Africa’s economic freedom rising, though much too slowly
Economic freedom is improving in sub-Saharan Africa, according to this year’s Economic Freedom Index, published by the Heritage Foundation. Progress, however, remains painfully slow. In the Washington DC-based think tank’s scale of 1 to 100, sub-Saharan African nations’ scores on property rights, government integrity, and business freedom are all lower than world averages by 10 points or more. Mauritius remains the brightest spot as sub-Saharan Africa’s freest nation in the 2021 index, ranking No. 13 among countries worldwide. It is the only country in the region considered ‘mostly free’ – though even in Mauritius, chronic issues with government integrity are considered to hold it back. The Republic of Congo had the region’s most improved overall score in the 2021 index, which was just enough for the economy to escape from the lowest ‘repressed’ category. Morocco ranked as the best country in North Africa, and No. 9 for the Middle East and North Africa, and No. 81 worldwide. Morocco’s overall economic freedom score, unchanged at 63.3, means the economy is seen as ‘moderately free’. A decline in trade freedom was offset by improvements in monetary freedom and other scores. Part of the African Continental Free Trade Agreement (AfCFTA) initiative must drive at seeing improvements in economic freedom accelerate.
Naira 4 Dollar = Devaluation
The Naira weakened significantly on the parallel market, dropping below 480 to the dollar levels at 485 most recently. The Central Bank of Nigeria introduced a ‘Naira 4 Dollar Scheme’ for remittances from the diaspora, in what is being seen by markets as effectively a further official devaluation. In a circular issued to all deposit banks and international money transfer operators (IMTOs), the CBN said that all recipients of diaspora remittances through approved IMTOs and commercial banks will receive an extra 5 Naira for every dollar received as a remittance inflow. This means that a dollar fetching 412 at the official rate last week will instead now pay 417. Effective from March 8 to May 8, the scheme is designed to encourage the inflow of diaspora remittances and forms part of the central bank’s continued efforts to improve remittance inflows into the country through official sources. It is also intended to reduce rent-seeking activities and to provide Nigerians in the diaspora with a cheaper and more convenient way of sending remittances.
On the I&E Window (NAFEX), the Naira weakened to a low of 415 compared to the previous week’s close of 411.88, due to the latest perceived devaluation of the currency. In the coming week, we expect the Naira to slide further toward 500, as market rates react negatively to the Naira 4 Dollar Scheme. On the NAFEX front, the Naira could weaken towards 425 levels in a bid to converge towards the parallel market.
Ghana Eurobond bodes well for Cedi
The Cedi remained stable at 5.7265 per dollar levels as the Bank of Ghana’s fortnightly intervention provides support for the currency. Every two weeks, the central bank is taking part in a $50m Foreign Exchange Forward Auction. Separately, the government has started the process to raise $5bn from the international capital markets to support growth-oriented expenditures in its 2021 budget and to conduct liability management in both Eurobonds and domestic debt. The government intends to raise the borrowing through Eurobonds, diaspora bonds, sustainable bonds, and syndicated or bridge loans, the Ministry of Finance said on Tuesday. News reports of a renegotiation in power supply contracts may be a positive economic indicator. The anticipated issuance should help spur strengthening against the dollar in the medium term. For now, we expect the Cedi to remain stable at around 5.72 levels in the coming week.
Rand rebounds from 2-month low
The Rand rallied from a two-month low to 14.94 against the dollar, supported by commodities soaring to an 8-month high, along with improved economic data at home. Statistics South Africa said year-on-year GDP fell by 4.1% during the fourth quarter, compared to an expected 4.6% decline, while on a quarter-on-quarter and on a seasonally adjusted and annualised basis there was a robust 6.3% growth, versus an expected 5.6%. The economy contracted 7% in the 2020 calendar year, the biggest drop in annual GDP since 1946, compared to 0.2% growth in 2019. The manufacturing industry saw the biggest recovery in the fourth quarter, with output surging 21% compared with the previous quarter, followed by the construction sector, up 11.4%. Other industries including trade, catering, and accommodation – also showed positive growth after the government freed those parts of the economy from lockdown restrictions. Taking into account the vaccination programme and the opening up of the economy, we expect business sentiment to improve further and project the Rand to appreciate in the coming days.
