Mozambique’s Inflation and Africa Local Currency Yields

Economics: What you need to know

Mozambique: Headline inflation rose to 4.1% y/y in January from 3.5% in December. Supply-side price adjustments, ranging from depreciating currency to rising food prices, have exerted price pressures. These factors are unavoidable given that they are externally prompted and, as such, we see inflation breaching the 5% mark over the next 12 months. We don’t think the recent 300bp hike in the interest rates will change the inflation trajectory.

Figure 1: Inflation showing signs of acceleration

 

Financial markets: What you need to know

Africa local currency yields: Carry trade interest in Africa has been focused in Ghana and Egypt as both of these markets have decent real yields with relatively stable currencies. Kenya hasn’t seen as much inflow given the lower nominal yields as well as tax related difficulties for offshore investors to execute such trades. In our conversations with clients, there seems to be an off-consensus view that Zambia could generate some returns given the unlikelihood that the currency could weaken by more than 30% in this election year to wipe out the 31% yield offered by the 10-yr bond. The argument is also supported by copper prices, which have surged by 43% on a year-on-year basis. We don’t carry this view as we see the macro risks as too great to justify a fundamental trade recommendation. Instead, we favour carry trades that are underpinned by strong fundamentals such as Egypt and Ghana.

As Nigerian fixed income yields rise, offshore investors are getting excited again about the prospect of investing in Nigeria. Their intent is, however, conditional. Africa Economist and FI Strategist Neville Mandimika takes a closer look at the three conditions raised by interested investors. Kindly access the full video here on YouTube.

Figure 2: Real yields in Africa

 

Source: RMB Markets, Bloomberg