Guy Report Africa

FICCResearch
Africa:LocalMarkets:Monthly
Stillsomejuiceinthebonds
15July2010
StephenBaileySmith*
Stephen.BaileySmith@standardbank.com
StevenBarrow*
Steven.Barrow@standardbank.com
HenryFlint*
Henry.Flint@standardbank.co.za
MichaelKeenan*
Michael.Keenan@standardbank.co.za
PhumeleleMbiyo*CFA
Phumelele.mbiyo@standardbank.co.za
AtusayeMughogho*
Atusaye.Mughogho@standardbank.co.za
DmitryShishkin*CFA
Dmitry.Shishkin@standardbank.com
SeamusVasey*
Seamus.Vasey@standardbank.co.za
Index EU/US (EUR/USD) Angola (AOA) Botswana (BWP) DRC (CDF) Egypt (EGP) Ghana (GHS) Kenya (KES) Malawi (MWK) Mauritius (MUR) Mozambique (MZN) Nigeria (NGN) South Africa (ZAR) Tanzania (TZS) Uganda (UGX) Zambia (ZMK)
Page 3 6 8 10 12 14 16 18 20 22 24 26 28 30 32
African FX outlook: lagging the EUR/USD upside correction
Last months rather sanguine expectation of African FX performance against the USD proved 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 currencies 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 African 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 interest rates such as Egypt and Ghana and even Angola and DRC, although access remains 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 possibly 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.
Please refer to the disclaimer at the end of this document.
Africa Local Markets Monthly 15 July 2010
African FX returns: 1-month versus the USD
6.0 3.0 0.0 -3.0 DRC -6.0 Angola Botswana Mozambique
Ghana
Tanzania
Mauritius
1m FX return (USD)
African FX returns: 1-month versus the EUR
1m IR return (USD)
Uganda
Tanzania
Mauritius
1m FX return (EUR)
African FX returns: 3-month versus the USD
1m IR return (EUR)
Uganda
Tanzania
Mauritius
3m FX return (USD)
African FX returns: 3-month versus the EUR
3m IR return (USD)
24.0 16.0 8.0 0.0 DRC -8.0 Angola Botswana
Mozambique
Ghana
Uganda
Tanzania
Mauritius
3m FX return (EUR)
Sources: Bloomberg; Global Markets Research
3m IR return (EUR)
2 FX & Rates Research
Uganda
Zambia
Malawi
Nigeria
Egypt
Kenya
South Africa
Zambia
Ghana
Malawi
Nigeria
Egypt
Kenya
South Africa
Zambia
Ghana
Malawi
Nigeria
Egypt
Kenya
South Africa
Zambia
Malawi
Nigeria
Egypt
Kenya
South Africa
Eurozone/United States
EUR/USD outlook
-1-m EUR/USD 1.245 Previous +1-m forecast 1.20 Actual current spot 1.239
Steven Barrow
New +1-m forecast 1.17
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 to lie in the Eurozone, given the significant fiscal consolidation 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 stress tests 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 with flying colours. By the same token, EUR/USD weakness is not going to go away either.
Daily EUR/USD: head-and-shoulders bottom forming

Price USD 1.5 1.45 1.4 1.35 1.3 1.25 1.2 1.15 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
Source: Reuters
US rates market outlook
Fears of a double-dip in the US economy are overdone 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 reasons: some fiscal incentives have ended with devastating 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 significant 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 Institute), theres no doubt that theres been some weakness recently but their ability to predict recessions, 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 do with tensions in the US banks. And, with US treasuries 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 removes 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 following for at least another six months after the commitment 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 treasury market. We dont need to see a double-dip to bring this about, just lacklustre growth, high unemployment and low inflation.
Changes in the yield curve

5.0
Inflation developments
7.0
3.5
4.5
2.0
2.0
0.5
-0.5
-1.0 1-m 3-m 6-m 2-y 5-y 10-y 30-y 14/07/2010 14/06/2010 1-m forecast
-3.0 Oct-04
Mar-06
Jul-07 Core CPI (YoY)
Nov-08
Mar-10
CPI (YoY)
Source: Ecowin
Fed funds target
Sources: Standard CIB Global Research
EUR rates market outlook
The ECB is attempting to normalise liquidity conditions 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 conditions, it could even cause the bank to reverse completely 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 sector. 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 trying 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.
Changes in the yield curve

4.0
5.0
3.0
3.5
2.0
2.0
1.0
0.5
0.0 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 Sep-04
Feb-06
Jul-07
Nov-08
Apr-10 ECB refi rate
CPI (YoY)
Source: Ecowin
Core CPI (YoY)
Source: Global Markets Research
Angola
USD/AOA outlook
-1-m USD/AOA Short USD % return (including interest rate difference) 92.5 Previous +1-m forecast 92.5
Stephen Bailey-Smith
Actual current spot 92.5 1.4
New +1-m forecast 92.5 1.0
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 of risk 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 endJan 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 fundamentals. 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.
Weekly USD/AOA: 92.5 mid looks like the new normal

