T-bill yield has remained fairly

stable even as the 182-d and 273-d yields trended

marginally higher. Since declining to 7.0% in Nov 09,

the 91-d yield has trended sideways mostly. Mean-

while, 182-d and 273-d yields have risen by between

100 and 200 bps. Even after rising by about 35 bps

by 2 Jul, the 91-d yield is still 414 bps and 465 bps

below the 182-d and 273-d yields respectively.

In any event, real T-bill rates are quite high, except for

the 91-d rate. Headline inflation fell to 7.8% y/y in May

from 8.1% y/y in Jun. The upside impetus provided by

the non-food components of the CPI commencing in

Dec 09, particularly transport (due to fuel prices) as

well as beverages and tobacco, seems to be dissipat-ing. Non-food inflation has trended marginally lower

to 10.1% y/y in May, from 10.3% y/y in Mar.

Non-food inflation is likely to moderate further during

Q3:10, with the transport index likely to exert down-

ward pressure. The marginal decline in the oil price in

Q2:10 is likely to lead to some easing of upward pres-

sure on fuel prices in the country.

Nonetheless, the key driver for inflation is likely to

remain fluctuations in food inflation. The combination

of low international maize prices and adequate local

and regional supply portends further food disinflation

during Q3:10. Although the government expects the

local maize harvest to fall short of the 2008/09 sea-

son, the country will probably still produce 800,000

tonnes above local demand. Already food inflation

declined to 5.8% y/y in May having fluctuated in a

6.3% y/y - 6.9% y/y range (at an average of 6.6% y/y)

in the 10-m to Apr.

Sources: RBM; Global Markets Research

MWK rates market outlook


Sources: NSO; Global Markets Research

Auctions

Date Auction Amount (MWK m) Yield (%)

2-Jul-10 91-d T-bill 11 7.35

2-Jul-10 182-d T-bill 274 11.49

2-Jul-10 273-d T-bill 461 12.00

7.0

10.8

14.5

18.3

91-d 182-d 273-d 3-y

YTM

07-May-10 02-Jul-10 1-m forecast

0.0

6.3

12.5

18.8

25.0

Jan-05 May-06 Sep-07 Jan-09 May-10

%, y/y

Headline Non-food Food


20/34


20

FX & Rates Research

Mauritius

USD/MUR is likely to stay in a 30.20 - 31.20 range

over the coming month, with upside risks likely to

predominate. Policy considerations are likely to play a

major part in the evolution of the currency pair in the

coming months.

Over the past month USD/MUR recorded aggressive

downside on account of EUR/USD upside. It is possi-

ble that the strong EUR/USD uptrend took the BOM

by surprise. In the preceding month, EUR weakness

seems to have galvanised the BOM to intervene to

prevent EUR/MUR downside. The European debt

crisis and the restrictive fiscal policy stance taken by

European governments has significant negative impli-

cations for the Mauritian economy. Europe is the larg-

est export destination for the country, so the authori-

ties are particularly sensitive to EUR/MUR downside

in an environment in which European demand is likely

to be subdued.

Economic growth has displayed a dichotomous pat-

tern that is likely to lead the BOM favouring trade-

weighted MUR weakness. Whereas the domestically-

oriented sectors of the economy are showing robust

growth, export-oriented sectors are struggling. Yet

tourist arrivals have bottomed. Tourist arrivals grew

9.1% y/y in Q1:10 from 1.5% y/y in Q4:09 and

-9.6% y/y in Q1:09. So clearly it is the goods produc-

ing export sectors of the economy that are underper-

forming, underlining the weakness of external de-

mand.

The pace of USD/MUR downside forced the BOM to

undertake a widely publicised intervention to buy

USD11.5m on 9 Jul. Seemingly, this is mere postur-

ing, intended to indicate the BOMs preference for aweaker MUR exchange rate. Daily turnover on the FX

markets is roughly USD20m.

FX reserves, at USD1.9bn in Jun, have been mostly

trending sideways since Dec 09, fluctuating between

USD1.8bn and USD2.0bn. The drop to USD1.8bn in

May from USD1.9bn in Apr (subsequently reversed in

Jun) was probably caused by revaluation losses.

Thus far FX reserve fluctuations indicate a stable

overall BOP. However, the imbalance between exter-

nal and domestic demand could lead to a further dete-rioration of the C/A and possibly the overall BOP.

