Mali’s hidden risk in currency clampdown; Lowest Kenyan Shilling has further to fall

Hidden danger in Mali coup from currency clampdown

Beyond the fallout from political turmoil in Mali, a clampdown on transactions in the West African CFA Franc risks adding to the COVID-era economic disarray. Within hours of the military seizing power, the Central Bank of West African States (BCEAO) announced protective restrictions on the flows of funds out of the country to member states. While a peg to the Euro backed by the French Treasury all but guarantees against any sudden lurches in the currency markets, limits on FX transactions will inhibit trade particularly for the dominant agricultural sector in Africa’s eighth-largest country. It is therefore crucial that the BCEAO resumes normalcy in the currency markets as soon as events on the ground permit.

Nigerian flights resumption fuels dollar demand

The Naira came under pressure this week with dollar scarcity sending the currency from 475 to a low of 480 in the unofficial market, in line with levels we predicted in previous bulletins. Plans to reopen airports for international travel spurred demand for dollars while commercial banks disabled or reduced the daily spending limit on dollar-denominated debit cards. Inflation for the month of July accelerated to 12.82% from 12.56%, driven by increases in the cost of food and other commodities. We foresee levels remaining weaker in the coming days as international flights fuel dollar demand.

Rand recovers lost ground on lockdown easing

The Rand bounced back from a low of 17.51 per dollar to 17.21 after President Cyril Ramaphosa announced the easing of lockdown restrictions over the weekend. The move towards normalizing the economy in the African country hit hardest by COVID-19 infections stimulated Rand purchases by investors seeking alternatives to low dollar yields. We expect to see further gains for the currency in the coming days.

Record-low Kenyan Shilling has further to fall

Ironically, a big factor behind the Shilling’s latest tumble is one of Kenya’s best success stories – Safaricom – as the company pays out shareholder dividends. Dollar demand has been further triggered by the government lifting a ban on the import of second-hand clothes and shoes with immediate effect. The Shilling weakened to a record low of 108.60 from 108.45 against the dollar. While agricultural exports are recovering – a beneficiary of the ongoing political tussle between India and Pakistan – this will be outweighed by dollar demand from the energy sector and other merchandise importers. We expect the current negative pressure to continue and the shilling to plumb further lows in the coming days and weeks.

Back to business in Uganda as Shilling steadies

The Ugandan Shilling was steady at 3,665/3,675 levels due to low dollar demand from companies in manufacturing, energy and retail sectors and some support from dollar inflows to tea and coffee exporters. Relatively high yields on government securities are also drawing investors away from the US assets. The government said it would continue analyzing COVID-19 infections to see which areas of life can be resumed safely, citing the re-opening the airport for special categories of people – including tourists. With the expected lifting of the coronavirus restrictions, business confidence will continue to pick up and this will strengthen the Shilling in the coming week.

Cashews, cotton, and cloves drive Tanzanian Shilling recovery

The Tanzanian Shilling strengthened slightly to 2315/2325 (2320) to the dollar this week from 2320/2330 (2325) a week ago. The Bank of Tanzania displayed a strong performance in the economy and predicted positive prospects for inflation, fuel prices, and food stocks in its monthly economic review. An increase in agricultural exports such as cashew nuts, cotton, cloves, sisal, and mining has driven the strengthening of the Shilling while import demand remains subdued because of coronavirus restrictions. We foresee the Shilling strengthening slightly in the coming week on increased inflows from agricultural exports and recovery in tourism.

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.