Price /USD 96 92 88 84 80 76 72 O N D Q4 2008 J F M Q1 2009 A M J Q2 2009 J A S Q3 2009 O N D Q4 2009 J F M Q1 2010 A M J Q2 2010 J A Q3 10 95.393 91.808
Source: Reuters
AOA rates market outlook
We have argued for some time that Angolan interest rate yields would come down aggressively once confidence 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 monetary 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 allow banks 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 inflation 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 reference 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 amendments 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 rate down to 20% or even below by end 2010.
Auctions
Date
Auction
Amount (AOA m)
Yield (%)
8-Jul-10 8-Jul-10 8-Jul-10
28-d T-bill 63-d T-bill 91-d T-bill
990.71 976.21 963.72
14.0 15.0 17.0
8-Jul-10
182-d T-bill
923.48
17.84
8-Jul-10
365-d T-bill
835.83
20.0
Changes in yield curve

YTM % 30.0
32 %
25.0
24
20.0
16
15.0
10.0 28-d 3m forecast 63-d 91-d mid-Jun 10 182-d 364-d mid-Jul 10
0 Nov-06
Oct-07 CPI y/y
Sep-08 91-d T-bill
Jul-09
Jun-10 Rediscount
Sources: BNA; Global Markets Research
Source: BNA
Botswana
USD/BWP outlook
-1-m USD/BWP Short USD % return (including interest rate difference) 6.964 Previous +1-m forecast 7.2
Atusaye Mughogho
New +1-m forecast 7.10 -1.0
Our USD/BWP forecast last month proved too bearish. 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 authorities welcome the weaker currency bias in their bid to stimulate 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 revised 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 mining sector which grew a whopping 135.1% y/y in Q1:10, from 21.0% y/y in Q4:09. We expect the rebound 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 improved to 55% from 47% as businesses find the prevailing conditions more favourable. Businesses are also more optimistic about future prospects as confidence 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 volumes 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 management of foot and mouth disease. We agree with the minister of agriculture that not abiding by international standards would prove detrimental to beef exports and place further pressure on the trade deficit.
Weekly USD/BWP: to benefit from ZAR

Price BWP
8 7.5 7 6.5 6 5.5
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
2007
Source: Reuters
2008
2009
2010
BWP rates market outlook
Following the early-Jul decision by the Bank of Botswana 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 mentioned in the past, growth remains the main focus for the authorities. Thus, inflation will not be the authorities focus until such time as they are convinced that growth 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 earlier end of year forecast of 8.0% y/y, and in all likelihood 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 expected 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 central bank remain in discussions over the size of the issuance and its composition. Government has, however, stressed that an issuance programme is still necessary, given the prevailing fiscal pressures.
Auctions Date 05-Mar-10 05-Mar-10 05-Mar-10 05-Mar-10 Auction 182-d T-bill BW006 BW003 BW007 Amount (BWP m) 800 200 192 195 Yield (%) 6.50 7.10 7.32 9.14
%, y/y
10.00
25.0
9.00
18.8
8.00
12.5
7.00
6.3
6.00 91-d 182-d 2-y 5-y 8-y 15-y 1-m forecast 13-Jul-10 23-Jun-10
0.0 Jan-07
Oct-07
Aug-08 Non-tradeable
Jun-09
Apr-10 Tradeable
Headine
Sources: BOB; Global Markets Research
Sources: BOB; Global Markets Research
DRC
USD/CDF outlook
-1-m USD/CDF Short USD % return (including interest rate difference) 903.3 Previous +1-m forecast 900
Atusaye Mughogho
New +1-m forecast 900 2.0
USD/CDF remained relatively flat over the past month, in line with our expectations. We target 900 for 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 the World 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, following 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, following 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 regarding 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

Price /USD
880 840
800
760 720 680 640 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
Source: Reuters
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 10
DRC rates market outlook
The reduction in the bank rate, and expectations for further cuts, by the Banque Centrale du Congo (BCC) from 42.0% to 29.5% in Jul 10, is likely to drive market 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 recommendation 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 supported 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 second 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 following 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 increase 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.
Auctions Date 02-Jul-10 02-Jul-10 30-Jun-10 23-Jun-10 Auction 7-d BTR 28-d BTR 7-d BTR 7-d BTR Amount (CDF bn) 76.241 16.785 76.241 91.200 Yield (%) 39.18 39.73 39.18 38.50

YTM
% y/y
45.0
90.0
40.0
67.5
35.0
45.0
22.5
30.0
0.0 Jan-06 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Jun-10
25.0 7-day 1-m forecast 02-Jun-10 28-day 02-Jul-10
Headline inflation Treasury bills 28-d
Policy rate
Sources: BCC; Global Markets Research
Source: BCC
Egypt
USD/EGP outlook
-1-m USD/EGP Short USD % return (including interest rate difference) 5.674 Previous +1-m forecast 5.64
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 now around 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 fundamentals 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 been much 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 persists, there would be some potential for them to outperform and thus support the EGP.
Weekly USD/EGP: looking overbought