Daily USD/MUR: likely to be range-bound between 30.20 and 31.20

Source: Reuters

USD/MUR outlook


castNew +1-m

forecast

USD/MUR 32.61 33.50 30.80


Actual currentspot

31.17

4.9

Phumelele Mbiyo

Price

/USD

24

26

28

30

32

34

36

N D J F M A M J J A S O N D J F M A M J J A

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 10


21/34


21

FX & Rates Research

The near-term outlook for yields is favourable, with

rates likely to rise marginally over the coming month.

But it is likely that further out yields will begin a more

persistent rising trend.

The disinflation process, augmented by an aggressive

monetary policy easing, has been helpful in leading to

lower rates across the yield curve. But the accommo-

dative monetary policy stance has gained traction,

with domestic demand growing strongly. Indeed, the

trade imbalance that has resulted with strong im-

port demand while external demand for Mauritian

exports has been subdued indicates that the

monetary easing might need to be complemented by

a weaker currency rather than even lower interest

rates.

Thus the policy imperative to retain low interest rates

is steadily losing ground. A further reason to be

doubtful about the probability of low rates persisting is

that inflation seems to have bottomed. Whereas the

12-m trailing average inflation rate typically reported

by the CSO and the media is still declining, 1.7% y/y

in Jun from 1.8% y/y in May, headline inflation was

2.4% y/y in Jun. In fact headline inflation has been

rising since reaching a low of 0.1% y/y in Oct 09, indi-

cating that the 12-m trailing average is likely to begin

rising.

Nonetheless, while upwards, we envisage still modest

inflation over H2:10. We expect inflation to rise to4.2% y/y by year-end. Unsurprisingly, the growth rate

of all the components of the CPI remain low, with the

highest growth rate recorded in clothing and footwear

at 7.2% y/y in Jun. The growth rate of the transport

index is currently subdued as well, but the possibility

of higher oil prices during H2:10 poses upside risks to

local fuel prices, which are likely to feed through into

higher headline inflation.

Naturally, a depreciation bias for the MUR is likely to

put upside pressures on the headline inflation rate,

particularly since inflation is on such a low base. Fur-thermore, the country is particularly vulnerable to a

surge in inflation since most consumer goods are

imported.

Sources: BOM; Global Markets Research

MUR rates market outlook


Sources: BOM; CSO; Global Markets Research

Auctions

Date Auction Amount (MUR m) Yield (%)

9-Jul-10 91-d T-bill 107 3.36

9-Jun-10 2-y T-note 1,000 5.15

9-Jun-10 3-y T-note 278 5.75

9-Jun-10 4-y T-note 219 6.03

9-Jul-10 182-d T-bill 170 4.04

9-Jul-10 364-d T-bill 223 4.50

2-Jun-10 5-y T-bond 3,000 7.05

3.0

4.8

6.5

8.3

10.0

3-m 6-m 1-y 2-y 3-y 4-y 5-y

YTM

1-m forecast 09-Jul-10 07-May-10

-1.0

3.0

7.0

11.0

15.0

Aug-00 Aug-02 Jul-04 Jul-06 Jun-08 Jun-10

%

CPI y/y Bank rate


22/34


22

FX & Rates Research

Mozambique

We maintain our view that upside pressure on USD/

MZN is likely to persist over the next month. While we

do not expect a sharp break upwards, we see USD/

MZN again testing the 35 level multi-week.

Demand on FX reserves remains strong despite a

resumption in donor inflows and improving trade dy-

namics. Indeed, there still appears to be pent-up orlatent demand for FX in the system. Of particular in-

terest is the rising fuel import bill. The latter is a com-

bined function of increased demand, solid crude oil

prices and the weaker MZN exchange rate. USD/

MZN upside of around 16% has been recorded YTD

(31% y/y by mid-Jul 10).

ZAR strength, and more particularly MZN weakness

against the ZAR, has also inflated the import bill, as

South Africa is a key trading partner. Apart from plac-

ing additional demands on available FX reserves from

an import perspective, a weaker MZN against theZAR also has implications for inflation, as discussed

in the interest rate section overleaf.

Exports continue to perform satisfactorily, in line with

the improved global economic outlook. Prices of the

countrys largest export (aluminium) remain solid (up

around 25% y/y by end-Jun 10). Electricity exports

(second-largest export item) also remains buoyant.

Electricity is mostly exported to South Africa and Zim-

babwe. Regional electricity demand has increased

recently, with the demands from the FIFA Soccer

World Cup and winter in South Africa.

