- Fitch Solutions expect broad depreciatory trends for most African currencies over the coming months.
- Rising inflation weighing on real interest rates will be a common trend across the region, while in countries including South Africa weak economic growth will limit policymakers’ capacity for monetary tightening to defend currencies.
- Fitch expects the managed currency regimes of Nigeria and Angola to be maintained. However, risks of steeper declines in foreign reserves in controlling their exchange rates remain due to their exposure to potential volatility in global oil prices, which could put pressure on the sustainability of these policies.
We forecast most African currencies to depreciate over the next six to twelve months. We expect emerging market and frontier economies’ currencies to receive moderate relief from the US Federal Reserve shifting towards a more neutral stance following its March policy meeting, at which it left rates unchanged, Fitch carried on its research engine. However, the recovery of global oil prices and the overall inflationary impact of increasing domestic food price growth will see real interest rates for much of the region deteriorate gradually, raising depreciatory pressures on various currencies. Risks of greater than anticipated currency weakness, or declines in foreign reserves in support of managed currencies, stem from potential for declines in prices of key commodity exports or increased risk-off sentiment should the global economy appear to be slowing significantly.
We expect the South African rand (ZAR) to see further volatility over the coming quarters, forecasting an overall depreciation from an average of ZAR13.24 over 2018 to ZAR14.20/USD in 2019 and ZAR14.59/USD in 2020. The Fed’s shift away from a previously more hawkish stance, alongside gradually improving prospects for US-China trade relations, will ease depreciatory pressure on major EM currencies such as the rand. However, domestic inflation is set to accelerate over the coming quarters, with risks tilted to the upside, while we expect that weak economic growth will prevent the South African Reserve Bank (SARB) from tightening its policy rate by more than 25 basis points (bps) over 2019. We expect President Cyril Ramaphosa and his ruling African National Congress (ANC) party to remain in power following the May 8 general elections. We note however that a poor performance at the national polls could see a weakened and perhaps fragmented ANC lose much-needed reform momentum, weighing on demand for the currency.
Rising Inflation And Low Growth Will Weigh On The Rand
The Ghanaian cedi (GHS) is set to see further depreciation over the coming quarters, though we do not expect the sharp selloff seen in early 2019 to be repeated. The Bank of Ghana (BoG) surprised markets with a policy rate cut of 100 bps to 16.00% in January, citing expectations for slower policy normalisation by the Fed and relative domestic price stability as providing room for renewed stimulus to the economy. Concerns over potential for Ghana to see further easing and deteriorating real interest rates underpinned a selloff to a record low of GHS5.59/USD on March 13. This marked a year-to-date depreciation of 12.0%, placing the cedi among the worst performing currencies globally in early 2019. The BoG later held its policy rate in April. We expect policymakers to refrain from implementing further cuts that could see greater depreciations over 2019: inflation is set to rise over the coming quarters, while much of Ghana’s debt is foreign-denominated, meaning that depreciation will increase potential debt-servicing costs. Moreover, the unit has since pared back some of its earlier losses, and we believe that Ghana’s strong macroeconomic fundamentals compared to its regional peers will help temper its depreciation going forward.
Early 2019 Selloff Will Discourage Further Monetary Easing
Major East African economies are set to remain economic outperformers within Sub-Saharan Africa, but are also set to see currency depreciations of varying levels over the coming year. Rising food and fuel prices will increase inflation in the region, with drought conditions weighing on agricultural output posing upside risks to price growth. We expect the Tanzanian shilling (TZS) to see a faster pace of depreciation over 2019 than in 2018 as reduced exports weigh on the unit, while uncertainty over the trajectory of government regulations affecting mining and energy companies could further reduce demand for the currency. Similar degrees of depreciation will be seen in Uganda and Kenya, where we expect central banks to implement monetary tightening to shore up real interest rates in the face of accelerating inflation. However, in order to not weigh on credit growth, this tightening will be only moderate, providing limited support to real interest rates over coming quarters.
Healthy Stock Of Reserves Allowing Naira Peg To Be Maintained
In Nigeria, we continue to expect the multi-tiered currency regime for the naira (NGN) to be maintained over the coming years following Muhammadu Buhari’s re-election in the February 2019 presidential race. Ahead of the election we expected the system to persist through to end-2019 regardless of whether Buhari or Atiku Abubakar, the main opposition candidate, were elected as president. Buhari has been a major proponent of the existing multiple exchange rate system , with the official interbank rate used for government transactions and petroleum imports pegged at around NGN307.0/USD. The NAFEX rate used by investors and businesses is in theory free-floating but in practice is also closely managed, and held around NGN360.1/USD. Despite inefficiencies caused by the regime, vested interests that benefit from access to the stronger official rate as well as its use in subsidising fuel prices would see resistance towards any attempts at unifying the exchange rates and allowing for currency liberalization. Nigeria’s stock of foreign reserves remains above 7 months of import cover, and our core expectation is for rising oil exports and foreign currency inflows over 2019 to enable the Central Bank of Nigeria to hold the naira rates around their existing levels. However, a negative external shock to the oil sector could see reserves decline more heavily than anticipated.
2019 Set To See Slower Depreciation Compared To Last Year
We similarly expect the Angolan kwanza (AOA) to remain under the control of monetary authorities over the coming year, with its controlled depreciation set to continue but at a more moderate pace than was seen over 2018. The Banco Nacional de Angola abandoned the unit’s previously overvalued peg in January 2018 as part of a broader macroeconomic reform package and to help stem the marked downtrend in foreign reserves, allowing it to weaken by around 47.5% since then. A significant gap between the official exchange rate and the weaker parallel exchange rate will remain an incentive for further depreciation to correct the imbalance between demand and supply for foreign currency in the wake of lower oil exports in previous years. However, since October 2018 the pace of depreciation has slowed, and we expect this to remain the case over coming quarters as policymakers aim to mitigate inflationary pressures that have been hindering economic growth. Moreover, as is the case with Nigeria, while Angola’s stock of reserves remains large by regional standards, its heavy exposure to potential oil sector volatility poses downside risks to the BNA’s capacity to support the kwanza.
Source: BMI Research Note.