Price /USD 5.7 5.6982 5.68 5.66 5.64 5.62 5.6 5.58 5.56 19 26 April 2010
Source: Reuters
03
10
17 24 May 2010
31
07
14 21 June 2010
28
05
12 19 July 2010
EGP rates market outlook
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 modest 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 increase in Jun 09 was a more modest 0.5% m/m. However, in the 4m between Jul and Oct 09, m/m inflation averaged 1.8%, and we suspect this will be nearer 1.0% over the same period in 2010. The resulting 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 contracting substantially in FY2010/11. On a more positive structural note, the pension reforms presently before parliament are likely to give a significant boost to the domestic bond market as private sector pension funds become much larger participants in the market.
Auctions
Date 6-Jul-10 6-Jul-10 6-Jul-10 6-Jul-10 15-Jun-10 15-Jun-10
Auction 91-d T-bill 182-d T-bill 364-d T-bill 6 Jun 2013 2 Mar 2015 16 Feb 2017
Amount (EGP m) 1,000 2,000 3,000 3,000 1,000 1,000
Yield (%) 10.15 10.50 10.84 11.55 12.25 12.60

14.0
% 30.0
13.0
22.5
12.0
15.0
11.0
7.5
10.0 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 Mar-05
Mar-06
Feb-07
Feb-08 CPI y/y
Feb-09
Feb-10
CBE lending rate
CPI y/y (ex-food)
Sources: CBE; Global Markets Research
Source: CAPMAS
Ghana
USD/GHS outlook
-1-m USD/GHS Short USD % return (including interest rate difference) 1.438 Previous +1-m forecast 1.420
Actual current spot 1.44 -0.5
Despite turning more cautious on GHS last month, we had felt USD/GHS would see some downside correction, especially given our expectation for some EUR/USD upside. The GHS once again underperformed our expectation, meandering up to 1.45/1.46 from around 1.438, despite the EUR/USD upside materialising. 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 surprised 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. Certainly, 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 servicing costs (USD120m) falling due in Q3:10, especially a 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
Price /USD 1.451 1.4 1.3 1.2 1.4074
1.4994
1.1
Q3
Source: Reuters
Q4 2007
Q1
Q2
Q3 2008
Q4
Q1
Q2
Q3 2009
Q4
Q1
Q2 2010
Q3
GHS rates market outlook
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 the length 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 involvement. 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 decline. There is also likely to be a sharp decline in producer 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.
Auctions Date 2-Jul-10 2-Jul-10 2-Jul-10 2-Jul-10 Auction 91-d T-bill 182-d T-bill 1-y note 2-y note Amount (GHS m) 100/3 100/3 100/3 50 Yield (%) 12.86 13.45 13.80 13.80

17.0
% 30.0
15.5
23.8
14.0
17.5
12.5
11.3
11.0 91d 28-May-10 182d 1y 07-Jul-10 2y 3y 3-m forecast
5.0 Oct-04
Feb-06
Jun-07 CPI y/y
Oct-08
Feb-10
91d T-bill
BOG Prime rate
Sources: BOG; Global Markets Research
Source: Ghana Stats Service
Kenya
USD/KES outlook
-1-m USD/KES Short USD % return (including interest rate difference) 80.4 Previous +1-m forecast 82.0 Actual current spot 81.65 -1.3
Phumelele Mbiyo
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 accelerated 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 upside, given that the CBK, as part of maintaining an accommodative policy stance to stimulate the economy, 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 managing the trade-weighted KES exchange rate is unprecedented. 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 stabilising 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 depreciation 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 compared 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 remittances 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

Price /USD 82 82.18 81
80 80.01
79 78 77 76 75 19 26 April 2010
Source: Reuters
03
10
17 24 May 2010
31
07
14 21 June 2010
28
05
12 19 July 2010
KES rates market outlook
Yields are likely to stabilise around current levels over the 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 rates to 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 disinflationary force has been food inflation, down to 4.4% y/y in Jun from 7.2% y/y in Feb when the constituents of 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 dampening price pressures. But the downside momentum of food inflation is likely to dissipate, and eventually reverse some time over the next 6-m. We expect inflation to drift higher over the course of Q4:10, reaching 4.1% y/y by year-end.
Q1:10 GDP growth indicates that the accommodative monetary stance has taken hold. GDP growth accelerated 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 expected 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.
Auctions Date 5-Jul-10 12-Jul-10 14-Jun-10 28-Jun-10 Auction 91-d T-bill 182-d T-bill 364-d T-bill 25-y T-bond Amount (KES m) 4,619 7,685 3,953 7,500 Yield (%) 1.80 1.80 4.20 10.46

