Navigating African LCY sovereign credits has been challenging, with subpar performances predominant in the earlier part of the year. However, financing conditions are improving, inspired by softer inflation in the developed market. For context, US inflation rose at its slowest pace in more than two years in June, reinforcing the views that the US Fed is nearing the end of the current interest rate-hiking cycle. The cooling inflation has also accelerated a decline in the dollar (-1.3% YtD), with potential positive pass-through to African LCY credits.
There are also positive developments coming from heavy-weighted African countries. In Nigeria, the newly elected government embarked on policy reforms, phasing out energy subsidies and converging the multiple exchange rate windows in the country. For Kenya, the IMF recently completed the fifth review, disbursing c.$415.4 million and extending its credit arrangements to 48 months from the initial 38 months to give the country more time to implement reforms. Also, the IMF provided an additional $551.4 million to support Kenya's climate resilience efforts, bringing total disbursement to $966.8 million in 2023. Similarly, Zambia reached an agreement to restructure $6.3 billion of overseas debt with Paris Club members and China, among others, prompting the IMF to disburse $189.0 million following its first review of the $1.3 billion loan programme initiated in August 2022. Aided by these developments, the Bloomberg African Bond Index gained 4.7% in July, a material improvement from the 0.7% gain witnessed in June.
We expect yield spreads to mostly narrow across African credit markets, supported by decelerating global inflation, a slower pace of rate hikes, and a declining dollar. Investors are also likely to cherry-pick instruments in countries with relative fiscal prudence, as borrowing costs in domestic and international markets remain elevated compared to the mean levels seen in the pre-tightening era.