FX reserves continues to be eroded. At end-Jun 10

FX reserves amounted to USD1.77bn following a

recent peak of USD1.87m in Aug 09. While this fig-

urer is ahead of the USD1.76bn target set for June,

we believe that demand on reserves will remain

strong, especially from imports. It is worth mentioning

that FX reserves are strongly seasonal. Reserves

generally tend to spike in Dec/Jan each year as do-

nors release budget support for the next year. Current

estimates places donor commitments for 2011 at

USD445m, compared to USD471m in 2010. An addi-

tion USD25m has been received from the World Bank

in 2010 in response to the international financial cri-sis.

Weekly USD/MZN: upside pressure resurfacing

Source: Reuters

USD/MZN outlook


cast

New +1-m

forecast

USD/MZN 34.25 34.50 35.0


Actual current

spot

35.0

-1.5

Henry Flint

26

33.44

35.77

Price

/USD

26

28

30

32

34

36

N D J F M A M J J A S O N D J F M A M J J A

Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010


23/34


23

FX & Rates Research

We expect interest rates to rise further in response torapid accelerating inflation. Rates across the money

market curve have been moving higher in response to

the BOM hiking its reference SLF interest rate by

200 bps, to 14.5% in Jun. We believe that the risks

are tilted for further rate hikes, which will probably

translate into a further upward adjustment in the

money market curve, given our view that the BOM is

currently underestimating year-end inflation out-

comes.

Inflation for Jun 10 came in at 14.52% y/y, compared

to 12.69% y/y in May and a recent low of 1.12% y/y in

Aug 09. Inflation has been rising on average by

1.64% m/m since the start of the year. The most im-

portant factors pushing inflation north include rising

import costs associated with USD/MZN and

ZAR/MZN upside, abolition of fuel subsidies and other

administrative cost increases.

A key determinant of rising inflation in Mozambique is

the 31% y/y MZN depreciation against the USD and

42% y/y against the ZAR. The MZNs performance

against the ZAR is significant, given that around 40%

of all Mozambican imports originates from South Af-

rica. A significant portion of these imports are food,

which carries a significant weight in the CPI basket.

ZAR/MZN upside has resulted in strong inflation in

consumables imported from South Africa, especially

fresh fruit and vegetables.

Also adding significant upward pressure on inflation isthe removal of fuel subsidies, which were introduced

in 2008 to shield consumers from the oil price shock.

The removal of these subsidies in Mar 10 has re-

sulted in energy related CPI basket components reg-

istering double-digit y/y growth.

Other administrative price increases have also con-

tributed to rising inflation. For instance, water tariffs

were hiked by 20% earlier this year.

The monetary base was MZN26bn at end Jun 10.

This level is running ahead of target, which is a fur-

ther source of upward pressure on inflation. The MPC

is planning stronger intervention in the inter-bank

money market to shore up liquidity in an effort to meet

the target for an average annual inflation rate of 9.5%

for 2010. We do not believe that the authorities will

succeed. The 12-m moving average inflation rate at

end-Jun is already running at 5.7% y/y, and we ex-

pect a level closer to 12% y/y by Dec.

Sources: Bank of Mozambique; Global Markets Research

MZN rates market outlook


Source: Mozambique National Statistics Institute

Auctions

Date Auction Amount (MZN m) Yield (%)

30-Jun-10 91-d T-bill 120 12.99

30-Jun-10 182-d T-bill 20 13.50

7-Jul-10 364-d T-bill 15 14.20

30-Jun-10 364-d T-bill 20 14.10

7-Jul-10 91-d T-bill 80 13.09

7-Jul-10 182-d T-bill 35 13.63

8.00

9.50

11.00

12.50

14.00

15.50

91-d 182-d 364-d

%

Dec-10 Dec-09 Jun-10

0

5

10

15

20

Jan-05 Apr-06 Jul-07 Oct-08 Jan-10

%

CPI Maputo BOM SLF 91-d T-bill


24/34


24

FX & Rates Research

Nigeria

Our expectation for USD/NGN to remain relatively flat

over the last month or so proved reasonably appropri-

ate. We see this broad stability with a reasonably tight

range around 150 persisting in coming weeks and

months.

Key to this USD/NGN stability remains the willingness

and ability to preserve such a policy. Our recent con-

versations with the CBN governor certainly confirmed

our core view that the CBN sees NGN stability as its

main monetary anchor. In particular, there is a pre-

vailing feeling that inflation targeting is misplaced

where food prices are arguably the major determinant

variable for inflation. Perhaps equally important is the

fact that 150 has been preserved in the new budget

planning as the appropriate level upon which to dis-

tribute oil revenue.