YTM 11.0
% 22.0
8.5
16.5
6.0
11.0
3.5
5.5
1.0 3-m 1-y 3-y 5-y 7-y 28-Apr-10 9-y 11-y 15-y
0.0 Jan-07 CPI y/y
Dec-07
Oct-08
Aug-09
Jun-10
1-m forecast
14-Jul-10
91-day T-bill rate
Central bank rate
Sources: CBK; Global Markets Research
Source: Kenya CSO
Malawi
USD/MWK outlook
-1-m USD/MWK Short USD % return (including interest rate difference) 150.8 Previous +1-m forecast 150.2 Actual current spot 150.8 0.4
Phumelele Mbiyo
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 facto peg 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 IMF programme 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 catalysts 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 devaluation. 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. Official reserves amounted to USD177.4m in May, covering 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 by 18.5% in over the same period last year, while average prices were 22.1% higher. Support provided to the agricultural sector has improved yields. The agricultural input subsidy programme, 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 declined. However, the countrys problems are of a mediumterm nature. Even the ramp-up of uranium production and exports is unlikely to eliminate the external imbalance. 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

Price /USD
150 148 146 144 142 140 01

Source: Reuters
18 Jan 10
01
16 Feb 10
01
16 Mar 10
01
16 Apr 10
03
17 May 10
01
16 Jun 10
01
16 Jul 10
MWK rates market outlook
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, compared to 10.7% in Jan. The tight liquidity conditions may account for the decline in demand for paper in recent T-bill auctions. The bid-cover ratio in 91-d auctions has averaged less 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. Meanwhile, 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 dissipating. 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 downward pressure. The marginal decline in the oil price in Q2:10 is likely to lead to some easing of upward pressure 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 season, 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.
Auctions Date 2-Jul-10 2-Jul-10 2-Jul-10 Auction 91-d T-bill 182-d T-bill 273-d T-bill Amount (MWK m) 11 274 461 Yield (%) 7.35 11.49 12.00

YTM
%, y/y 25.0
18.3
18.8
14.5
12.5
10.8
6.3
7.0 91-d 07-May-10 182-d 02-Jul-10 273-d 3-y 1-m forecast
0.0 Jan-05
May-06
Sep-07 Non-food
Jan-09
May-10 Food
Headline
Sources: RBM; Global Markets Research
Sources: NSO; Global Markets Research
Mauritius
USD/MUR outlook
-1-m USD/MUR Short USD % return (including interest rate difference) 32.61 Previous +1-m forecast 33.50 Actual current spot 31.17 4.9
Phumelele Mbiyo
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 possible 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 implications for the Mauritian economy. Europe is the largest export destination for the country, so the authorities 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 pattern that is likely to lead the BOM favouring tradeweighted MUR weakness. Whereas the domesticallyoriented 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 producing export sectors of the economy that are underperforming, underlining the weakness of external demand.
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 posturing, intended to indicate the BOMs preference for a weaker 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 external and domestic demand could lead to a further deterioration of the C/A and possibly the overall BOP.
Daily USD/MUR: likely to be range-bound between 30.20 and 31.20

Price /USD 36 34 32 30 28 26 24 N D J Q4 2008
Source: Reuters
F M Q1 2009
M J Q2 2009
A S Q3 2009
N D Q4 2009
F M Q1 2010
M J Q2 2010
A Q3 10
MUR rates market outlook
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 accommodative monetary policy stance has gained traction, with domestic demand growing strongly. Indeed, the trade imbalance that has resulted with strong import 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, indicating 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 to 4.2% 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. Furthermore, the country is particularly vulnerable to a surge in inflation since most consumer goods are imported.
Auctions Date 9-Jul-10 9-Jul-10 9-Jul-10 9-Jun-10 9-Jun-10 9-Jun-10 2-Jun-10 Auction 91-d T-bill 182-d T-bill 364-d T-bill 2-y T-note 3-y T-note 4-y T-note 5-y T-bond Amount (MUR m) 107 170 223 1,000 278 219 3,000 Yield (%) 3.36 4.04 4.50 5.15 5.75 6.03 7.05

YTM 10.0
% 15.0
8.3
11.0
6.5
7.0
4.8
3.0
3.0 3-m 6-m 1-y 2-y 09-Jul-10 3-y 4-y 5-y
-1.0 Aug-00
Aug-02
CPI y/y
Jul-04
Jul-06
Jun-08
Bank rate
Jun-10
1-m forecast
07-May-10
Sources: BOM; Global Markets Research
Sources: BOM; CSO; Global Markets Research
Mozambique
USD/MZN outlook
-1-m USD/MZN Short USD % return (including interest rate difference) 34.25 Previous +1-m forecast 34.50 Actual current spot 35.0 -1.5
Henry Flint
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 dynamics. Indeed, there still appears to be pent-up or latent demand for FX in the system. Of particular interest is the rising fuel import bill. The latter is a combined 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 placing additional demands on available FX reserves from an import perspective, a weaker MZN against the ZAR 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 Zimbabwe. 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 figurer 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 donors release budget support for the next year. Current estimates places donor commitments for 2011 at USD445m, compared to USD471m in 2010. An addition USD25m has been received from the World Bank in 2010 in response to the international financial crisis.
Weekly USD/MZN: upside pressure resurfacing

