In July 2024, reforms, elections, and rising debt were pivotal themes across African economies. Ethiopia joined Nigeria, Ghana, Egypt, and Kenya in implementing comprehensive macroeconomic reforms to unlock $16.6 billion in multilateral funding. The country liberalised its foreign exchange market by removing import restrictions and allowing the Ethiopian birr to float freely against major currencies for the first time this century.
As seen in Egypt, the Ethiopian reforms will likely create a more structured foreign exchange market, enhancing trade competitiveness and reducing currency risks as parallel market activities diminish. These reforms spotlight new investment opportunities in Ethiopia and the wider East African Community (EAC), which has outperformed sub-Saharan Africa’s growth twofold over the past decade.
East African countries are becoming hubs for tourism and technology investments, evidenced by the 2.2x growth in start-up funding from 2019 ($110 million) to 2023 ($247 million). However, as seen in Nigeria, poorly implemented reforms
South Africa
Inflation and interest rate decisions
In June, the headline inflation rate slowed to 5.1% (y/y) from 5.2% (y/y) in May 2024 and down 0.3 percentage points from 5.4% in June 2023. This deceleration was primarily due to lower fuel, utilities, and transportation costs. Weaker global oil prices reduced fuel (petrol and diesel) prices, lowering domestic pump prices and easing transportation costs.
However, inflation risks persist, as shown by the increase in the m/m food sub-index from 0.2% in May to 0.5% in June. Rising import costs for food items like milk and cereals and domestic supply challenges due to dry weather conditions in key growing regions, high input costs (fertilisers), and supply chain issues are driving up prices. For instance, global prices for dairy products, sugar, and oils rose in June due to adverse weather conditions impacting output in key producing regions, particularly the European Union. These commodities are imported into South Africa for raw consumption and input materials for other products.
Waning base effects and rising food inflation risks due to adverse weather conditions are expected to stoke inflationary pressures in the coming months. Due to anticipated higher food prices, the July and August inflation figures will likely remain above the South African Reserve Bank’s (SARB) midpoint target range of 4.5%. Food accounts for roughly 20.3% of South Africa’s CPI basket items, meaning elevated food prices will negatively impact the headline inflation rate. As a result, our inflation predictions are between 5% and 5.5%, slightly above the SARB’s revised Q3 2024 inflation forecast of 4.8%.
To mitigate these inflationary risks, the SARB’s monetary policy committee held rates for the 15th consecutive month at their July 18 meeting, aligning with our expectations. Although the voting amongst the six-member committee was split, with two members supporting a rate cut to ease borrowing costs and support output growth, the central bank remains committed to curbing price pressures. By keeping rates relatively high at 8.25%, the SARB aims to anchor inflation expectations and support the rand. In the near term, the SARB will keep interest rates high until inflation hits its mid-point target (4.5%). This means that yields on fixed income instruments (T-bills) that fell 31 basis points (bps) between June and July for the 12M tenor are expected to pick up, increasing returns for investors.
Currency risk
The South African rand depreciated by 0.31% from R18.21/$ in June to close at R18.27/$ in July. The decline follows a steady appreciation between June 28 and July 12 due to sustained positive market sentiment from easing political tensions and the Government of National Unity (GNU) coalition's perceived expectation of efforts to promote inclusive growth.
The currency movements were mainly influenced by the performance of the US dollar, which strengthened as the Fed held interest rates at 5.25-5.5%.
The stronger US dollar has kept investors bullish on government-backed securities in advanced economies. This trend increases the risk of reducing capital inflows into South Africa, especially portfolio investments that rose from R3.68 billion to R4.15 billion between Q1 2023 and Q1 2024. This bearish market sentiment negatively impacted the performance of the rand.
Still, we expect the rand to be relatively more stable in the coming months. The US Fed has hinted at rate cuts in the upcoming meeting in September as inflation rates are quickly cooling towards its 2% target. This means investors will likely rebalance their portfolios toward stable emerging markets in Africa like South Africa to garner favourable yields. As of July, the inflation-interest rate differential in South Africa stood at +3.15%, indicating positive real rates of returns on investments. Among the six countries tracked in this report, South Africa has the third highest real rate of return on investments after Kenya and Ghana, respectively.
Lower global interest rates are also likely to push investors towards safe-haven assets like gold, increasing price and supporting export earnings for South Africa. As of August 1, the gold futures price for the December 2024 contract ($2,491/t.oz) was 1.88% above the spot price of $2,445/t.oz. Higher gold prices point towards a positive current account balance for South Africa in the near term, easing currency pressures.