On the ability to preserve such a policy, the CBN FX

reserves still has huge FX reserves (around 13m im-

port cover) albeit that they have slid somewhat in

recent months. They were USD38.82bn on 9 Jul 10,

compared to USD38.74bn on 14 Jun 10 and a low of

USD36.9bn on 6 Jun 10. These are all still down com-

pared to a recent high of USD41.5bn in mid-Apr. In-

terestingly, however, it appears that ECA levels have

stabilised over the last month, with reported holdings

of USD3.54bn in mid-Jul 10 similar to USD3.2bn in

mid-Jun 10.

The key NGN driver, however, remains the price and

production of oil, which we remain relatively construc-

tive on. Oil production in H1:10 has averaged 2.25 m

bpd including condensates which we assume at

250,000 bpd. This is the new budget assumption. The

average Bonny price has been USD78.6/bbl, which is

slightly below our USD80.0/bbl assumption, but

above the new USD60/bbl price assumed in the

budget. If this were to continue, we would certainly

see a rebuilding of the ECA and a C/A surplus in

2010 of the magnitude of USD25bn.

Although data is sketchy, financial flows have clearly

been very negative over the last year or so. We sus-

pect this is associated with very low interest rates and

some lingering pre-election uncertainty. On the other

hand, we remain constructive on the equity market

and foreign flows into it, especially now parliament

has passed the Asset Management Company bill.

Weekly USD/NGN: 148-152 range set to persist

Source: Reuters

USD/NGN outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/NGN 151.4 150.0 150.0


Actual current

spot

150.4

0.8


148.54

152.11

145.54

155.87

Price

/USD

141

144

147

150

153

156

159

M A M J J A S O N D J F M A M J J A

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 10


25/34


25

FX & Rates Research

Although yields backed up very modestly along the

curve over the last month or so, yields remain ele-

vated relative to where they where back in May. We

maintain that the bias is towards higher yields along

the curve in coming months, with some possible bear

flattening as liquidity is drained out of the short-end.

Key to our view is that interest rates remain artificially

low compared to where inflation is and that this is a

product of the CBN trying to resuscitate the credit

market following a loss of confidence in the banking

system. As confidence in the sector improves, the

need for such excessive negative real interest rates

should decline.

Certainly, the last CBN MPCs comment on 5 Jul 10

presented a neutral tone, with the risk bias moder-

ately hawkish. That said, in some ways the hawkish

concern was in response to policy measures that will

essentially foster monetary expansion. These include

high budget deficit financing and further quantitative

easing via the funding of the AMCON.

Moreover, inflation looks set to remain relatively be-

nign and even break out (to the downside) from the10-14% y/y range that has prevailed since mid-08.

We see headline inflation with a 9.0% y/y handle in

Jun 10 and an 8.0% handle in Jul 10 before heading

north again in Aug. Key to the move is base influ-

ences from some strong m/m increases during strong

May-Jul 09.

Perhaps more important to the CBN than inflation

numbers will be changes in monetary aggregates. At

present, private sector credit extension continued to

be extremely muted, basically remaining flat in the

year-to May 10. Meanwhile, the headline rate has

fallen to 17.7% y/y in May from 30.8% in Mar 10. That

said, broad money increased to 23.2% y/y in May

from a low of 12.3% y/y in Jan 10, mainly due to a

62.7% y/y increase in credit extension to the public

sector. Importantly, this is presented in the data as a

net reduction in the credit provided by the govern-ment to the banking sector. Although we see this rate

slowing down, public sector credit extension will re-

main a key source of monetary growth ahead of the

elections likely in Q2:11.

Sources: CBN; Global Markets Research

NGN rates market outlook


Source: CBN, NSO

Auctions

Date Auction Amount (NGN bn) Yield (%)

1-Jul-10 91-d T-bill 31.56 2.99

1-Jul-10 182-d T-bill 50.35 3.99

1-Jul-10 1-y T-Bond 50.00 4.84

YTM

0.0

3.0

6.0

9.0

12.0

91d 180d 1y 2y 3y 5y 10y 20y

3m forecast 5-May-10

18-Jun-10 13-Jul-10

%

0.0

8.8

17.5

26.3

35.0

Jul-01 Sep-03 Nov-05 Jan-08 Mar-10

CPI y/y 90-day T-bill


26/34


26

FX & Rates Research

South Africa

We expect renewed ZAR weakness over the coming

month, partly because of global risk aversion and

partly as result of SA-specific factors. We also still

anticipate continued ZAR weakness during the course

of H2:10 and thus still advocate selling into ZAR

strength.