Price /USD 36 34 32 30 28 26 26 35.77
33.44
N D J Q4 2008
Source: Reuters
F M Q1 2009
M J Q2 2009
A S Q3 2009
N D Q4 2009
F M Q1 2010
M J Q2 2010
J A Q3 2010
MZN rates market outlook
We expect interest rates to rise further in response to rapid 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 outcomes. 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 important 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 Africa. 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 is the 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 resulted in energy related CPI basket components registering double-digit y/y growth. Other administrative price increases have also contributed 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 further 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 expect a level closer to 12% y/y by Dec.
Auctions Date 30-Jun-10 30-Jun-10 30-Jun-10 7-Jul-10 7-Jul-10 7-Jul-10 Auction 91-d T-bill 182-d T-bill 364-d T-bill 91-d T-bill 182-d T-bill 364-d T-bill Amount (MZN m) 120 20 20 80 35 15 Yield (%) 12.99 13.50 14.10 13.09 13.63 14.20

% 15.50 14.00 12.50
% 20
15
10 11.00 9.50 8.00 91-d Dec-10 182-d Dec-09 364-d Jun-10 5
0 Jan-05
Apr-06
Jul-07
Oct-08
Jan-10 91-d T-bill
CPI Maputo
BOM SLF
Sources: Bank of Mozambique; Global Markets Research
Source: Mozambique National Statistics Institute
Nigeria
USD/NGN outlook
-1-m USD/NGN Short USD % return (including interest rate difference) 151.4 Previous +1-m forecast 150.0
Our expectation for USD/NGN to remain relatively flat over the last month or so proved reasonably appropriate. 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 conversations 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 prevailing 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 distribute oil revenue. On the ability to preserve such a policy, the CBN FX reserves still has huge FX reserves (around 13m import 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 compared to a recent high of USD41.5bn in mid-Apr. Interestingly, 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 constructive 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 suspect 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

Price /USD 159 156 155.87 153
152.11
150
148.54 147 145.54 144 141 M A M J J A S O N D J F M A M J J A
Q1 2009
Source: Reuters
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 10
NGN rates market outlook
Although yields backed up very modestly along the curve over the last month or so, yields remain elevated 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 moderately 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.
Auctions
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 government to the banking sector. Although we see this rate slowing down, public sector credit extension will remain a key source of monetary growth ahead of the elections likely in Q2:11.
Moreover, inflation looks set to remain relatively benign and even break out (to the downside) from the 10-14% 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 influences from some strong m/m increases during strong
Date 1-Jul-10 1-Jul-10 1-Jul-10
Auction
Amount (NGN bn) 31.56 50.35 50.00
Yield (%)
91-d T-bill 182-d T-bill 1-y T-Bond
2.99 3.99 4.84

YTM
35.0 %
12.0
9.0
26.3
6.0
17.5
3.0 8.8 0.0 91d 180d 1y 2y 3y 5y 10y 20y 3m forecast 18-Jun-10

Sources: CBN; Global Markets Research
5-May-10 13-Jul-10
0.0 Jul-01
Sep-03 CPI y/y
Nov-05
Jan-08
Mar-10
90-day T-bill
Source: CBN, NSO
South Africa
USD/ZAR outlook
-1-m USD/ZAR Short USD % return (including interest rate difference) 7.49
Michael Keenan (FX) & Seamus Vasey (Rates)
Previous +1-m forecast 7.55
Actual current spot 7.57 -0.2
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 measures 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 target band (3-6%). Higher wage settlements will not only place the ZAR in a vulnerable light from an inflation 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 further 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

Price /USD 10.5 10 9.5 9 8.5 8 7.5 7 6.5 J F M Q1 2009 A M J Q2 2009 J A S Q3 2009 O N D Q4 2009 J F M Q1 2010 A M J Q2 2010 J A Q3 2010
Source: Reuters
ZAR rates market outlook
The past month saw the release of Q1:10 demandside national accounts. Solid jumps in external and domestic demand were surprisingly robust, but are universally expected to normalise to much lower levels 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 compressed by 30-35 bps over the past month. A lack of solid corporate fixing activity, continued disinflation and heightened rate-cut expectations have all contributed 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 more heavily anchored, curve flattening has resulted. Furthermore, ASW spreads have continued to climb and are in many instances at all-time highs at present. Government inflation-linkers have fallen under moderate weakening pressure over the past few weeks, with the exception of the R189 (2013). This instrument 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 of the next one will be announced on 22 July and conducted on 29 July. The near-term outlook for SAs local interest rate markets is constructive. Standard Banks monetary policy view is for an unchanged rate, although risks of another cut in 2010 are seen as high. Bonds are expected to retain current levels over the next month, with a mild strengthening bias.
Auctions Date 09-Jul-10 09-Jul-10 13-Jul-10 Auction Amount (ZAR m) 3,825; 1,075; 875; 475 200; 140; 95 1,400; 700 Yield (%) 6.57; 6.63; 6.80; 6.84 2.75; 3.08; 3.05 8.48; 8.89
T-bills: 91-d; 182-d; 273-d; 364-d ILBs: R211 (2017); R210 (2028); R202 (2033) Nominals: R207 (2020); R213 (2031)