With the rand expected to improve over the coming months, import costs will likely ease, supporting output growth. We predict the rand to end Q3 2024 at R18.4/$, up from R19.1/$ in Q1 2024.
In June, South Africa’s purchasing managers index fell to 49.2 points from 50.4 points in May 2024 due to bearish business confidence and weak demand. In Q1 2024, the economy contracted by 0.1%, down from 0.3% in the previous quarter. We expect growth in Q2 and Q3 2024 to slightly edge higher on better macroeconomic fundamentals. The International Monetary Fund (IMF), in its latest World Economic Outlook (WEO) report, retained South Africa’s 2024 GDP growth forecast at 0.9%, citing the positive impact of the substantially reduced load shedding on output levels.
Overall, South Africa will be marked by a relatively stable political climate in August, with improving market confidence due to a better-performing rand and higher interest rates.
Egypt
Inflation and interest rate decisions
Price pressures are mixed in Egypt. While necessities like bread and fuel are more expensive due to the country’s reform efforts, luxury items like cars are seeing price declines due to higher supply. As part of the conditions for its IMF program, Egypt removed subsidies on bread and energy-related items between March and June to expand the government’s fiscal space. As a result, the prices of these items have more than doubled, heightening near-term inflation risks. However, due to base effects, the headline inflation rate (y/y) continued the downward trend for the 16th consecutive month to 27.5% in June, the lowest level since January 2023.
With inflation risks persisting, shown by the jump in the m/m inflation rate from 0.7% in May to 1.6% in June, the Central Bank of Egypt (CBE) kept overnight deposit rates unchanged at 27.25% for the fifth time since March 2024 to curb price pressures and support the currency, in line with Stears’ expectations. The CBE paused rate hikes in July to ease the impact of higher lending rates on the real sector, support output, and positively influence business expectations.
In the coming months, we expect the disinflationary trend in y/y headline inflation to continue towards 25% due to favourable base effects, though underlying inflation will likely rise. The m/m headline inflation rate is expected to increase further towards 2.0%, indicating the current disinflationary trend is temporary. With rising domestic commodity prices, consumer demand will remain weak, negatively impacting business revenues in the near term.
The higher interest rate environment will keep businesses' borrowing costs high, likely slowing growth. However, high interest rates are attracting continuous investment inflows as yields on fixed-income instruments remain elevated. In July 2024, all 12M T-bill auctions were oversubscribed twice, highlighting robust investor appetite. Yields on the 12M bills increased from 25.9% in June to 26.24% in July.
Comparing the inflation rate (27.5%) with the overnight deposit rate (27.25%), the real rate of return is marginally negative. However, we expect a reversal towards a positive real rate of return in the near term, and this trend will likely continue until year-end, offering investors attractive returns. This is barring any significant domestic or external shocks that will alter the trend. Since implementing reforms, Egypt has seen an upsurge in capital inflows from multilateral and bilateral creditors such as the IMF ($8 billion) and the UAE ($35 billion), supporting reform efforts such as removing bread subsidies.
Currency risk
With the consistent inflow of capital into Egypt, foreign exchange reserves increased by 0.35% from $46.1 billion in May to $46.4 billion in June. Compared to June 2023 ($34.8 billion), reserves are up 33.2%.
The Egyptian pound steadily depreciated in July to close the month at E£48.62/$ from E£48.08/$ at the end of June. This follows a brief appreciation from E£48.06/$ on July 10 to E£47.99/$ on July 14, after the inflation numbers were released. However, since then, downward currency pressures have persisted, partly due to escalating tensions between Israel and Hamas after ceasefire talks faltered during the month.
Like in South Africa, the performance of the Egyptian pound was also partly driven by the movements in the US dollar. While we expect the US dollar to lose steam in the coming months because of lower interest rates, we still foresee currency pressures in Egypt sustained over the short term, though with less aggressive swings than the Nigerian naira. The downward currency pressures will be driven by lingering tensions in the Middle East and elevated inflation risks. In Q3 2024, we predict the Egyptian pound will trade at E£50.3/$, marginally down from E£48.10/$ in Q2 2024.