Senegal rocked by opposition protests
Business in Senegal ground to a standstill as unrest rocked the country. The latest protests on Monday came hours after authorities freed opposition leader Ousmane Sonko. By Wednesday, diplomats on the ground said the situation had calmed. Sonko’s case has sparked deadly protests, threatening to erode Senegal’s reputation as one of West Africa’s most stable nations. Opposition supporters are accusing President Macky Sall of pursuing criminal charges to derail Sonko’s prospects in the 2024 election. Amnesty International says at least eight people have died since unrest broke out last week in the capital, Dakar.
Kenyan Shilling gains as vaccine spurs hope of tourists returning
The Shilling strengthened slightly to 109.7 against the dollar during the week from 109.8 levels last week, on the back of markets expecting a positive economic recovery from the COVID-19 emergency. News that vaccinations had arrived in the country last week also reinforced the Shilling. However, a decline in foreign dollar inflows to business sectors – including tourism and horticulture – and continued global economic uncertainty could lead market participants to opt to hold dollars and other hard currencies, putting pressure on the Shilling in the medium term. That said, we expect the support of the local currency to come from central bank reserves, which remained adequate at $7.359 billion (4.52 months of import cover) on March 4, down from $7.605 billion on Feb 25. The $246m decline in reserves was due to interest payments on Kenya’s external debt, the payment of government suppliers from overseas, and the Central Bank of Kenya’s sale of dollars in the market to mitigate exchange rate volatility.
Kenya’s economic outlook is expected to improve as its vaccination programme is rolled out. The government plans to vaccinate 1.25m people by June and a further 9.6m during the next phase. Further vaccine deliveries are expected within weeks. Foreign tourists could start to return in the medium term as more vaccinations take place. We foresee continued improvement to the Shilling in the coming week, on the back of the better economic outlook.
Kenyan ban on Ugandan maize pressures Shilling
The Shilling traded in 3653 to 3663 range, maintaining its levels from last week, as dollar demand from companies matched inter-bank inflows from commodity exporters. Uganda received the first batch of 864,000 doses of the AstraZeneca vaccine under the Covid-19 Vaccine Global Access (Covax) programme on Friday. It started the first phase of its vaccination programme on Wednesday, with priority given to public healthcare workers. The country also received 100,000 vaccine doses donated by the Indian government.
In economic news, the Kenyan government banned maize imports from Uganda last Friday, citing an acute increase in chronic aflatoxin-related illnesses. It followed a ban on the import of poultry products – including chicken and eggs – from Uganda, enforced in January. The latest ban is likely to further impact hard currency inflows into Uganda as Kenya is a major market for the country’s maize. The maize ban will see Uganda lose around $121m in annual revenue, according to the Bank of Uganda. Uganda exports at least 90% of its maize to Kenya with a cumulative average of 330,620 tonnes a year. The Ugandan government has called for a crisis meeting with its Kenyan counterparts. We foresee pressure on the Shilling in the coming week, reinforced by the maize ban.
Tanzanian 25-year bond and slower inflation supports Shilling
The Shilling traded unchanged against the dollar in the 2314 to 2324 range. On Monday, the National Bureau of Statistics released its annual headline inflation data, which showed a slowing to 3.3% in February from 3.5% in January. The Bureau said the slight drop was due to a decline in the prices of non-food items. The Bank of Tanzania on Wednesday launched a 25-year Treasury bond, which will be auctioned on April 21. The central bank said the bond will have a fixed coupon of 15.95%. The bond forms part of the government’s programme to lengthen the maturity profile of its domestic debt, and will also help to raise funds for long-term development projects. We foresee stable a Shilling in the coming week, helped by the slower rate of inflation and as the 25-year bond attracts foreign investors and currency inflows.
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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.