Nacq 8.50%
%y/y 20 15 10
8.00% 7.50%
5 0
7.00%
(5)
6.50%
6.00% 1-y 7-y 1-m ago 13-y Current 19-y 25-y 1-m forecast
CPI
Source: Statssa
Core CPI
PPI
Sources: JSE; Global Markets Research
Tanzania
USD/TZS outlook
-1-m USD/TZS Short USD % return (including interest rate difference) 1,463 Previous +1-m forecast 1,530 Actual current spot 1,494 -2.0
Atusaye Mughogho
New +1-m forecast 1,530 -2.2
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 retaining its 40% stake in Zain Tanzania. This figure may be upwardly revised as the government has requested a valuation of Zain Tanzanias assets to determine 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 Coffee Board has been forced to set indicative prices in line with global prices, possibly providing an incentive for farmers to increase production and curb smuggling 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. Brazilian 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 following 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 companies to list on the Dar es Salaam Stock Exchange. However, this month AIM-listed Kibo Mining chairperson came out in support of the Act, which may ease investors concerns. He acknowledged that the government 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

Price /USD 1,500 1,425 1,400 1,300 1,200 1,140 1,100 1,050 1,000 900 2004 2005 2006 2007 2000 2008 2009 2010 2010
Source: Reuters
TZS rates market outlook
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 negative real returns. For instance, the 1-y rate stands at 6.36% relative to inflation in May 10 of 7.9% y/y. Conversely, 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 expansionary 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, declining 1.5 pp to 7.9% y/y in May 10. This downward inflation trend has largely been driven by food disinflation. 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 allocation 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 eased 0.9 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 supply growth prior to the elections in Oct.
However, an anticipated electricity tariff hike, if granted, will likely damper the disinflation process. The Tanzania Electric Supply Company has requested a 34.6% tariff hike to ease funding pressures. Plans by the BOT to establish a credit reference bureau are likely to lead to lower interest rates. Regulations under which the bureau will function are already in place and the authorities are currently in the process of identifying two suitable companies to operate the reference bureau. The BOT has blamed the high interest rates charged by commercial banks, at 14.6% in Apr 10, on elevated operational costs to mitigate the risk of default.
Auctions Date 06-Jul-10 06-Jul-10 06-Jul-10 16-Jun-10 Auction 91-d T-bill 182-d T-bill 364-d T-bill 2-y T-bond Amount (TZS bn) 35.0 35.0 30.0 83.4 Yield (%) 3.35 3.92 6.36 8.79

YTM
20.0 %
15.0
15.0 11.3 10.0 7.5 5.0 3.8 0.0 Jan-06 35-d 91-d 182-d 364-d 2-y 5-y 7-y 10-y
0.0 1-m forecast 06-Jul-10 23-Jun-10
Jan-07
Feb-08
Mar-09
Apr-10
Headline inflation Non-food inflation
Food inflation
Sources: BOT; Global Markets Research
Sources: BOT; Global Markets Research
Uganda
USD/UGX outlook
-1-m USD/UGX Short USD % return (including interest rate difference) 2,250 Previous +1-m forecast 2,300 Actual current spot 2,262 -0.3
Atusaye Mughogho
USD/EUR consolidation thwarted the move north in USD/UGX, preventing it from reaching our 2,300 target over the past month. However, we retain our target at 2,300 over the coming month. The uptrend in USD/UGX that we anticipate is likely to be driven by a return of broad-based USD strength. In contrast, BOP developments in Uganda are likely to be supportive of a stronger UGX. The governments conditional approval of Heritage Oils sale of assets to Tullow Oil will go some way towards allaying investor uncertainty regarding the governments policies. Heritage Oil is required to deposit 30% of the disputed USD400m tax bill and provide a bank guarantee for the remainder if they decide to pursue arbitration over the matter. With investors focus firmly on the oil sector, we expect the government to reach an amicable solution with Heritage Oil in the near future. Under pressure from the opposition, civil society organisations and donors, the government finally released very sketchy details regarding production sharing agreements between the government and oil companies. Government expects to receive on average 70% of oil revenues. With no official information available we take this with some scepticism. Nonethe-
less, the start of the government discussion on contracts is a step in the right direction, given the prior lack of transparency.
Current transfers could get a boost from the EUR166m aid package pledged by Ireland. The funds are earmarked for social and private sector development. Interestingly, the Irish foreign minister said that Ireland would not cut aid to priority countries such as Uganda despite Irelands fiscal constraints brought on by the global financial crisis. The BOP will be further buoyed by a USD120m World Bank loan granted at the end of Jun 10. The funds are to be directed to the agriculture sector. An additional USD41m is expected from other donors. Investment in the agriculture sector could benefit exports down the line, which would be UGX supportive. The acquisition of Zain by Bharti Airtel should see a boost in FDI. Bharti Airtel has pledged to invest USD100m in Uganda over the next two years. FX reserves decreased to USD2.73bn as of Feb 10 (5.3 months of import cover), from USD2.75bn in Jan 10.
Daily USD/UGX: 2,300 still on the cards