Amid the reforms, access to dollars for imports has improved, and we expect this trend to continue in the coming months. This will likely sustain the increase in the supply of big-ticket items like cars. However, consumer demand will remain considerably weak as Egyptians prioritise demand for necessities over luxury items in the near term. This points to a possible slowdown in GDP growth. The IMF predicts the Egyptian economy will grow by 2.97% in 2024, down from its 2022 growth of 6.65% and the country’s ten-year growth average of 4.39%.
In August, Egypt will be marked by rising inflation risks from food and fuel prices and shrinking consumer wallets. Still, investor sentiments towards the economy will be positive despite lingering Middle Eastern tensions. The currency will remain volatile, but swings will be manageable, reducing economic uncertainty in the near term.
Nigeria
Inflation and interest rate decisions
Like Egypt and South Africa, Nigeria faced significant inflationary pressures in July, primarily from food and energy prices. The price of petrol increased by roughly 10% between June and July as queues resurfaced at filling stations caused by scarcities. Meanwhile, staples like yams, tomatoes, and beans are more expensive, increasing the cost of living.
Per the June inflation headline numbers released by the National Bureau of Statistics (NBS), inflation edged higher, though rising at a slower pace, to 34.2% (Stears forecast: 35.27%). The m/m inflation rate, which had declined for three consecutive months, reversed the trend to increase from 2.14% in May to 2.31% in June, emphasising that near-term price pressures are still potent in the country. The inflation dynamic in Nigeria is underpinned by lingering structural deficiencies that impede agricultural productivity, such as informal taxation, insecurity, and post-harvest losses. Higher fuel costs also contribute to upward commodity price trends in retail outlets and open markets nationwide.
The downward trend in the naira also exacerbates inflation risks. In this light, the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) decided to increase interest rates by an additional half percentage point to 26.75%. This makes the cumulative interest rate hike 800 basis points since the monetary tightening cycle began in February 2024—the highest rate since the MPC was established in 2007. Stears predicted a 60% chance of the MPC holding a 40% chance of hiking between 25-100 basis points at the July meeting. Notably, our scenario prediction of the hike was solely premised on the apex bank increasing rates due to heightened exchange rate pressures, which materialised.
The CBN’s decision to raise interest rates moved the market, as yields on treasury bills increased across the 3M, 6M and 12M tenors at 18.5%, 19.5% and 22.1%, respectively, in July, compared to June. There was only one primary market auction in July (24th), and it was after the MPC meeting on the 23rd. Only the 12M tenor was oversubscribed almost 2x.
This indicates robust demand from investors for higher returns, a trend we expect to continue in the near term. We will likely see more rate hikes in the upcoming meetings, which align with the CBN’s commitment to subdue inflation toward its 21.4% year-end target and anchor exchange rate expectations. We still maintain our stance of a cumulative 1000 basis point hike in 2024 to bridge the inflationary gap substantially. Consequently, we expect an additional 200bps rate hike by year-end.
The CBN also adjusted its asymmetric corridor around the MPR from +100/-300 to +500/-100bps, indicating higher borrowing costs for commercial banks from the CBN. The aim of the lever is also to reduce money market liquidity to bring down inflation. What this means in the short term for the broader macroeconomy is that commercial banks will likely continue their restrictions on cash withdrawals as they deposit excess cash with the CBN to get more interest. It also means that if any commercial bank borrows from the CBN at the new interest rate of 31.75%, lending rates to the private sector will likely increase further, dampening output growth prospects.
Unfortunately, this coincides with fiscal authorities' latest 70% one-off tax on foreign exchange rate gains earned by commercial banks until 2025. The windfall tax and high interest rates may reduce banks' profitability and willingness to lend. Consequently, this could dampen economic growth, limit access to credit for businesses and consumers, and potentially exacerbate inflationary pressures as financial institutions pass on the costs to their clients.
In the coming months, we expect Nigeria’s headline inflation rate to slow as base effects kick in amid the harvest season, which could increase the supply of staples like yams and bring down prices. The Federal government’s 150-day import duty suspension on food imports will likely support this trend. Still, due to the exchange rate volatility, inflation risks remain elevated, worsening living standards for Nigerians. Attesting to the public discontent with the current economic environment, Nigerians started the #EndBadGovernance ten-day protest on August 1. Considering the disruptive fallout of the #EndSars protest in 2020, this planned protest could further douse investor and business sentiments towards Nigeria.
