Naira at an all-time low faces likely further devaluation

Sudan’s huge devaluation should improve remittances and relations

In its boldest economic move yet, the military junta that has governed Sudan on a transitional basis since the overthrow of Omar al-Bashir in 2019 succumbed to pressure from international financial institutions and freely floated the pound on Sunday. It had been trading at over 350 pounds to the dollar on the informal market, while its official rate was only 55 to the dollar. Following the massive devaluation, local media reported that banks were selling the dollar at an average of 375 and buying at 390, in order to attract those trading on the unofficial currency market.

The pound will now fluctuate according to supply and demand and the Central Bank of Sudan said it will announce a daily indicative rate in a ‘flexible, managed float’ that banks and other exchange bureaus are required to trade at within a 5% range. The devaluation came after Prime Minister Abdalla Hamdok announced a Cabinet reshuffle to add rebel ministers. This formed part of a deal the transitional government struck with a rebel alliance last year.

The American Embassy in Khartoum, the capital, welcomed the move and said it will help Sudanese companies to attract foreign investment, as local and foreign companies will no longer face the obstacle of a dual exchange rate. The country has a $32.4bn economy and a population of 45.5m people, according to the International Monetary Fund. It has been in recession since 2018; GDP shrank by almost 8.4% last year.  The Fund expects the economy to return to positive territory this year, expanding at 0.8%. The nation is suffering from major economic issues including consumer inflation estimated at 130% by the IMF. The government’s primary deficit stood at an estimated 6.8% last year and almost 11% in 2019. General government gross debt has jumped from 200% in 2019 to an estimated 250% today.

The devaluation marks a milestone on the country’s path to economic normalisation. It will help the country improve ties with international and regional financial institutions and should encourage remittances into the country.

Naira at an all-time low faces likely further devaluation as reserves slide

The Naira dipped to an all-time low of 429.75 to the dollar on the I&E window (NAFEX)  on Thursday. Despite global oil prices soaring past the $64 threshold, the country’s external reserves have been slowly dropping towards the $30bn critical level. We believe that the official exchange rate across the multiple windows is crawling towards

the Central Bank of Nigeria’s target NDF rate, on the back of depleting reserves and the low foreign exchange turnover on the I&E window.  Meanwhile, the parallel market rate slightly depreciated from 473 to 478 in the past week, mirroring the weakness witnessed on the NAFEX front.

In the week to come, we expect the exchange rate to remain stable in the parallel market, hovering around 473 to 478 levels. On the other hand, on the I&E window, the currency could depreciate towards a new low of 440. Considering forward rates, it is easy to see the I&E window converging towards the parallel rate.

Randclimbs as better revenue collection offsets need for tax hike

The Rand gained slightly on Wednesday to trade at 14.55 to the dollar, following the announcement by Finance Minister Tito Mboweni in his 2021 Budget Speech that he will not hike personal taxes this year. He had planned to raise 40bn Rand through personal tax rises but, in the end, did not need to do so because of improved revenue collection since the end of last year. The budget made space for up to $1.3bn of spending on coronavirus vaccines and presented a huge forecast deficit of 14% of GDP this fiscal year. Gross debt has jumped from 65.6% last year to 80.3% of GDP for the 2020 to 2021 period. It is expected to stabilise at 88.9% in 2025 to 2026. Mr. Mboweni raised excise duties on alcohol and tobacco by a hefty 8% for 2021/22. Minister Mboweni’s key goal is to narrow the fiscal deficit by containing the public wage bill during the next few years, with a focus on a stronger economy to help generate jobs.

The Rand was weighed down in the past week by unemployment data from Statistics South Africa, the national statistical agency, which showed that the rate jumped to 32.5% in the fourth quarter last year to 7m people. However, the currency rebounded back to the 14.60 level amid dollar weakening after US Federal Reserve Chairman Jerome Powell indicated that the US economy would require support from the Fed for ‘some time’.

We project that the Rand will stay at around the 14.55 level, if not gain slightly during the coming week, as the market digests the Budget statement.