Price /USD 2,250 2,200 2,150 2,100 2,050 2,000 1,950 1,900 1,850 1,800 02 16 06 20 04 18 01 22 06 20 03 17 Q3 2009 Q4 2009
Source: Reuters
2,294.7
2,099.7 2,045.1
1,849.9
07 21 07 21 04 18 02 16 06 20 04 18 01 Q1 2010 Q2 2010 Q3 2010
UGX rates market outlook
Over the next month, we expect rates to drift lower at the short-end of the curve, while the longer-end of the curve is likely to remain fairly static, with a bias to the downside. The authorities still remain concerned with growth and, as such, are likely to keep in place their loose monetary policy stance. We expect the authorities to maintain this stance for at least the remainder of the year and possibly until the presidential and parliamentary elections in Feb/Mar 11. The BOU will be further encouraged to maintain a loose monetary policy stance, given the benign inflation environment. Despite the temporary increase in inflation to 4.4% y/y in Jun 10, from 4.3% y/y in May 10, we expect the disinflation trend to continue until Q3:10 when 3.3% y/y inflation levels are anticipated. Subsequently, inflation is expected to accelerate to end the year at around 4.6% y/y. Food inflation (27.2% weighting) is likely to be the key driver of the downward inflation trend. Food disinflation has been far more aggressive than we had anticipated. Food inflation eased to 2.4% y/y in Jun 10 from 18.6% y/y at the start of the year. The current harvest is likely to be far better than appeared likely six months ago as the floods experienced during the beginning of the planting season proved not to be significantly disruptive. As a consequence, a favourable harvest is likely to keep food inflation pressures subdued in months ahead.
There are several upside risks to our view. Oil prices are likely to place upward pressure on consumer prices in H2:10. We maintain our constructive oil view and see Brent oil prices rising to USD87 in Q4:10. Higher oil prices are likely to be exacerbated by a weaker UGX. We expect broad-based USD strength (possibly heading to parity against the EUR over the next six months) to push USD/UGX towards 2,500 by year-end. A further source of upside risks to inflation in coming months is a likely ramp-up in pre-election government spending. Such a loosening of fiscal policy, coupled with an accommodative monetary policy stance, could ignite additional upward inflationary pressures in 2011.
Auctions Date 16-Jun-10 16-Jun-10 16-Jun-10 31-Mar-10 Auction 91-d T-bill 182-d T-bill 364-d T-bill 10-y T-bond Amount (UGX bn) 20.0 30.0 40.0 50.0 Yield (%) 4.42 5.81 7.64 11.74

13.0 YTM %
%, y/y 40.0
10.5
28.8
8.0
17.5
5.5
6.3
3.0 91-d 182-d 364-d 2-y 3-y 5-y 10-y 19-May-10 16-Jun-10 1-m forecast
-5.0 Jul-07
Mar-08 Headline
Dec-08 Food
Aug-09
May-10 Core
Sources: BOU; Global Markets Research
Sources: Uganda Bureau of Statistics; Global Markets Research
Zambia
USD/ZMK outlook
-1-m USD/ZMK Short USD % return (including interest rate difference) 5,095 Previous +1-m forecast 5,230 Actual current spot 5,010 1.8
Phumelele Mbiyo
We expect USD/ZMK to reach 5,135 over the coming month. Although global sentiment is likely to roil the pair through its impact on copper prices, an upside bias will probably dominate. Importantly, the trade account continues to improve, helped by copper exports. The cumulative volume of copper exports in the first 5 months of 2010 are 41% higher than the same period in 2009. Thanks to a higher copper price, 81% higher on average over the period, the value of copper exports amounted to USD2.5bn compared to USD3.7bn for all of 2009. The improvement in the overall trade balance has been even more impressive. While monthly exports (in USD) have grown at an average 140% y/y in the first 5 months of 2010, imports have grown at a comparatively sedate 55%. Hence, the trade surplus increased to a cumulative USD852m from a surplus of USD520m for 2009 as a whole. Although impossible to monitor on a regular basis, it appears likely that the financial account of the balance of payments has experienced significant inflows. Given the high copper prices, it is likely that FDI financed through retained earnings of copper mines
has been robust. Additionally, foreign mining firms have persisted with exploration activity and mine development projects.
Dividend outflows, particularly from the copper mines, remains a major downside risk to the C/A. The costcontainment measures mining companies introduced during the global crisis have ensured that most mines have reduced unit operating costs to between USD3,000 and USD4,000 per tonne. Hence, at copper prices that prevailed in the first 5 months of the year, copper mines is expected to have recorded exceptional profitability. Hence, even after earnings have been retained to finance ongoing mine operations, dividend outflows are likely to have been large, perhaps even sufficiently so to plunge the overall C/A into deficit. The possibility that the income account of the C/A has been deteriorating is further strengthened by trends in FX reserves. Since rising to USD1.8bn (4.4 months of imports) in Oct 09 they have remained between USD1.8bn and USD1.9bn, despite the improvement in the trade balance.
Weekly USD/ZMK: reflecting swings in global sentiment

