Africa FX risk downside amidst 2021 recovery

FX risk skewed to downside amidst 2021 recovery

With the new year’s trading now in full swing, we reiterate our 2021 outlook for moderate depreciation of sub-Saharan currencies—between 5.50% and 9.99% against the dollar—given the lag effects of the economic fallout from COVID-19, softened commodity prices in the global market, and rising risk of debt distress. The Rand is already off to a negative start after hitting levels of 15 to the dollar while the Naira experienced some sort of convergence as its official rates surpassed 400 levels in a tumble towards unofficial rates. We continue to monitor and reassess each day. While risks are skewed to the downside, the one potential tailwind we are watching closest is the anticipated regional rollout of mass Covid-19 vaccinations within H1 2021. This could accelerate a return to near normalcy in business operations and serve to reduce macro risks.

Coronavirus variant concerns hit Rand

The Rand weakened to levels of 15 to the dollar from closer to 14 at the end of 2020 as worries over increased infections and deaths as a result of coronavirus turned to speculation of a new variant of the disease. Concern that South Africa could be headed towards tighter restrictions or lockdowns is bound to add further pressure on economic performance and the Rand in the near-term.

Naira defense counters rate unification drive

The Naira lost ground to a low of 410.25 to the dollar in the official market, narrowing the gap with unofficial rates at around 470, as the market pointed towards the CBN’s drive to unify the country’s multiple exchange rates. However, the devaluation proved short-lived as the rate reversed to trade at 394.3 to the dollar in the official market as the regulator took measures to defend the local currency. Selling pressure on the Naira is likely to pick up as commercial activities resume after the festive season.

Back to school and better weather anchor Kenyan Shilling

After a stable start to the year, the Kenyan Shilling weakened to 109.30/109.70 levels from 109.15/109.35 as importer demand for dollars returned to the market after the end-of-year holidays. The CBK reported usable foreign exchange reserves at an adequate USD 7,750 million, equivalent to 4.76 months of import cover. With positive economic forecasts from the Treasury, IMF, and World Bank, we foresee shoots of recovery supporting a stable Shilling in the coming days as economic activity returns along with the reopening of schools, cancelling of travel restrictions, and increased agricultural output, helped by weather favourable to agriculture.

Tanzania Shilling protected by reserves, recovery

The Tanzanian Shilling has been trading steadily at levels of 2314/2324(2319) since the new year. The BoT’s monthly economic review showed improvements in the economy, especially in the external sector where exports of agricultural goods and minerals, mainly gold, surpassed the import bill. According to BoT, reserves were still sufficient to cover 5.6 months of projected imports (excluding FDI-related imports). With the government focused on transforming the agricultural sector by improving farming methods, marketing, and agricultural financing, we expect to see significant economic growth and the central bank sustaining monetary policies set in 2020 to ensure stability of the financial sector and exchange rate after the pandemic.

Uganda election disruption balanced by rebound prospects

The Ugandan Shilling weakened to 3695/3705 levels from 3,640/3,650 at the end of 2020 amid increased appetite for dollars as business activity picked up after the holidays. General elections scheduled for Jan. 14 are poised to disrupt economic activity and reduce investment from foreign investors. Slightly longer term, we expect exchange rate pressure to ease as the economy recovers. The World Bank on Tuesday forecast 2.7% growth for Sub-Saharan Africa overall, with agricultural and commodity exporters leading growth. As an agricultural exporter, Uganda should see a stronger rebound. We foresee a stable Shilling medium term amid evenly matched economic activities, with a bias towards a mild depreciation caused by COVID-19 uncertainty and heat in the country as elections approach.

Issued by AZA. This Newsletter is produced as a service to our clients. It is prepared by our dealing professionals and is based on their understanding and interpretation of market events. AZA cannot be held responsible for any losses of whatever nature sustained as a result of action taken based on comments contained in this publication.

About The Author

  • Murega Mungai is the Trading Desk Manager at AZA, based out of the Nairobi office. His work revolves around FX trading and market analysis of emerging and frontier markets, particularly in Africa.

  • Terry Karanja is a Treasury Associate at AZA. She is actively involved in conducting market research to analyze current trends in the global economy and their effects on currencies, with a strong focus on Africa.

About The Author

Murega Mungai

Murega Mungai

Murega Mungai is the Trading Desk Manager at AZA, based out of the Nairobi office. His work revolves around FX trading and market analysis of emerging and frontier markets, particularly in Africa.