Nigerian, Angolan Currencies Worst Performing in Africa
Top oil producers in Africa, surprisingly, have the worst record of currency performance year to date, according to a report which showed naira has officially lost more than 40% in 2023.
Coming closer to the worst exchange rate condition is Angola, whose local currency has lost about 39% from the beginning of the year to date despite higher crude oil prices in the global market.
In its update, CardinalStone Research said low foreign currency liquidity continues to weaken African currencies.
Down the year, the Egyptian pound has lost 20% of its weight despite the government’s ability to obtain funding support from the International Monetary Fund – terms on condition include devaluation of the Egyptian currency. Kenya shilling has lost 15.2% of its purchasing power due to weak FX inflow greeted by rising demand for imports amidst fiscal pressures.
Ghanaian cedis is down 10.5% year to date even though Accra was enmeshed in debt overload that triggered a series of exchange programmes to boost the local economic performance.
This was followed by Zambia whose kwacha sunk by 10.4% following the country’s debt default and eventual settlement with international creditors. In terms of currency movement, Zambia was a bit better than Rwanda with a 10.5% year-to-date slump in exchange rate.
Mozambique’s metical exchange rate rarely lost up to an inch, just like Uganda’s shilling. Fairly enough for a country with one of the smallest economic balance sheets, the Mauritian rupee has lost 3.1% to exchange rate fluctuation, trailed by 5.9% lost by Botswana Pula.
Despite reform efforts, African currencies continued their descent in August on the back of pent-up FX demand from the manufacturing and energy sectors, especially in Zambia and Kenya, and similar pressures in Egypt and Nigeria.
In its view, CardinalStone Research said African currencies will likely remain mostly pressured in September, belaboured by fiscal inadequacies and elevated foreign currency demand.
“This prognosis is consistent with insights from non-deliverable forwards (NDFs) across the markets, which point to further depreciation over the next 12 months.
“We are of the view that external imbalances underscore the need for more foreign inflows and tighter monetary policy environments to support carry trade”, the investment firm stated in a report.
Analysts expressed that African sovereign credits were presented with new challenges in August, as the wave of military coups triggered fears of possible contagion and resulted in wider yield spreads.
Dollar strengthening added another layer of pressure, according to analysts who noted that US dollar index (DXY) advanced by 1.7%mon on month versus a decline of -1.0% in July.
“We attribute the rise in the DXY to a possible ‘higher for longer rate’ environment, which became increasingly likely after the US Fed ruled out any 2023 rate cut and emphasised the need to drive inflation close to its target of 2.0%”.
According to CardinalStone, the renewed haven appeal of the greenback may have also been supported by economic concerns in China. Elsewhere, uninspiring performances in countries like Kenya, Nigeria, and South Africa weighed on sentiment, it added.
Analysts said for context, reform excitement was blurred in August after Kenya partially reinstated petroleum motor spirit (PMS) subsidies to stabilise retail fuel prices and reduce agitations from the public over the high cost of living.
For Nigeria, CardinalStone Research said relatively tight system liquidity and concerns about the CBN’s net international reserve position fueled sell pressures.
Similarly, the South African local fixed income market was dragged by growing fiscal concerns emanating from higher spending on public wages and a dip in tax receipts, the firm added in its update.
In line with the preceding, the Bloomberg African Bond Index declined by 3.7% in August versus +4.7% in July.
Navigating African local currency sovereign credits could be challenging in September, the investment research said.
Specifically, it noted that with China’s Covid and property crises yet to be resolved and the US Fed still set to remain hawkish for the rest of the year. Naira Steadies as Banks Issue Update on FX Purchase
Analysts said they see scope for negative pass-through from a stronger dollar. Nevertheless, CardinalStone Research expects investors to cherrypick instruments in countries with relative fiscal prudence, as borrowing costs remain elevated compared to the mean levels seen in the pre-tightening era. Naira Gains as CBN Limits Tenure of Banks Chiefs
Nigerian, Angolan Currencies Worst Performing in Africa
