Business as usual means weaker Naira
The Naira dipped against the dollar to 475, the second slide since the start of the year in the unofficial market. Rising dollar demand and a shortfall in FX supply are putting pressure on the local currency as commercial activities returning to normal means businesses sourcing imports to meet local demand. After the recent official rate adjustment to 400 to the dollar seen earlier this year, market players await communication from the central bank that might provide forward guidance for the Naira. We expect the currency to remain around 470-480 levels in the parallel market in the near term.
Mutant COVID and rate outlook hits Rand
The Rand weakened to as low as 15.60 to the dollar from 15 last week as South Africa continues to suffer increased infections from a new COVID variant. Concerns of extended and stricter lockdowns weakened the Rand, while some expectations that the South African Reserve Bank may cut the benchmark rate when it meets on Jan. 21 added further pressure. With rates at an all-time low after 300bps of reductions last year, we see little room for further reductions. Even so, the Rand may continue to struggle in the medium term as South Africa’s economic malaise leaves little room for further fiscal support for recovery and doubts persist over supplies of vaccines.
Kenyan remittance and reserves slide
Kenya’s Shilling weakened against the dollar to 109.75/95 as demand from manufacturers and goods importers increased with businesses resuming activities, while inflows from foreign remittances and exports declined. The CBK has been using foreign reserves to support the local currency against depreciation and also to repay foreign debt and help the economy through the COVID crisis. Data released by the CBK showed foreign reserves fell by $1 billion or 11.4% last year to a current level of USD 7.722 million, equivalent to 4.74 months of import cover. This is above the CBK’s statutory requirement to maintain at least 4 months of import cover, and the EAC region’s convergence criteria of 4 ½ months of import cover. While we expect further weakening pressure on the Shilling, actual declines are likely to be minimized as the CBK will keep supporting the Shilling as it raises more funds from investors via government securities, as recently seen from the 55.9 billion shillings raised last week.
Shilling under pressure as Ugandans vote
The Ugandan Shilling weakened to 3700/3710 levels as uncertainty hung over the country’s outlook. The Central Bank of Uganda on Monday said it had converted some treasury bonds worth over 1 trillion Shillings maturing on Jan. 21 into securities that will come due between 2023 and 2040. While no reason was officially cited, the action signals the country may be struggling to raise enough revenue from taxes and exports to meet obligations amid pressure from the COVID-19 pandemic and concern over an election marred by violence and security crackdowns.
Tanzanian exports keep Shilling in balance
The Tanzanian Shilling remained at 2314/2324(2319) levels, the same as a week ago, as agricultural exports balanced FX flows against moderate demand from corporates and SMEs. With an expected reduction of inflows from exports of agricultural products, especially as the cashew nuts season comes to an end, we expect to see a slight weakening in the medium term.
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.