Any bout of renewed global risk appetite stemming

from European growth concerns and/or further meas-

ures to cool down the Chinese economy are likely to

bring about renewed ZAR weakness from a sentiment

as well as from a trade balance perspective. This is

because the ZAR remains highly correlated to risky

assets, while Asia and Europe are SAs largest export

destinations.

Wage negotiation season (mainly Q3) has just begun

in SA. Considering that certain sectors have already

achieved 11% salary hikes, this leads us to believe

that wage settlements within the other sectors of the

economy will also be in excess of both the prevailing

inflation rate (4.6% y/y) and the SARBs inflation tar-

get band (3-6%). Higher wage settlements will not

only place the ZAR in a vulnerable light from an infla-

tion differential perspective, but the lost man days

associated with industrial action would hinder SAs

economic recovery and in so doing adversely influ-

ence the ZARs GDP differentials.

Dividend payments also pose a threat to the ZAR

over the coming months, because Q3 is traditionally

is a high dividend payment period in SA. Not only

have non-residents become substantial holders of

JSE shares, but SA corporates are also in a better

position to pay dividends after the 2009 recession.

Larger dividend payments would foster a widening of

the current account deficit.

Perhaps key will be interest rate policy. SARB FX

reserve accumulation has picked up in recent months,

signalling the SARBs ZAR thinking. A key driver for

lower rates is to reduce the sterilisation costs of fur-

ther USD purchases. On the other hand, the dovish

bond market tone is keeping foreign flows into the

sector high.

SA exporters could refrain from repatriating their

earnings for longer, during periods of rand weakness,because regulations now allow them to keep their

earnings in dollar beyond the 180-day rule of past

years.

Weekly USD/ZAR: risk to the sideways range is to the topside

Source: Reuters

USD/ZAR outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/ZAR 7.49 7.55 7.66


Actual current

spot

7.57

-0.2

Michael Keenan (FX) & Seamus Vasey (Rates)

Price

/USD

6.5

7

7.5

8

8.5

9

9.5

10

10.5

J F M A M J J A S O N D J F M A M J J A

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010


27/34


27

FX & Rates Research

The past month saw the release of Q1:10 demand-

side national accounts. Solid jumps in external and

domestic demand were surprisingly robust, but are

universally expected to normalise to much lower lev-

els over the rest of the year. Inflation continues to

prove particularly benign: Mays CPI came out at

4.6% y/y from 4.8% y/y previously, while PPI printed

at 6.8% y/y (consensus: 7.2% y/y).

The short-end of the curve has moved aggressively to

price in another 50 bps repo rate cut from the SARB,

potentially as early as 22 July, or if not this month,

than later this year. The FRA market was especially

encouraged by the SARB Governors speech on 7

July which was interpreted as very dovish.

The longer-dated swaps curve (beyond 3y) has com-

pressed by 30-35 bps over the past month. A lack of

solid corporate fixing activity, continued disinflation

and heightened rate-cut expectations have all contrib-

uted to the move.

The bond curve has ended up rallying slightly harder

than swaps over the past month, with the exception of

the very long-end. With the shorter-end being moreheavily anchored, curve flattening has resulted. Fur-

thermore, ASW spreads have continued to climb and

are in many instances at all-time highs at pre-

sent.

Government inflation-linkers have fallen under moder-

ate weakening pressure over the past few weeks,with the exception of the R189 (2013). This instru-

ment has continued to become richer (AIP: 203.2)

despite trading at a real yield more than 100 bps

lower than longer-dated issues. This is due to the low

free-float of the stock (tied up in structured deals and

part of commercial banks ALCO books) and the

Finance Ministrys intention to buy back these bonds

to improve their near-term redemption profile.

These switch auctions (focusing on the R189, but

including nominal issues too) are to be conducted on

a monthly basis until the end of FY2012/13. Details ofthe next one will be announced on 22 July and con-

ducted on 29 July.

The near-term outlook for SAs local interest rate mar-

kets is constructive. Standard Banks monetary policy

view is for an unchanged rate, although risks of an-

other cut in 2010 are seen as high. Bonds are ex-

pected to retain current levels over the next month,

with a mild strengthening bias.

