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Where are African currencies heading?

Where are African currencies heading?

The devaluation of the Turkish lira has sparked fears of contagion in emerging and frontier markets. Gaimin Nonyane, Ecobank’s Head of Economic Research, spells out the risks for African Business.

Are African currencies threatened by a run on the currency like we saw with the Turkish lira this summer?

There is always the risk of a knock-on effect because when there is a shock in any market it creates uncertainty in the global economy, which results in an increase in risk aversion. If investors decide to sell off in emerging markets [which includes a handful of African currencies such as those of Egypt and South Africa], it has a negative global effect for frontier markets [most African currencies].

What we’ve seen, ever since the Turkish crisis, as well as the Argentinian crisis, is increased volatility in African currencies, and on top of that you’ve got the US dollar strengthening as well [against all global currencies]. Add to this trade disputes, and you have a confluence of factors that will put pressure on African currencies over the short term.

For instance, Ghana was doing very well last year and we’ve seen the currency tumbling recently, to the point that their reserves are now declining because the central bank is being forced to continue to pump money into the foreign exchange markets to support the currency.

Are the fundamentals of African economies strong enough for those currencies to perform strongly over the medium term?

Because of the [commodity] crisis in 2014-15, which really hit them hard, these economies were in a fragile state already. The IMF stepped in in a number of countries and helped to support their external and fiscal accounts, such that it will reduce imbalances and help to stabilise their currencies. Because they were already in a fragile state, they are not at a level where they are very resilient to external shocks. However, we expect these economies to continue growing. We are not expecting a recession in most African countries like we’ve seen in South Africa recently. They will also be more resilient because of the central banks’ aggressive intervention and the IMF’s assistance as well as commodity prices remaining modest.

Can we expect further falls in the exchange rates?

The thing about African currencies, beside South Africa and Ghana, is that most of them have pegged exchange rates. The central bank intervenes aggressively; they’re not floating currencies. But had they not been on a managed peg, the situation would have been much worse than it is now.

Countries have been reaching out for assistance. Do you see a lot more of that taking place?

I think that will happen but maybe not so much now because they are on their programmes with the IMF. One of the challenges that countries face is the rising debt level. They have been cautioned by their donors that they need to reduce debt because that is one of the main factors that’s weakening their currencies, as they pay over the odds in terms of debt servicing costs. I think they will focus more on the concessional debt than on the commercial [debt] and the good thing also is that commodity prices have stabilised and they are modestly priced – not like the heady pre-crisis prices and not rock bottom either. n

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Written by African Business Magazine

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