Farmers Driving FX Resilience across Africa

How farmers are driving FX resilience

IMF projections bunch African tourist hotspots like Mauritius, Seychelles, and Gambia with oil-dependent economies, notably, Nigeria and Angola, as the most vulnerable to prolonged effects of the post-pandemic slowdown. Even with a global recovery, the IMF notes that tourism is unlikely to pick up any time soon. Ceteris paribus, those countries with significant agriculture sectors will recover faster, such as Rwanda and Kenya. The FX market signals similar conclusions. Countries with a high dependency on oil and tourism have experienced more pressure on their currencies as dollar inflows dry up, compared with those that are more diversified. In line with this, we are long-term more constructive on the outlook for the Kenyan Shilling than the Naira or Kwanza.

Christmas stocking is no gift for Naira 

The Naira traded as low as 487 to the dollar as Nigeria recorded its worst recession in three decades, with the economy shrinking 3.62% in the third quarter as a result of lockdowns, border closures, currency restrictions, and protests. Dollar demand pressure continues to weigh in from importers stocking up for Christmas sales. Many companies and individuals are diverting export proceeds and remittances away from approved channels while directing unmet dollar demand to the parallel market. As dollar scarcity continues to linger, we foresee more pressure on the local currency. 

Rand to hold 8-month high on vaccine booster

The Rand rallied to 15.15 levels, close to an eight-month high, supported by the three consecutive announcements of successful COVID-19 vaccine test results. South Africa’s government said it would support vaccine distribution by allocating R500 million ($33 million) towards the program facilitated by the WHO. The momentum outweighed fallout from Fitch’s ratings downgrade and negative outlook. In further constructive news for the currency, US President Donald Trump accepted the commencement of transition towards a Biden presidency. With global sentiment favoring the Rand, we foresee steady levels in the coming days, if not further strengthening.

Flower powered growth in Kenya to sustain Shilling

Despite most industries in Kenya being hit hard by the COVID-19 pandemic, the country has maintained positive economic growth in 2020, supported by earnings from horticultural exports. Finance Minister Ukur Yatani projected a 0.6% growth rate this year, down from earlier forecasts for 2.6%. The World Bank predicted a rebound in economic growth in the coming year. The outlook will help maintain a stable shilling in the coming days.

FDI slide adds pressure on Ugandan Shilling

The Ugandan Shilling weakened to 3700/3710 levels on the back of demand for dollars from importers of energy and other goods. A report from the International Monetary Fund indicated that the economy is likely to contract by 0.3% this year as a result of the fallout from COVID-19.  Behind the decline is lower Foreign Direct Investment as well as reduced remittances and exports, according to the Bank of Uganda. We foresee more pressure on the Shilling amid the continued slow economic recovery.

Cashews counter Tanzania’s undersubscribed bond

The Tanzanian Shilling remained stable at levels of 2314/2324 (2319), the same as a week ago. Dollar inflows fell short as a ten-year bond auction by the Bank of Tanzania was 43% undersubscribed, raising 62.44bn of the 110.03bn tendered. Dollar outflows have been lower too, according to the BoT’s economic review for October showing imports falling amid lower global oil prices. Fuel imports declined to $1,451.6 million from $1,768.6 million and accounted for 18.4% of total goods imported vs. a previous 20%. Looking ahead, Tanzania benefits from export diversification in agricultural products such as cashew nuts, cotton, cloves, sisal, and tobacco, along with horticulture and gold. We expect FX inflows from cashews and other farming products to continue supporting the Shilling as dollar demand rises from oil importers and other manufacturers in the approach to month-end, keeping the currency stable.

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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.

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.