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Fluctuations begin to stabilize while uncertainty remains:
Overview of the sub-Saharan African foreign exchange market in April
The following is Standard Bank Group’s special column summarizing the sub-Saharan African foreign exchange market every month. The Financial Market Department of Standard Advisory (China) Limited provides monthly updates and analyses of the African foreign exchange market.
In April, COVID-19 continued to spread, with the number of confirmed cases around the world surpassing 3 million. In the financial markets, people once again witnessed history: WTI crude oil futures fell below zero for the first time (the closing price on April 20 was negative USD 37.63 per barrel). This once again warned us that the only thing certain in the financial markets is uncertainty, and there will be more unprecedented happenings in the future.
The prevention of black swans and grey rhinos will become a must for every financial market player to consider. In Nature of Exchange Rate, Guan Tao, former director of the International Payments Department at the State Administration of Foreign Exchange, mentioned: “Foreign exchange market is an efficient market, and exchange rate changes randomly. Therefore, linear extrapolations based on rational expectations can hardly identify short-term nonlinear changes in exchange rates... For enterprises, it is very important to establish risk-neutral awareness, not to substitute market judgment for market operation, and to control and manage currency mismatch risks. This is a pertinent suggestion for enterprise operators.
After a sharp depreciation in the first quarter, the exchange rate markets in most sub-Saharan African countries are relatively stable in April with fluctuations significantly reduced. What happens next depends on a range of internal and external factors. The main external factor is the change in the overall strength of USD. After the Federal Reserve System has cut interest rates back to near zero and planned to purchase assets in unlimited quantities to provide sufficient liquidity, the Federal Government of the United States launched a USD 2.9 trillion economic stimulus package. If COVID-19 control will be effective in the United States and if these rescue measures and stimulus will raise the expectation of the market that The US economy can recover rapidly, risk appetite in financial markets will be boosted and risk aversion of holding USD will decrease, thus weakening USD. Otherwise, USD will remain strong. Internal factors are the situation of COVID-19 control, work and production resumption and economic recovery in each country.
USD to NGN exchange rate
Low oil prices and low production have a significant impact on Nigeria’s crude oil export. The government’s expectation for crude oil export revenue has decreased from NGN 2.7 trillion at the beginning of this year to NGN 250 billion. Meanwhile, the withdrawal of foreign institutional investors from the Nigerian market has resulted in sustained foreign exchange outflows. Recently, Nigeria’s foreign exchange reserve decreased to about USD 34 billion, the lowest in two years.
Probably intending to save foreign exchange reserve, Central Bank of Nigeria, as the major source of foreign exchange, sharply cut the amount of foreign exchange to the domestic market: the average daily trading volume of IEFX, the major foreign exchange market, fell to about USD 50 million from USD 345 million in the first quarter. Enterprises are generally feeling a shortage of foreign exchange, and foreign exchange needed for the normal operation of import businesses cannot be supplied in full. The short supply of foreign exchange also resulted in the continued depreciation of the exchange rate. By the end of April, the market exchange rate was about NGN 390 to USD.
The Nigerian government has sought help from the International Monetary Fund (IMF), the World Bank, the African Development Bank (AfDB) and other financial institutions (By the end of April, the IMF has approved a USD 3.4 billion emergency financial assistance to Nigeria), which is conducive to increasing foreign exchange liquidity and reducing the pressure for further depreciation. However, whether Nigeria’s exchange rate will really stabilize depend on the recovery of international crude oil price and Nigeria’s crude oil export revenue.
USD to ZAR exchange rate
The exchange rate of ZAR experienced two fluctuations in April. At the beginning of April, Fitch Ratings followed Moody’s to further downgrade South Africa’s credit rating, which resulted in an exchange rate of ZAR 19.35 to USD, the lowest in history. In mid-April, South African Reserve Bank (SARB) held an emergency meeting and announced a further 100 basis point cut to the repo rate, making ZAR fell below 19 again after a brief rally. After that, the government announced ZAR 500 billion social and economic support package to stabilize the economy, leading to a rise in the yield of national debt that sold off before. It seems to have attracted the return of some foreign exchange, with ZAR rising back to near 18. Since May 1, South Africa’s lockdown will be eased from the highest level 5 to level 4, and work and production will resume partly with caution. However, this does not mean that COVID-19 is already under control since the number of confirmed cases is still on the rise and the specific effect requires further observation.
USD to KES exchange rate
The exchange rate of KES to USD remained between 105 and 107 over the month. The future development of COVID-19 will decide the demand for tea and fresh flower products in overseas markets, whether Kenya’s capacity will be sufficient to meet such demand, and the international demand in tourism and other sectors. Large-scale domestic infrastructure construction projects will result in the concentrated imports of raw materials and machinery and equipment in a short period, leading to fluctuations in the exchange rate. The Kenyan government is seeking help from the World Bank and the IMF. If approved, external assistance will increase foreign exchange inflow and support KES. It is also worth attention whether the Central Bank of Kenya will continue to regard a stable exchange rate as one of its aims and practice appropriate interventions when necessary.
USD to UGX exchange rate
Uganda’s 2021 election will happen in the first quarter of next year. In general, Uganda’s government expense will see a significant increase in the year before the election. An important part of this year’s budget is infrastructure construction related to oil and gas development projects, which will drive the increase in import demands. Coffee export and tourism are Uganda’s traditional sources of foreign exchange, which are expected to be severely affected by COVID-19. Foreign exchange is highly involved in Uganda’s bond market and will be significantly affected by risk appetite in the international market. In recent years, Uganda’s gold export saw a sharp increase, but real net foreign exchange income was limited by low domestic gold production. So far, a stronger factor affecting Uganda’s foreign exchange is the long-overdue final investment decision (FID). Once settled, the FID will bring considerable foreign investment to Uganda over the next few years and improve the balance of payments.
USD to TZS exchange rate
Tanzania will also welcome an election in October this year, so there is also a trend of expanding governmental expenses. Due to the severe impact of COVID-19, the country’s tourism and transportation have been contributing less to foreign exchange earnings. However, Tanzania’s cashew nut export by the end of last year saw a substantial growth than the previous year, and the rise of gold prices this year will probably boost the country’s gold export revenue. These all support the exchange rate of TZS (The country’s total gold export revenue increased from USD 1.5 billion in 2018 to USD 2.2 billion last year). Over the weeks, the exchange rate of TZS remained stable with fewer fluctuations. However, foreign exchange supply has become tight and the Bank of Tanzania has called on importers to slow their purchases of foreign exchange through persuasion but has not yet intervened in the market. This indicates that when prices do not reflect the supply-demand relationship, they, in turn, influence it.
Source: Standard Bank Group