Africa’s worst currency at precipice; Naira risk rises amid #EndSARS

Africa’s worst performing currency at a precipice

African nations have continuously taken more and more debt from China for infrastructure development. The day of reckoning is approaching for Zambia, which is set either to default on its international borrowings on Nov. 13 or agree to a restructuring of commitments in tandem with an IMF program. Any suspension of debt servicing would reduce the need for dollars. A restructuring plan coordinated with the IMF could entail long-resisted austerity measures including tax increases that would raise revenue to service debt obligations. It may mark a turning point for the Zambian kwacha after a 30% plunge this year, the biggest decline of any African currency.

Naira steady in face of #EndSARS tension

Nigeria’s currency traded in the parallel market at 463 against the dollar, slightly weaker from 462 a week ago, as deadly clashes between protestors and security forces escalated. Negative sentiment was muffled in trading as rioting, blazes and round-the-clock curfews slowed economic activity and shuttered many businesses. The currency remains in a risk-averse state, with Amnesty International saying at least 56 people have been killed since the #EndSARS protests began earlier this month.

Signs of recovery to drive Rand higher

The Rand gained 1.5% to 16.64 in the past week as a pick up in indicators in the third quarter including retail spending, export commodity prices and vehicle sales pointed to recovery for South Africa’s economy. We project further gains on the currency in the near term after the easing of COVID-19 restrictions.

Reserves support weaker Kenyan Shilling

The Kenyan Shilling marginally lost ground from last week’s close of 108.60 to trade at 108.70 as dollar demand from key sectors such as energy and manufacturing outpaced inflows from remittances and horticultural exports. Year to date, the Shilling has lost 7.2% to the dollar. We expect the currency to be supported from further depreciation given adequate reserves at the Central Bank of Kenya at $8.3 billion, equivalent to five months’ import cover. We project the Shilling to trade steadily around current levels in the coming days.

Ugandan sentiment turning positive

The Ugandan Shilling weakened 0.3% from last week’s close to 3735 per dollar. Official data showed that the economy expanded 2.9% in the 2019/20 financial year, slower than the official projections of 3.1%. Inflation fell to 4.5% in September from 4.6% in August. The sentiment of doing business in the country turned positive for the first time since February, according to the Ministry of Finance. We project similar trading levels in the coming days.

Tanzania capital flight risk amid election

The Tanzanian Shilling traded unchanged from last week’s close at 2320 to the dollar. With elections on Oct. 28, we expect to see capital flight from investors wary of uncertainty. Inflation was down to 3.1% in September, the slowest pace since March 2019. With economic growth slower than expected at 2.3% in the last quarter, suppressed by the upcoming elections, we expect to see further weakening of the local currency during this immediate period.

Authors

  • 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.