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New WTO leadership force for Africa trade optimism

Ngozi Okonjo-Iweala, Nigeria’s former finance minister and former Managing Director of the World Bank, looks set to become the next Director-General of the World Trade Organisation, as South Korea’s Yoo Myung-hee pulled out of the race, and US President Joe Biden has thrown his backing behind her. The formal appointment should be made soon, though no exact date has been given yet. Her appointment comes at an exciting moment for free trade in Africa. Trading under the African Continental Free Trade Area Agreement (AfCFTA) – a free trade area that connects 1.3 billion people across 55 countries with a combined GDP valued at $3.4 trillion ­– started on January 1 this year. With her expertise, Okonjo-Iweala can help to ensure a smooth take-off of the huge new continental market. One of the main issues she will have to tackle is agreement among African nations about the Rules of Origin – a key element in international trade, as it is a cornerstone of preferential trade arrangements such as AfCFTA. Countries that have ratified the pact appear to have agreed on the Rules of Origin on over 81% of tariff lines, according to the UN. We hold out optimism that Okonjo-Iweala will help bolster global trade and commit to reducing poverty, inequality, and corruption across the world.

Naira at 10-month low as Nigeria resists IMF devaluation call

The Naira fell to its weakest level in 10 months at 401 per dollar at the I&E window, as mounting dollar demand piles further pressure on the foreign exchange market. Nigeria’s currency continued losing ground as resumed business activity in the country pushed up dollar demand amid a low supply of FX coming in. The International Monetary Fund is recommending that the Central Bank of Nigeria establishes a more transparent and market-based exchange rate policy to instill confidence in the market. The IMF has advised Nigeria to devalue the currency, saying that it is currently overvalued by 18.5% on the official market. Nigeria is holding out against such a move, insisting that further devaluation would worsen the economic situation and stoke inflation. In the coming week, we expect the Naira to remain stable around 475 to 480 in the parallel market, as the economy continues to face low-dollar supply and high demand for the greenback. This rate reflects market realities and since the CBN is working hard to maintain its stability, we do not foresee any further depreciation in the near term. We also expect the I&E rate to slowly converge towards the parallel market rate.

US stimulus domino effect for Rand in run-up to budget

The Rand gained 1.8% from 14.99 to the dollar last week to 14.72 on Feb. 10, underpinned by the expectation of new stimulus measures by the US government boosting global appetite for risk. The new Biden administration has been pushing hard to conclude a $1.9trn stimulus package. With this massive level of fiscal spending, the dollar is expected to weaken, creating further headroom for riskier assets supporting the Rand. Disappointing data on US payroll numbers have been a further external support for the Rand. The currency’s strengthening comes ahead of this year’s budget on Feb. 24, in which Tito Mboweni, the finance minister, is expected to raise some taxes as well as improve tax administration in order to bolster the government’s finances. We expect such measures to support the Rand in the medium term. In the coming week, we expect the Rand to remain steady, supported by the US stimulus measures and the improved risk appetite of investors.

Bank of Ghana interventions to hold Cedi steady

Stability has prevailed since the beginning of the year for the Cedi at around 5.81 to 5.85 to the dollar. Foreign portfolio inflows have picked up and are likely to remain strong this year, as international investors seek opportunities for higher yields in the fixed income and capital markets. While some analysts are forecasting depreciation this year, following 8% and 12% depreciation in 2018 and 2019 respectively, we continue to project a stable rate for the short term at least. The Bank of Ghana is likely to continue intervening in the spot and forward markets to ensure the local currency does not depreciate drastically. This week, the Cedi traded between 5.80 to 5.82, and we project a similar range in the coming days.

Egyptian Pound supported by reduced trade deficit

The Egyptian pound gained from 15.73 to the dollar to 15.61 this week amid supportive news on the trade deficit. The deficit dipped 4.7% during November 2020 to $3.3bn, compared to $4.7bn in the same month the previous year, according to the country’s Central Agency for Public Mobilisation and Statistics (CAPMAS). In November, exports declined by 11.2% to $2.2b compared to $2.5b in the previous November, on the back of a reduction in the exports of commodities, including petroleum, clothes, and food produce. We project the pound will remain steady, supported by the relatively stable macro indicators in the country.

Strong COVID-19 response positions Senegal for recovery

Senegal has performed relatively well during the COVID-19 pandemic compared with its main peers, largely because of its stronger institutions, more stable political climate and positive economic fundamentals. Last year, the country – which uses the CFA Franc, pegged to the euro at 655.96 CFA Francs per euro – quickly reacted by imposing a three-month state of emergency by presidential decree, which ended in June. The government’s policies will now focus on addressing the economic fallout from the pandemic and at the same time sustain a broadly pro-business agenda. The country has developed a national response plan to set the economy on the right path, costing about 7% of GDP. Growth in the coming years will be driven by hydrocarbon projects coming on stream and new exploration in the minerals sector, particularly gold. While the pandemic could result in some delays, growth will be underpinned further by major oil and gas fields expected to come online between 2023 and 2025.

Remittances and agri boost Kenyan Shilling

The Shilling improved to a range of 109.15 to 109.55 against the dollar, as inflows from the Kenyan diaspora – mainly in the form of remittances and agricultural exports, namely tea and coffee – picked up. At the same time, dollar demand from the energy sector declined. Expectations that the COVID-19 vaccine will soon be rolled out in Kenya also improved sentiment about the country’s economic prospects. Businesses in a number of sectors – including education, transport, retail trade and financial services – have started to boost their economic activity. We foresee a continued strengthening of the Shilling in the coming week.

Uganda Shilling strengthens as investors set to pour into oil and gas

The Ugandan Shilling strengthened slightly to 3660 to 3670 levels against the dollar this week, on the back of flat dollar demand from the manufacturing and energy sectors and improved inflows from agricultural products and from the oil and gas sectors. France’s Total E&P and China’s Cnooc are expected to invest up to $10 billion in the country over time. Bank of Uganda held a Shilling 245 billion Treasury Bill auction on Feb. 10 and its next monetary policy committee (MPC) meeting is scheduled for Feb. 15. With adequate foreign exchange reserves – above five months import cover – and an active interbank money market and better corporate activity, we expect to see a mild appreciation of the Shilling in the coming week, as the economic recovery gathers pace after disruption from the presidential election and concerns over the COVID-19 pandemic.

Tanzania Shilling stable amid gold investment flows

The Tanzanian Shilling remained stable at levels of 2314 to 2324 to the dollar as inflows matched outflows. Inflation climbed to 3.5% in January from 3.2% in December, according to the country’s National Bureau of Statistics. This was mostly due to the increased price of non-food items, such as clothing materials and rents for private households. Earlier this week, Tanzanian Gold said that it had agreed to sell 32.9 million shares at a purchase price of $0.65 per share to a number of institutional investors, valuing the total sale at $21.4 million. The net proceeds will be used for the continued development of the Buckreef gold project in the country, including capital expenditures, continued exploration, general corporate purposes, and working capital. Good weather patterns in Tanzania and the government’s support of farmers by helping them look for new markets is also likely to improve tea and coffee exports. We expect a stable Shilling on the back of continued foreign investment in the economy and inflows from agricultural product exports.

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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.