Egypt’s stable pound offers lesson in loosening FX restrictions

Egypt’s stable pound offers lesson in loosening FX restrictions

The Egyptian Pound has been one of the strongest-performing African, and indeed emerging market, currencies since the start of 2019, on the back of improving investor confidence and the government’s economic stimulus package. The currency appreciated by more than 2% from a low of 16.22 against the US dollar since June last year to 15.72, while major peers in the FX markets depreciated between 2% and 30% during the same period. The Central Bank of Egypt’s decision to freely float the pound in November 2016 has gradually led to an improvement in investor confidence, notably among foreign investors. The move ended a regime of multiple or parallel exchange rates, which had dented investor confidence over time. Egypt’s pound appreciated by 10.8% between June 2017 and June 2020. The government’s economic stimulus to counter the negative impact of COVID-19 has also helped shore up investor confidence. By November 2020, it had disbursed EGP 65 bn (USD 4.1 bn) of a planned EGP 100 bn (USD 6.3 bn) package on healthcare, staple goods and employment grants for day labourers. The government has also spent an additional EGP 70 bn (USD 4.4 bn) to improve pensioners’ allowances and boost public sector salaries and pensions. The country’s foreign exchange reserves reached USD 39.22 bn at the end of October 2020, up from USD 38.4 bn at the end of the previous month. The rate of inflation stood at 5.4% in December, compared to 5.7% the month before. We project a steady outlook for the Egyptian pound. Other African nations with multiple exchange rate regimes might look at Egypt’s example. 

NDFs signal 4% Naira devaluation

After a relatively stable week in which the Naira traded on the parallel market in the range of 467 to 480 against the dollar, we are now expecting depreciation towards 490. The Central Bank of Nigeria plans to settle Feb. 24 Non-Deliverable Forwards (NDFs) at 412.14 on the official market. This represents a 4% devaluation compared with 395 per dollar at the Investors and Exporters (I&E) window. Our outlook keeps in mind moves by the CBN aimed at stabilising the currency, including barring anyone with unrepatriated export proceeds pre-dating Jan. 31 from accessing banking services. Markets have experienced a decline in speculative purchases of the greenback. On a macro level, gross external reserves inched up to USD 36.19 bn on Feb. 1, providing some reassurance for longer term stability. The central bank has set a target of achieving USD 40 bn in external reserves, which should underpin the currency’s ‘key resistance level’ and boost foreign portfolio investment inflows.

Stimulus measures boost Rand

The Rand gained 1% to 14.94 Rand to the dollar from 15.08 in this week’s trading session, supported by the prospect of economic measures to counter the negative impact of the pandemic. Governor Lesetja Kganyago indicated that the South African Reserve Bank has leeway to offer further stimulus if necessary, after keeping its benchmark repo rate on hold at 3.5% last week. There is scope to reduce the base rate as it is not as near to zero as in the developed world, while inflation is not in negative territory, allowing room to respond to negative events, according to Kganyago’s comments in a televised interview with Bloomberg. Optimism that the country’s COVID-19 vaccination program will begin rollout to tackle one of Africa’s highest infection rates helped the Rand’s recovery, along with the US dollar’s slight retreat in what has been a volatile week for global financial markets. We project a steady outlook in the coming days based on the domestic measures put in place.

Steady Cedi on 4.8% Ghana GDP outlook

The Cedi gained climbed to 5.81 to the dollar from 5.85. While inflation crept up to 10.4% in December from 9.8% the previous month on the back of the pandemic’s disruption to the agricultural sector, more positive indicators came from Fitch Ratings forecasting a 4.8% GDP growth rate year-on-year during 2021 (against 1.2% growth in 2020). Resumption of economic activity among the country’s key trading partners, most notably China and Europe, bodes well for a positive economic outlook. In light of all this, we foresee a steady Cedi in the medium term.

Google pledge supports stable Shilling

The Kenyan Shilling remained stable in the range of 110.05 to 110.25 per dollar as improved inflows from agricultural exports met demand for dollars from importers. At the end of January, usable foreign exchange reserves remained adequate at USD 7.663 bn (4.71 months of import cover), helping to support the Shilling. Google, the search engine, pledged USD10m (KES 1.1 bn) last week towards the country’s economic recovery, including USD 3 m for small businesses, USD 5 m for startups, and USD 2 m for local non-profit organisations. We expect the currency to remain stable in the coming week.

Ugandan Shilling steady on exports outlook 

The Ugandan Shilling traded in a stable range between 3,680 and 3,690 Shillings to the dollar. Favourable weather conditions are a positive indicator for dollar inflows from agricultural exports, including coffee, the country’s main cash crop. This should support stability for the Shilling against dollar demand from importers and negative fallout from disruption created by disputed presidential elections held in early January. Opposition leader Bobi Wine filed a legal challenge in the country’s Supreme Court on Monday, seeking to annul the election results, which handed victory to President Yoweri Museveni. US and international pressure will weigh on Uganda given its indebtedness. The Ministry of Finance projected that public debt would jump to 49.9% of GDP by June 2021, and peak at 54.1% at the end of the 2022-2023 financial year, in order to finance infrastructure projects and the post COVID-19 recovery.

BOT confidence for Tanzanian Shilling against oil inflation

The Tanzanian Shilling held steady this week at 2,314/2,324. The monthly economic review for January from the Bank of Tanzania, the country’s central bank, indicates continued stability amid a gradual increase in supply of foreign exchange, mostly from improved exports of minerals, cash crops and manufactured goods. The petrol price in the country rose to TZS 1,887 per litre after the Energy and Water Utilities Regulatory Authority announced a new cap on prices of petroleum products this week, driven by higher global oil prices. There is a concern that this might lead to higher inflation in the future. We foresee a stable Shilling in the coming week, as Tanzania continues attracting investors into the country.

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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.

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.