Senegal’s sanitary catastrophe curfew’ extended amid Covid second wave

Senegal has extended its so-called ‘sanitary catastrophe curfew’ in two regions – Dakar and Thies – to March 20 in order to contain the spread of the coronavirus. President Macky Sall passed a decree this week, which includes a 9 pm to 5 am ban on the movement of people and goods, and a ban on demonstrations and gatherings at public places and religious events. Since mid-December, Senegal has been hit hard by a second wave of Covid-19. By Feb. 21, the country had recorded 32,927 positive cases, including 27,134 recoveries and 808 deaths. The government has received 200,000 doses of the coronavirus vaccine from China’s Sinopharm and is expected to roll out its vaccination programme soon. It has invested $3.7m in the vaccines and expects to open up the economy during the next few months as the vaccination programme is rolled out.

Kenya’s World Bank score for enabling agribusiness could stimulate exports

The Shilling traded at a stable level of around 109.70 to the dollar this week, with some support from the Central Bank of Kenya. Usable foreign exchange reserves remained adequate at USD7.6bn (4.67 months of import cover) this week, slightly down from USD7.63bn on Feb. 18. Kenya is the second-best country in Africa for effectively enabling agribusinesses after South Africa, according to a World Bank report published last week. The bi-annual ‘Enabling Business Agriculture’ report awarded Kenya an average score of 64.8%, second to South Africa which posted a score of 68.7%. The report is highly encouraging for foreign investors in the country’s agricultural sector and could stimulate further inflows from agricultural exports, fostering economic growth. We expect the Shilling to come under pressure this week, because of month-end demand for dollars from importers in the manufacturing and energy sectors.

Ugandan Shilling under month-end pressure while US considers ‘targetting options’

The Shilling weakened against the dollar to the 3664/3674 level after resilience throughout the past week at the 3655/3665 level. The European Union Parliament’s threat of sanctions last week over disputed presidential elections in January prompted a tough response from the government. At a meeting between EU representatives and government officials, Uganda urged Europe against meddling in its internal affairs. On Tuesday, the Biden administration said the US would consider targetting anyone involved in election irregularities. At a media briefing, US Department of State spokesperson Ned Price said the country would consider a range of ‘targetted options’ to hold Ugandan officials to account. Conversely, a senior Chinese foreign policy official, Yang Jiechi, arrived in Uganda on Saturday with the aim of boosting the relations between the two countries, which has been elevated to the status of a ‘comprehensive cooperative partnership’. China has donated to the country 300,000 doses of its Covid-19 Sinovac vaccine. We expect the Shilling to remain under pressure during the next week, mainly due to month-end dollar demand from importers.

Tanzanian Shilling steady as President Magufuli signals Covid U-turn

The Shilling appreciated from the range of 2,311 to 2,329 to the dollar last week to 2,304.59/2,309.95. Tedros Adhanom Ghebreyesus, the director-general of the World Health Organisation, urged Tanzania to start reporting Covid-19 cases this week and to take “robust action” against the coronavirus pandemic, amid warnings that the country is witnessing a resurgence in infections. The international pressure on the government seems to be having some effect, as speaking at St Peter’s Parish in Dar es Salaam on Sunday, President John Magufuli urged citizens to take precautions against Covid-19 and wear masks. He signaled a major U-turn on his previous stance that the country is Covid free.

In other news, the OPEC Fund for International Development (OFID), the development finance institution of the Organisation of Petroleum Exporting Countries, signed a $50m loan agreement with Tanzania to finance the ‘Fourth Tanzania Poverty Reduction Project.’ This initiative aims to build rural infrastructure to boost economic opportunities and improve access to social services for more than 900,000 people. Improved connectivity will help increase agricultural and tourism-related activities, and facilitate trade with neighboring Burundi and the Democratic Republic of the Congo.

In a boost for the outlook for crop production, Tanzania Meteorological Authority’s climate forecast for the next couple of months shows that there should be enough long rains in the country. On this basis, we foresee continued support of the Shilling from agricultural inflows. We also expect investor inflows to support the currency, in particular because the government has raised its economic forecast to 6% growth this year from its original forecast of 5.5% that it made last year.

For the coming week, we expect a stable outlook for the Shilling, as inflows into Tanzania – for example, the loan from OFID – balance increased end-of-month dollar demand from importers.

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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.