Throughout the quarter, global bond markets wrestled with expectations of the impending end of exceptionally easy monetary conditions and the extent of inflationary pressures in the global economy. Investor risk sentiment was negatively impacted by surging US inflation, more hawkish DM central banks and China growth concerns, all of which strengthened the dollar and unsettled global bond markets and emerging market assets in October and November, exacerbated by the emergence of the Omicron variant. However, we saw risk sentiment stabilise in December and African sovereign eurobonds started recovering strongly.

Earlier in the quarter the global allocation of Special Drawing Rights (SDRs), eectively hard currency reserves, to all member countries by the IMF in August, significantly strengthened external reserves across many countries in our investment universe. USD34bn worth of SDRs were disbursed to Africa in this round, but the IMF is currently engaging with rich countries to develop a viable mechanism of channelling another USD100bn worth of “unused” SDRs from wealthier to poorer countries, which would be a further key support for Africa sovereigns. The emergence of the Omicron variant and swift imposition of travel bans across most of the globe presented a setback for the resumption of tourism, which is a key sector in many countries across Africa such as Kenya and Egypt. Fortunately the variant also appears to be less severe than previous mutations, auguring well for the resumption of much needed holidays and tourist spend. Oil prices have climbed back towards $79/b again on the assumption of a faster opening up of economic activity going forward. The sharp rally in oil over the course of 2021 (from levels around $50/b at the beginning of the year) has been an important positive for the outlook for oil exporting credits which such as Nigeria and Angola. In November Moody’s revised the outlook of Nigeria to Stable from Negative, reflecting their expectation that higher oil prices and the recent measures taken by the government should improve the sovereign’s credit metrics and support its external position. On the negative side, Ghana’s local and dollar bond markets were under pressure due to a perceived overly ambitious (on the revenue forecasts) budget, as well as a frustratingly stubborn reluctance by authorities to approach the IMF for assistance – for now. At current yields, the Ghanaian government is likely to pause in issuing Eurobonds and instead use other methods such as multilateral and bilateral financing, as well as an increase in domestic issuance to meet their funding requirements. Zambia has been the stand-out positive story this year, post the election surprise in August. The quarter saw numerous highly encouraging developments, with a reform-friendly budget and fruitful IMF re-engagement. These developments have resulted in a significant strengthening in the Zambian kwacha. We still see attractive opportunities in the local rates market given the anticipated fall in the medium-term inflation outlook, attractive yields and stable currency outlook.