Currency risk
Since the announcement of the protests in the last week of July, the naira has steadily depreciated at the official and parallel markets. The official rate moved from ₦1,505.3/$ on June 28 to a record low of ₦1,621.1/$ on July 30 before appreciating mildly to close the month at ₦1,608.7/$. At the parallel market, the currency depreciated to ₦1,640/$ before closing at ₦1,610/$. This brings naira YTD depreciation to 44.1% and 24.8% at the official and parallel markets. Lingering forex supply challenges primarily drive the naira’s downward trend amid rising demand, especially as importers try to take advantage of the 150-day import waiver. The average daily FX turnover at the official market slid 21.3% from $242.7 million in June to $190.9 million in July.
Additionally, the naira’s decline occurred despite the $2.6 billion increase in foreign exchange reserves between June and July. Reserves are up partly due to higher oil export earnings driven by rising production and the World Bank’s $1.5 billion support fund.
With currency risks persisting, we expect the CBN to intervene, albeit staggered, in the foreign exchange market to stabilise the rate in the short term. While a weaker naira means higher export earnings in local currency terms and increased federal accounts allocation to the tiers of government, it does not equate to economic development. Nigeria’s track record with high recurrent expenditure attests to this, and the sentiment holds despite the proposed ₦6.6 trillion supplementary budget that shows a 50% budget allocation to capital spending.
Currency pressures will likely persist, increasing business import costs and negatively impacting prices. We predict the naira to end Q3 2024 at ₦1,569/$ from ₦1,415/$ in Q2 2024. Unfortunately, the highly uncertain and challenging business environment will continue to force investors to go long on dollar positions, continuing the loop of heightened currency pressures. The IMF revised Nigeria’s 2024 growth forecast downwards from 3.3% to 3.1%.
Rising inflation, exchange rate pressures, weak consumer demand and social instability will characterise the Nigerian economy in August. The outcome of the #EndBadGovernance protests will largely shape the macro economy and investor sentiments. How the federal government handles the protest through dialogue, policy reversals, or brute force will determine whether investors and creditors will bring in the much-needed capital in the near term. Nigeria’s sovereign debt risk premium is already rising.
Ghana
Inflation and interest rate decisions
Presidential election campaigns have kicked off in Ghana, with the main opposition party, the National Democratic Congress (NDC), leading the way. President John Mahama (2012-2017) is the NDC’s party flag bearer ahead of the December 2024 elections and has promised to eradicate corruption and provide jobs for the youth.
Mahama’s plan to regain the presidency is fuelled by his track record where Ghana experienced economic prosperity. Between 2012 and 2017, Ghana’s inflation averaged 14.2%, below the recent average (2018-2023) of 17.8% and slightly above the 13.2% in the five years preceding his tenure. Growth was also impressive at an average of 4.2%, above the latest IMF projections of 2.8% in 2024. The cedi traded at ₵4.4/$ in 2017 compared to the ₵14.9/$ as of July 2024, and debt-to-GDP ratio levels were lower at 57% in 2017 compared to 86.1% in 2023.
While it is too sudden to call the outcome of the elections, a weighted average polling data of first-time voters in Ghana by Global InfoAnalytics, a non-partisan policy and politics research and insights company, shows a Mahama lead over the incumbent party’s (New Patriotic Party: NPP) candidate, Mahamudu Bawumia. The current political climate suggests a highly contested election with risks of instability that investors will keenly observe. As for monetary policy authorities, election campaign spending is an injection into the economy that could induce inflation through a higher money supply. As of June 2024, broad money supply (M2) grew by 34.2% compared to a year ago.
Higher money supply growth coinciding with heightened food price pressures, currency depreciation and weaker base effects will likely elevate inflation risks in the near term. In June, the headline inflation rate moderated to 22.8% from 23.1% in May due to the sustained tight monetary stance, base effects and lower service costs. However, food inflation is likely to rise, evidenced by the 2.4ppt rise in the m/m food inflation to 5.1% in June from 2.7% in May.
Anticipating these risks, the Bank of Ghana (BoG) left rates unchanged at 29.0% at its July 18 MPC meeting. The aim is to rein in inflation further, anchor inflation expectations and support the cedi. We expect the BoG to retain its tight monetary policy stance in the near term until core inflation (the bank's closely watched inflation sub-index) trends down from 21.6% (June 2024) to the Bank’s 7-10% target. Additionally, with interest rates above the inflation rate, investors will likely flock towards asset classes in Ghana, increasing capital inflows in the short term. Among the six countries covered in this report, Ghana currently has the second highest real rate of return on investments (+6.2%) after Kenya (+8.7%), offering favourable returns to investors. In July, the 12M T-bill rate increased marginally from 27.8% to 27.9%.
