Fred Ojambo, Bloomberg, Christine Mungai
A Somali money changer with a stack of Somali shillings in Bakara Market, Mogadishu. Similar piles of cash are popping in many African countries where currencies have taken a tumble. (Photo by Tyler Hicks/Liaison).
SEVERAL African currencies are on a downward spiral over the past few weeks and months, weakening precipitously against the US dollar as the international markets remain fragile and oil prices hover in the sub-$60 zone.
Between June and December 2014, global crude prices fell by more than 45%, and Africa’s oil exporters such as Nigeria, Angola and Gabon immediately felt the squeeze on their current accounts.
The low prices were expected to be a boon for oil importers, which the majority of African countries are. Instead, a perfect storm of factors - including a stock market crash in China, the European Union in knots over Greece, and a spate of summer terror attacks - has central banks all over Africa are in a flurry to shore up their rapidly depreciating currencies.
“Many sub-Saharan economies are paying a heavy price for not having implemented tighter fiscal and monetary policies when market conditions were favourable,” Nicholas Spiro, MD of Spiro Sovereign Strategy in London told Bloomberg a fortnight ago.
“It’s one thing for vulnerable sub-Saharan economies to hike [interest] rates. It’s another to restore financial stability at a time when market sentiment remains fragile, oil prices have fallen sharply and the [U.S.] Federal Reserve is preparing to hike rates.”
One of the worst-performing recently is the Ugandan shilling, which has dropped 21% over the past year, prompting the country’s Monetary Policy Committee (MPC) to meet one month earlier than expected after the shilling fell to another record low this week, before making a modest recovery after a Central Bank intervention.
The Bank of Uganda sold an unspecified amount of dollars in the foreign-exchange market Thursday to stabilise the currency and said it would meet on July 13 to “assess the current state of the economy and respond appropriately,” according to a statement e-mailed from the capital, Kampala.
The MPC, which usually meets every two months, raised its key rate by 100 basis points to 13% at its last meeting in June, citing accelerating inflation.
Neighbouring Kenya’s central bank has increased the benchmark interest rate by 150 basis points; the shilling has dropped about 10% against the dollar this year and breached 100 on Monday for the first time in more than three and a half years as a collapse in tourism and falling tea output reduces revenue from the nation’s two biggest foreign-currency earners.
Ghana’s cedi has tumbled 26% this year against the dollar, but with the release of the International Monetary Fund’s bailout funds - the rescue package is worth nearly $1 billion - the recovery has been considerable. The cedi has recouped almost all of its losses this year.
“We will not be complacent about the currency’s gains,” Minister of Finance Seth Terkper said. “We are also encouraging more flows and managing the reserves.”
Nigeria’s naira plunged dramatically between October and February, when crude prices were in free-fall. But authorities were able to arrest the decline, and although the Naira is exchanging for 20% more than it did last year, it has remained fairly stable for the past four months.
Angola’s kwanza has dropped 14% in the past year, battered by the fall in crude. But the country’s central bank said it would not defend the kwanza “at all costs” and it does not expect abrupt movements in the currency despite lower oil prices sapping U.S. dollar supply.
Angola is Africa’s second-largest crude producer and President Jose Eduardo dos Santos asked China for a two-year moratorium on debt repayments, state media reported last month, to shore up public finances.
The Tanzania shilling, too, has taken a tumble, dropping 25% in the first half of the year to a historic low, the second worst performing currency in Africa after the Ugandan shilling. To stabilise the shilling, the Bank of Tanzania pumped some $410 million into the market in the first five months of this year.
South Africa’s rand is similarly on the downward trend, shedding 7.2% of its value this year. Authorities are looking nervously at China’s stock market volatility, which may serious risks to the South African economy, more than the jitters in Europe.
“Unlike Greece, China is a very important country directly to South Africa,” Peter Worthington, an economist at Barclays Africa Group Ltd.’s investment banking division, told reporters in Johannesburg on Thursday. “It’s the main market for export of iron ore, it’s also a key source for global demand of commodities generally, so a very important underpinning for commodity prices.”
Some African governments have to shoulder part of the blame for the deterioration in their currencies, said Razia Khan, head of Africa macroeconomic research at Standard Chartered in London. “There has been a material deterioration in fiscal policy across a number of countries,” she said.
But the monetary policy measures to defend sliding currencies may only work in the short term.
“The model of increasing interest rates to strengthen your exchange rate can only take you so far,” Antoon de Klerk, a fund manager at Investec Asset Management told Bloomberg a fortnight ago.
“If you continue importing and people see your exchange rate depreciate from year to year, as happened in Ghana, then it does not matter if you pay 9%, 10% or 11% for money, it’s simply not enough to attract capital.”
Several other African countries may also have to raise rates as concerns over a depreciating currency and deteriorating inflation outlook outweigh those about growth. Top of the list are Mozambique, where the new metical has dropped 15% this year against the dollar, and Zambia, which has seen a 14% decline in the value of its kwacha.
“Longer term, a stable macroeconomic backdrop is the best guarantee of future growth,” said Ms Khan.
No comments:
Post a Comment