Regional Currency Round-Up: Energy Exporters Hit Hard


Tuesday, September 06, 2016 7.03pm/ BMI Research

BMI View: African currencies have continued to show a huge divergence in performance since the start of the year, with a significant amount of volatility in the past month. Energy exporting countries such as Nigeria, Mozambique and Angola have seen significant downward pressure and incurred large losses against the US dollar in the year-to-date (YTD). In contrast, Zambia and South Africa have seen their currencies rebound, paring back a share of their losses after both countries saw sharp exchange rate depreciation in 2015.

Nigeria: The naira peg was removed in June, resulting in a 29.4% depreciation in the month of June and the year-to-date. The central bank's decision to float the currency and remove capital controls represents a crucial step towards addressing the severe dollar shortages created by the previous heterodox policies.

While we forecast some additional depreciation ahead for the naira, the extent of downward pressure will be tempered over as investment begins to pick up and oil prices continue to rise.

We forecast that the currency will average NGN242/USD in 2016, weakening further to average NGN298/USD in 2017 as the macroeconomic imbalances continue to weigh on the currency.

South Africa: The rand has strengthened 7.1% in the year to date, helping to claw back some of the losses incurred toward the end of last year. The rebound in commodity prices this year have certainly lent some support to the currency, as has the decision by ratings agencies Fitch and S&P to maintain South Africa's credit rating at investment grade in June.

Over the short-term, we believe more accommodative monetary policy in the developed world will buoy investor appetite for emerging market assets, offering tailwinds to the rand. However, we caution the country's macroeconomic fundamentals remain weak and as such still anticipate depreciation for the currency over a multi-quarter timeframe.

We forecast the rand will average ZAR15.40/USD this year, broadly in line with the year-to-date performance, but then weaken marginally in 2017 to average ZAR15.70/USD next year.

: The kwanza held steady at AOA169.22/USD in the last month, keeping the year-to-date depreciation at 20.1% against the US dollar. We forecast further weakness for the currency in 2017, albeit at a slower pace. The sharp depreciation in H116 came as the Banco Nacional de Angola enacted a series of large-scale devaluations in a bid to relieve downward pressure on the pegged currency in the wake of the collapse in oil prices.

In the coming quarters the bank will continue to adjust the currency downward, although with oil prices beginning to rebound and reserves having stabilised, the lion's share of depreciation has likely already occurred.

We forecast the currency will trade at AOA168.00/USD in 2016, suggesting moderate further depreciation from the year-to-date average of AO163.82/USD, weakening further to average AOA176.50/USD in 2017.

Kenya: The shilling has traded mostly sideways for much of the year, with almost no change since the start of June and a minor 1.0% appreciation in the year-to-date.

Although mildly positive sentiment combined with strong GDP growth has helped support the currency in H116, we believe depreciatory forces will build and will result in a slight weakening of the currency into 2017.

We forecast the shilling to average KES103.15/ USD in 2016 and KES105.50/USD in 2017.

Ghana: The cedi has weakened modestly in the year to date, depreciating by 3.0% in both June and the year to date. Moreover, while this modest depreciation has kept the currency broadly within the narrow GHS3.7-GHS3.9/USD band since September 2015, we expect the cedi will depreciate more substantially over the coming quarters, to average GHS4.02/USD in 2016, and GHS4.34/USD in 2017.

Downward pressures will start to pick up in H216 as the US dollar reserves are run down and investor uncertainty (and fiscal spending) rise as the November general election approaches.

Zambia: The kwacha has been one of Africa's best performing currencies this year.

It rallied a massive 7.0% in June, and even despite a sell-off in the early weeks of July, the currency is still up 5.8% in the year-to-date.

This strong performance in the last month has likely come on the back of quarterly domestic tax obligations, as mining firms which make their profits in dollars but must pay taxes in local currency, ramped up demand for kwachas.

While we maintain our view the currency will weaken over coming months due to investor sentiment deteriorating on the back of negative real rates for the country, the current performance of the unit and the potential for a victory by the investor friendly opposition candidate, Hakainde Hichilema, poses upside risks to our view.

We forecast the kwacha will average ZMW11.25/USD in 2016 and ZMW11.20/in 2017.


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