Currency risk
While we expect the high interest rate environment and weaker US dollar to shore up the Ghanaian cedi, the currency’s performance in July shows that currency stability in the short-medium term will come gradually. The cedi depreciated throughout July, with a daily average loss of 0.03%. The downward currency trend happened despite the IMF’s $360 million support fund.
Ghana's currency is also susceptible to changes in global gold prices due to its impact on export earnings. Like South Africa, lower global gold prices negatively impacted market sentiments towards the Ghanaian economy, translating to a bearish currency performance. The weaker currency will continue to increase importation costs of food and energy-related items, which will stoke inflation in the near term. We predict the cedi to end the third quarter of 2024 at ₵15.2/$ from ₵13.8/$ in Q2 2024.
Overall, Ghana will be characterised by the campaign activities leading up to the December elections, food inflation risks and currency pressures in the coming months.
Kenya
Inflation and interest rate decisions
With over 5 weeks of protests and another planned demonstration set for August 8, the Kenyan economy has faced social tensions over the past month. Moody’s downgraded Kenya’s sovereign credit towards junk status in July from B3 to Caa1, citing rising debt and a widening fiscal deficit. Investor sentiments are also bearish towards the Kenyan economy, evidenced by the undersubscription of longer-dated T-bills (6m and 12M) at the primary market auctions in July. Notably, the 3M tenor was oversubscribed, meaning investors seek to minimise risks and exposure to future market volatility.
Since the protests, fiscal authorities have withdrawn the 2024 finance bill, cut expenditures by over 20% from the 2024/2025 budget, and reshuffled the ministerial cabinet to include four allies of Raila Odinga, the leader of the strongest opposition party in Kenya. However, these moves have yet to substantially calm the tide. Kenyans still call for President Ruto’s resignation.
Despite the risks of political complexities, key macroeconomic indicators are improving. In July, Kenya’s headline inflation rate (y/y) declined for the sixth consecutive month to 4.3% (Stears forecast: 3.8%) from 4.6% in June. This is the lowest inflation rate since September 2021. Inflation is steady at the lower end of the central bank’s target range of 3-7%. Lower food, utilities, fuel, and transportation costs primarily drove the decline in inflation, partly due to easing import costs and improved food supply. The disinflationary trend persisted month on month, highlighting declining inflation risks. The ease in inflation will likely improve consumption levels, albeit gradually, in the short to medium term.
The next MPC meeting is scheduled for August 6, and we expect the Central Bank of Kenya (CBK) to retain its policy rate of 13.0% to re-anchor exchange rate expectations and bolster investor sentiments. We expect the government to raise more T-bills and bonds to raise finance from domestic investors. However, as seen in July, investors will remain cautious, primarily demanding shorter-dated securities. We expect the CBK to keep interest rates higher for longer despite the current disinflationary trend.
Currency risk
After a steady 24.11% appreciation from Ksh160.75/$ in January 2024 to Ksh129.53/$ in June 2024, the Kenyan shilling depreciated throughout July, losing 2.30% during the month to Ksh132.57/$. Notably, the Kenyan shilling appreciated marginally (0.58%) between July 30 and 31, partly due to the positive inflation data release and a possible drawdown from forex reserves by the CBK to intervene in the market. In the last two weeks of July, foreign exchange reserves steadily declined by 6.28% from $7.80 billion in June to $7.31 billion.
The decline in investor confidence and foreign exchange reserves suggests that currency risks persist in Kenya due to the country's ongoing social and political tensions. This points to higher import bills and a possible increase in producer prices in the near term.
Looking ahead, the lingering political uncertainty in Kenya will exacerbate the economic challenges, negatively influencing investor sentiments. Social and political challenges can accelerate capital flight, further straining foreign exchange reserves. The shilling’s depreciation will likely fuel inflationary pressures as the cost of fuel and food imports rises, which may dampen economic growth prospects. We forecast the Kenyan shilling at Ksh131/$ by the end of Q3 2024, down from Ksh128.7/$ in Q2 2024.
Additionally, bearish domestic and international investor sentiment will further dampen the overall economic environment, further straining the government’s ability to meet the 2024/2025 budgetary needs, debt and interest payments, and reduce fiscal deficits.
