Oil plunge will hurt Naira; Recession pressure for Rand

Oil price plunge sets Naira on course for further weakening
Today’s 30% crash in global oil prices sets the Naira on course for further depreciation. The price of crude today plunged by almost a third, the steepest one-day decline since the 1991 Gulf War, to the lowest level in four years. As predicted last Monday, the Naira lost ground against the dollar during the week’s session, trading between 366 and 368 against the dollar, amidst the slowdown in global demand for oil caused by Covid-19. Given Nigeria’s heavy reliance on oil as the major contributor to GDP, the reduction in oil demand is severely limiting the supply of dollars to the economy, resulting in illiquidity in the market and buying pressure on those dollars available. As the coronavirus continues to damage the global economy, we expect to see further weakening pressure on the Naira in the coming days and advise reduced exposure.

Kenya hoovering dollars for reserves to buoy currency weakens shilling
The Central Bank of Kenya announced that it would start buying up to $100 million every month from the nation’s commercial banks in a bid to shore up its dwindled foreign exchange reserves. The reserves are to ensure availability of foreign exchange to pay the country’s international obligations, imports, external debt servicing and as a safeguard against any depreciation of the shilling. Statistics from the Central bank of Kenya’s weekly bulletin indicate the reserves fell to $8.409 billion on 27th February 2020 from $8.508 billion on 20th February 2020. As part of its fulfillment criteria for IMF facilities, the central bank is committed to keeping reserves equivalent to at least 4 months’ import cover, according to CBK statutory requirements. We have seen depreciation on the Shilling due to the dollar purchasing pressure. However, we foresee the Shilling leveling between ranges of 102 to 103 per dollar in the medium term as the cautionary funds guard against further weakness and the dollar comes under negative pressure from lower US interest rates.

South Africa recession signals more depreciation pressure for Rand
In line with our last week’s forecast, the Rand weakened against the dollar last week after data showed that South Africa slid into its second recession in two years, with the economy shrinking by 0.5% last quarter. This economic downturn increases the likelihood of a downgrade to junk status this year from Moody’s. An incident of Covid-19 was reported in South Africa, creating public fear over the preparedness of the government. With South Africa’s Reserve Bank coming under increasing pressure to lower interest rates this year to help counter the negative economic trends, we expect to see further depreciation for the Rand.

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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.