Prize from free trade beats COVID handouts
One of the first cohesive steps African governments took after the outbreak of COVID-19 earlier this year was to postpone the process toward a continent-wide trade pact. The delay to the Africa Continental Free Trade Area’s progress is regrettable. A World Bank report this week concluded that a fully implemented AfCFTA could boost regional income by 7%, or $450 billion. It would lift 30 million people out of extreme poverty within 15 years, and accelerate wage increases for women. Every African nation bar Eritrea has signed the initial pact, after Nigeria and Benin entered last year. It’s an impressive feat for the African Union, paving the way for the world’s largest single market. At a time when strained global supply chains threaten food security and livelihoods, unfettered intra-Africa trade is needed more than ever. At a time when trading blocs around the world are imploding, Africa must show the world the path back to free trade.
What unification? Naira rates diverge
Persistent shortages of dollars drove the naira to its weakest rates in 3 ½ years in the parallel market, sliding to 475 levels from 465, as banks restricted their customers’ ability to spend dollars abroad using debit cards. Yet, at the same time this week, the naira strengthened against the dollar at the Investors and Exporters (I&E) window, climbing to 389 from 391.50. As a result, the gap between the official NAFEX and unofficial rates extended to 85 naira, the widest disparity in five months. This week’s move serves to illustrate that unification remains far from implementation weeks after CBN governor Godwin Emefiele confirmed the policy. We foresee sustained pressure on the naira in the near term as dollar demand, speculation and illiquidity persists. Long term, we see rates heading for 480 to 500 levels.
Rand retraces after first IMF loan since apartheid
After hitting a five-month high of 16.24 per dollar earlier this week, supported by the nation’s first IMF agreement since the apartheid era, the rand has come under pressure in recent days from deteriorating fundamentals and risk appetite. The currency retraced to 16.50 levels as the total number of confirmed COVID–19 cases in South Africa approached half a million, with lockdown extended until the end of September. The risk of deeper downgrades to economic growth prospects further weighed on the outlook for fiscal sustainability. While positive risk appetite and the hunt for yield has clouded macro dynamics in recent weeks, any reversal will likely weigh on rand positioning and near-term momentum.
Kenya reserves show defense for record-low shilling
End-of-month dollar demand from oil and merchandise importers, along with companies seeking dollars to pay dividends to foreign investors, drove Kenya’s shilling to a record low of 108 per dollar this week. A decrease in CBK reserves by 26.7 billion shillings signals attempts by the central bank to firm up the exchange rate at levels approaching 107.70 per dollar by actively selling dollars to commercial banks. Reserves remain adequate at $9.4 billion, equivalent to 5.7 months of import cover. With increased cases of COVID-19 triggering an extended nationwide curfew for a further 30 days along with a ban on alcohol sales in restaurants, we foresee sustained weakness in the shilling in the coming days.
Crisis response funding helps Ugandan shilling recover
The Ugandan shilling appreciated to 3683 from 3700 levels, boosted by month-end inflows of dollars outweighing subdued importer appetite. Further support came from the World Bank, which approved $150 million to enable greater access to secondary education for Ugandan children, especially girls. The African Development Fund separately approved a $31.6 million Covid-19 Crisis Response Support Program. We foresee the shilling continuing its appreciation, with increased dollar inflows from charities as well as potential regional tourism as the government considers reopening airports that have been shuttered since the outbreak.
Against-the-odds growth in Tanzania to steady shilling
The Tanzanian shilling depreciated to 2315.39/ 2339.59 (2324.09) from 2310.93/2327.93 (2319.43) a week ago under pressure from companies and manufacturers settling month-end payments in dollars. Meeting to review the economy, the MPC maintained that, despite the impact of COVID-19 on tourism and entertainment, growth will be around 5.5% in 2020, supported by agriculture, investment in infrastructure, and the return of key trading partners since business activity resumed. Inflation was projected by the MPC to remain between 3-5% this year, stabilized by adequate food supply, moderate oil prices, and a steady exchange rate. The MPC also requested the Bank of Tanzania devise ways to protect individual borrowers against high interest rates charged by banks and financial institutions. We expect the shilling to stabilize as agriculture export inflows support the currency this coming week.