Addressing the fiscal challenges in Kenya while managing the current public discontent will be pivotal for Kenya’s economic development in the coming months. The outcome could quickly reverse the gains from lower price pressures as exchange rate volatility persists. More synergy between fiscal and monetary policy measures to provide adequate economic outcomes in Kenya has become imperative to avoid further downgrades and encourage more funding from multilateral and bilateral lending institutions. These funds will be critical for Kenya’s domestic debt relief measures in the short term.
Ethiopia
On July 29, Ethiopia restructured its foreign exchange market to a free float from the managed float system prior. This means that the exchange rate will now be determined by the market forces of demand and supply rather than the National Bank of Ethiopia (NBE).
Commercial banks can now buy/sell foreign currency at freely negotiated rates. The NBE intends to make limited interventions in the early days of this change in the FX regime to support the market should disorderly conditions occur. Investors also now have free access to trade Ethiopian securities.
Like Nigeria, the Ethiopian government also removed all capital control measures by removing forex import restrictions on 38 products to enhance market accessibility. The full-form reform package also includes investment incentives, such as reinstating benefits to companies with Special Economic Zones, including the ability to retain 100% of their foreign exchange earnings.
Over the next three years, Ethiopia took these steps to unlock about $16.6 billion of pooled funds from the IMF, the World Bank, and other creditors. The reforms followed the country’s default of a $33 million Eurobond coupon payment in December 2023.
In the last five years, Ethiopia has been marked by the Tigray civil war, rising debt (47.09% of GDP), and heightened inflation (28.7%: December 2023). Like other African countries, the coronavirus pandemic and fallout of the Russia-Ukraine war exacerbated these trends, triggering capital flight and high economic uncertainty. Foreign Direct Investments (FDI) into the country declined considerably by 23.47% from $4.26 billion in 2021 to $3.26 billion in 2023.
Inflation and interest rate decisions
The decision to float the currency means that import costs will rise in the near term, potentially increasing price pressures. Ethiopia’s inflation rate (y/y) eased to 19.9% in June, the lowest level since May 2021. The decline was driven by lower food and non-food products. However, inflation rose m/m to 0.9% from 0.5% in May, spotlighting lingering inflation risks.
The impact of the currency devaluation will be minimal on price pressures in the near term. This is because importers were already bringing in commodities with a parallel market rate of around Br111-120/$ before the devaluation. Hence, we do not expect prices to change drastically in the new forex market structure. We predict the headline inflation rate for July and August within 18-19%. Additionally, as part of the social safety net measures, the government initiated temporary subsidies on significant food items to ease the short-term pain of consumers. This was possible because of the immediate disbursements by the IMF ($1 billion) as part of its three-year $3.4 billion bailout package for Ethiopia.
In line with these reforms, the NBE adjusted its monetary policy framework from monetary aggregates to interest rate-based. Like other major African economies, especially within the East African Community (EAC), the NBE will adjust interest rates based on prevailing market conditions. At the July meeting, the NBE set its national bank rate at 15%, 4.9ppt below the current inflation rate.
Currency risk
After the floating rate exercise, the Ethiopian birr depreciated by 24% from Br57.8/$ to Br74.2/$, making it the third worst-performing currency among the nine tracked by Stears. We forecast the birr to trade at Br79.88/$ at the end of Q3 2024, down from Br57.90/$ in Q2 2024.
The new exchange rate regime and removal of capital controls will increase investor confidence in the Ethiopian economy, especially as the multilateral agencies lend support. The initial findings from the IMF and World Bank will provide the necessary guardrails to shore up Ethiopian reserves, which have declined 23.55% to $3.05 billion in the last four years. The country could also see improved credit ratings in the coming months. As of November 2023, Fitch downgraded Ethiopia’s foreign currency sovereign bonds from CCC- to CC, further down the junk territory.
The devaluation of the birr suggests that the currency had been previously overvalued; that is, the official rate was trading above the actual market rate. As the currency moves towards an expected fair value of Br95.2/$, volatility will ensue. However, with the necessary dollar cushions available, we do not foresee sharp swings in the currency as in Nigeria, which adopted the same mode of reforms within a short time frame.
Additionally, capital inflows into Ethipoa will likely improve as investors find it easier to bring in capital and exit. This will support Ethiopia's economic recovery in the near term towards the IMF’s optimistic growth forecast of 6.49% in 2025, up from 6.23% in 2024.
Overall, Ethiopia will likely be characterised by how fiscal and monetary policy authorities manage these reforms in the short to medium term to steer the country toward high growth, low inflation, bullish investor sentiments and robust consumer demand.
