As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFK Insider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
A Currency Bloodbath
Earlier this year, AFKInsider columnist Jeffery Cavanaugh predicted a rough year for African currencies as the US Fed ended quantitative easing on the back of improving employment numbers.
In 2014, African currencies depreciated an average of 10.4 percent as the US dollar strengthened against all major currencies in the world and commodity prices, which are a major revenue earner for many countries in the continent, fell to record lows.
With these external factors persisting into the new year, the rout on nearly all African currencies has increased in 2015.
Ghana, a country whose currency, the cedi, has never gained against the dollar since it was taken off a fixed exchange rate in 1983, has shed 22.8 percent to a 21-year low, making it the worst performer among the 24 African currencies tracked by Bloomberg.
Others that have plunged include: the South African rand, down nearly 9 percent this year to a thirteen-and-half-year low of 12.7105 per dollar; the Kenyan shilling that has fallen 6.8 percent to a three-year low and the Angolan kwanza that has been hurt by falling oil prices.
“Wherever you care to look, our currencies are falling off a cliff and are in free fall,” Aly Khan Satchu, a Nairobi-based financial analyst said a column published by The Star.
“Last time I checked the only currency in Africa that had appreciated in 2015 against the dollar was the Malawi kwacha,” he added.
Weakening currencies have put regulators in several countries across the continent on a defensive mode. While some have resorted to hiking interest rates and placing restrictions on currency trading, others have devalued their currencies to attract foreign investments.
After weeks of speculation, Nigeria, Africa’s leading economy and largest oil producer, devalued its currency by 8 percent on November 25 in an effort to contain inflation as world oil prices retreated.
Since then the country’s central bank has introduced tighter trading rules to limit speculation by commercial bank traders and increased its benchmark interest rate to 13 percent.
There are even expectations that the Central Bank of Nigeria might devalue the naira once again if its foreign exchange reserves continue dropping.
Reuters reported on Friday that the Angolan central bank had also devalued the kwanza by 6 percent against the greenback, a move analysts said was aimed at stimulating foreign currency inflows eroded by falling global oil prices, the country’s main revenue earner.
Tanzania, whose shilling is the second worst performing this years after the Ghanaian cedi and at a record low against the dollar, restricted the use of foreign exchange swaps and forwards on the local currency but that has done little to slow demand for dollars and the depreciation.
Dollar Is King
In Neighboring Kenya, the central bank bought forward its monetary policy committee meeting to June 9, where analysts expect a 100 basis point hike in the benchmark lending rate to 9.5 percent in a bid to stem inflation and consequently the shilling’s slide, Bloomberg reported.
Analysts however say all these efforts by regulators will provide little or no reprieve to local currencies in the face of a globally stronger US dollar.
Most of the currencies are seen falling to new lows against the greenback in coming weeks, if not months, as foreign investors exacerbate local currencies rout by moving out of assets they perceive risky in the region and into dollar denominated ones.
“I believe the dollar has now achieved escape velocity. Therefore, in my view, the trend is your friend and there is going to be more blood in the water,” Satchu said.