Price /USD 5,400 5,100 4,800 4,500 4,200 3,900 3,600 3,300 J A S O N D J F M A M J J A S O N D J F M A M J J A Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 5,291
Source: Reuters
ZMK rates market outlook
Short-term yields are likely to continue heading higher over the next month, with the 91-d T-bill yield ultimately reaching 8.3% before year-end. Since falling to 1.7% in early Apr, the 91-d yield has risen to 4.9%. Even the 1-y yield has risen to 7.3% from 4.3% in early Apr. The BOZ seems to have begun the liquidity withdrawal process as we have been anticipating. The BOZ resumed open market operations, which has reduced the demand for T-bills and T-bonds. Although the bid-offer spread for T-bills during Q2:10 averaged 1.3 per week, it has fallen significantly from the average of 1.9 during the previous 6 months. T-bills currently offer a negative real return. Inflation fell to 7.8% y/y from 9.1% y/y in May, largely depressed by falling food inflation. It is unlikely that negative real T-bill yields will persist for long. We anticipate that nominal yields will continue to climb, reflecting the removal of excess liquidity the BOZ supplied to the market in late 2009. The accommodative monetary policy stance the BOZ adopted was intended to stimulate domestic demand. Certainly, currently low rates make it attractive for companies to borrow and lock into low funding rates. Indeed, broad money supply growth has shot up to 18.6% y/y in Apr from 5.4% y/y in Jan, indicating that the accommodative policy stance has begun to work. Contrary to our expectations, much of this growth is attributable to growth in demand deposits as well as time and saving deposits rather than foreign currency deposits.
The near-term outlook for inflation looks favourable. With a good harvest, food inflation is likely to remain exceptionally low. However, there are still signs that food disinflation is losing momentum. The rate of decline of local maize prices has stabilised at an average of 8.7% y/y over the past 4 months. Maize prices typically follow a seasonal pattern with m/m price declines between Apr and Jun followed by price increases. Hence, should a similar pattern follow, the likelihood is high that food inflation will rise during the course of Q4:10, pushing headline inflation higher as well.
Auctions Date 8-Jul-10 8-Jul-10 8-Jul-10 8-Jul-10 18-Jun-10 18-Jun-10 21-May-10 Auction 91-d T-bill 182-d T-bill 273-d T-bill 364-d T-bill 2-y T-bond 3-y T-bond 5-y T-bond Amount (ZMK m) 20, 000 20,000 20,000 40,000 30,000 15,400 2,100 Yield (%) 4.87 6.38 6.56 7.30 8.85 10.81 9.49

YTM (%) 19.5
%, y/y 30.0 22.5 15.0
15.0
10.5 7.5 6.0 0.0 1.5 91-d 273-d 2-y 18-Jun-10 5-y 10-y 1-m forecast -7.5 Jan-05 Total
May-06
Sep-07 Food
Jan-09
Jun-10
23-Apr-10
Non-Food
Sources: BOZ; Global Markets Research
Sources: CSO; Global Markets Research
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African FX outlook: lagging the EUR/USD upside correction

African bond outlook: squeezing out the last of the juice

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

Africa Local Markets Monthly 15 July 2010

African FX returns: 1-month versus the USD

6.0 3.0 0.0 -3.0 DRC -6.0 Angola Botswana Mozambique

6.0 3.0 0.0 -3.0 DRC -6.0 Angola Botswana Mozambique

16.0 8.0 0.0 -8.0 DRC -16.0 Angola Botswana Mozambique

24.0 16.0 8.0 0.0 DRC -8.0 Angola Botswana

2 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

New +1-m forecast 1.17

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

3 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

US rates market outlook

Changes in the yield curve

Jul-07 Core CPI (YoY)

Fed funds target

Sources: Standard CIB Global Research

4 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

EUR rates market outlook

Changes in the yield curve

Apr-10 ECB refi rate

Core CPI (YoY)

Source: Global Markets Research

5 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

Actual current spot 92.5 1.4

New +1-m forecast 92.5 1.0

Weekly USD/AOA: 92.5 mid looks like the new normal

6 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

AOA rates market outlook

8-Jul-10 8-Jul-10 8-Jul-10

28-d T-bill 63-d T-bill 91-d T-bill

990.71 976.21 963.72

14.0 15.0 17.0

Changes in yield curve

10.0 28-d 3m forecast 63-d 91-d mid-Jun 10 182-d 364-d mid-Jul 10

Oct-07 CPI y/y

Sep-08 91-d T-bill

Sources: BNA; Global Markets Research

7 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

Actual current spot 6.98 0.1

New +1-m forecast 7.10 -1.0

Weekly USD/BWP: to benefit from ZAR

8 7.5 7 6.5 6 5.5

8 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

BWP rates market outlook

Changes in yield curve

Sources: BOB; Global Markets Research

Sources: BOB; Global Markets Research

9 FX & Rates Research

Africa Local Markets Monthly 15 July 2010

Actual current spot 903.8 2.4

New +1-m forecast 900 2.0

Weekly USD/CDF: sideways range persisting

10 FX & Rates Research