Sources: JSE; Global Markets Research

ZAR rates market outlook


Source: Statssa

Auctions

Date Auction Amount (ZARm)

Yield (%)

09-Jul-10 T-bills: 91-d; 182-d; 273-d; 364-d3,825; 1,075;

875; 4756.57; 6.63; 6.80;

6.84

09-Jul-10ILBs: R211 (2017); R210 (2028);

R202 (2033)200; 140; 95 2.75; 3.08; 3.05

13-Jul-10 Nominals: R207 (2020); R213 (2031) 1,400; 700 8.48; 8.89

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

1-y 7-y 13-y 19-y 25-y

Nacq

1-m ago Current 1-m f orecast

(5)

0

5

10

15

20

%y/y

CPI Core CPI PPI


28/34


28

FX & Rates Research

Tanzania

USD/TZS upside extended just beyond our 1,500

target over the last month. Over the next few weeks,

we expect further upside in the currency pair. Our

view is partly based on continued corporate demand

for USD and partly on a return of broad-based USD

strength.

Following the purchase of Zain by Bharti Airtel, the

government is set to receive USD11.2m whilst retain-

ing its 40% stake in Zain Tanzania. This figure may

be upwardly revised as the government has re-

quested a valuation of Zain Tanzanias assets to de-

termine their market value.

Coffee production is likely to receive a boost due to a

realignment of local prices with international market

prices. Since the liberalisation of the coffee market,

the tendency was for buyers to offer farmers prices

below those prevailing in international markets. But

following complaints from farmers, the Tanzania Cof-

fee Board has been forced to set indicative prices in

line with global prices, possibly providing an incentive

for farmers to increase production and curb smug-

gling into neighbouring Uganda where prices are

higher.

The BOP is likely to get a further boost if debt relief to

the tune of USD240m from Brazil is forthcoming. Bra-

zilian president Lula Da Silva made the pledge on a

state visit to Tanzania earlier this month.

FX reserves decreased to USD3.46bn in May 10 (5.1

months of import cover), from USD3.58bn in April 10

(5.4 months of import cover).

Investors concerns have remained heightened follow-ing the passing of the Mining Act 2010 in Apr 10.

Concerns have centred around some provisions of

the Act, including government owning stakes in future

mining projects, no gemstone licences to be issued to

foreign companies and the need for mining compa-

nies to list on the Dar es Salaam Stock Exchange.

However, this month AIM-listed Kibo Mining chairper-

son came out in support of the Act, which may ease

investors concerns. He acknowledged that the gov-

ernment had been contemplating these changes for

some time but that investors were mostly concerned

about the speed of implementation. He otherwise

claimed that the law was in line with other African

countries. He further recommended Tanzania as a

favourable mining investment destination, given its

mineral resources and political stability.

Monthly USD/TZS: a continued push north expected

Source: Reuters

USD/TZS outlook

-1-mPrevious +1-m

forecast

New +1-m

forecast

USD/TZS 1,463 1,530 1,530


Actual current

spot

1,494

-2.0

Atusaye Mughogho

1,140

1,050

1,425

Price

/USD

900

1,000

1,100

1,200

1,300

1,400

1,500

2004 2005 2006 2007 2008 2009 2010

2000 2010


29/34


29

FX & Rates Research

Over the next month, we expect rates at the short-end

of the curve to edge slightly higher, as they have

done since about Apr 10. Currently, T-bills offer nega-

tive real returns. For instance, the 1-y rate stands at

6.36% relative to inflation in May 10 of 7.9% y/y. Con-

versely, at the longer-end of the curve, we expect

rates to remain fairly static. T-bond rates offer positive

real interest rates, which should render rates static

over the next month.

Loose monetary policy is likely to put a cap on rates.

We expect the authorities to maintain its expansion-

ary monetary policy until they are convinced that

growth is firmly rooted in the economy. In any event,

the BOT expects inflation to dip below 6.0% y/y by

Jun 10.

Headline inflation continued its downward trend, de-

clining 1.5 pp to 7.9% y/y in May 10. This downward

inflation trend has largely been driven by food disinfla-

tion. Food inflation eased to 8.1% y/y in May 10, from

9.8% y/y in Apr 10. Food inflation has benefited from

good rains and robust investment in agriculture that

have boosted food production. Food production is

likely to continue getting a boost, as agricultures allo-

cation in the FY2010/11 Budget increased by 35.5%,

to TZS903m, as government continues to pursue its

agriculture initiative, Kilimo Kwanza.

Non-food inflation has also played its part in the

downward trend in inflation. Non-food inflation eased0.9 pp, to 7.7% y/y in May 10. We expect non-food

inflation to remain subdued in months ahead the

BOT said that it would restrain money sup

guy report africa

Documents