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FOREX Africa: Forces Conspire Against African Currencies In 2014

FOREX Africa: Forces Conspire Against African Currencies In 2014

As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.

Luckily, the ups and downs of the African currency markets are not one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.

A Tough Two Months

In a January summary of 2013 currency movements that appeared in this space previously, it was noted that the outlook for African currencies heading into 2014 was not altogether stellar. Most of Africa’s currency markets experienced a decline last year and the prognosis for the next wasn’t promising. The tapering of financial asset purchases by the U.S. Federal Reserve, continuing labor unrest in South Africa, political problems in Nigeria, and a slowed Chinese economy were all things to watch out for.

Unfortunately, many of these headwinds have in fact put significant downward pressure on African currencies. The South African rand, for instance, recently tumbled to a five-year low against the dollar, though it has since recovered somewhat, and with labor disputes still disrupting the all-important mining sector there the prospects for sustained upward movement on the rand as we head further into 2014 seem unlikely. Unless, of course, there is a dramatic turnaround in the mining sector.

Nigeria, Africa’s second-largest economy after South Africa, has also had its share of currency woes. The recent dismissal of the head of the Central Bank of Nigeria, Lamido Sanusi, by the country’s president, Goodluck Jonathan, after revealing what Sanusi alleges is massive fraud at the Nigerian National Petroleum Company has hit the country hard. The news sent the naira tumbling to its lowest valuation vis-à-vis the dollar since 1999 and the fallout, both political and economic, has raised the specter of currency crisis in the months ahead if Nigeria does not soon rekindle market confidence in the naira.

Other major Africa currencies have also felt downward pressure, though some more than others. The Kenyan shilling, for instance, has fallen from its January valuation of 86.20 KES to the U.S. dollar on January 1 of this year to its most recent close of 86.59 KES to the dollar as of March 10. Kenya’s neighbors to the north and south – Tanzania and Ethiopia – however, saw more forceful downward pressure on their currencies. The Ethiopian birr, for example, has fallen by one percent to 19.37 to the dollar since the beginning of the year while, over the same time period, the Tanzanian shilling has fallen by three percent versus the dollar to 1626.49.

Ghana and Sudan, unfortunately, have seen much larger declines in the valuation of their currencies. Sudan, of course, has been shorn of its oil resources as a result of South Sudanese independence while devaluation of the South Sudanese pound and civil war in South Sudan since the beginning of the year have put a crimp of that country’s vital oil exports – which flow through territory control’s by Khartoum. As a result the Sudanese pound has fallen by nearly 30-percent since the beginning of the year.

Ghana, meanwhile, has not broken from its perennial trend in the downward valuation of its currency, the cedi, which has fallen from 2.35 GHS to the U.S. dollar on January 1 to 2.55 GHS to the dollar as of March 10, a loss of 8.5 percent. This follows on a terrible performance last year when the cedi lost 24-percent versus the dollar in 2013. Indeed, the cedi is now at record lows against the dollar and the government there is apparently considering actions aimed at stemming further losses that, says Ghanaian President Dramani Mahama, could make many Ghanaians “uncomfortable.”

All is not bad news on the currency front, however. Angola, one of emerging Africa’s largest oil producers, has been able to keep the kwanza’s losses to a bare minimum. The Angolan currency moved from 97.61 AOA to the U.S. dollar at the beginning of the year to 97.59 AOA to the dollar as of March 10 – a barely discernable dip in the forex pits. The CFA Franc, keeping to form, has also done relatively well by bucking downwards trends in Africa and moving a similarly imperceptible amount upwards in valuation vis-à-vis the U.S. dollar.

Looking Ahead

As the old saying goes, past performance is no certainty of future gain (or loss), but in Africa we have several well-defined trends that seem to be making themselves felt across the continent. Fed tapering, still-weak Western labor and consumer markets, and weak Chinese demand – especially for petroleum – are all important factors putting downward pressure on African currencies that don’t look to be ending anytime soon. Politics, too, is also an important determining factor as South African labor unrest, the firing of Lamido Sanusi in Nigeria, and the chaos in the Sudans attest to.

So, on the currency front it pays to be wary. When larger global trends meet up with idiosyncratic political factors in a given country, they can have a powerful effect on currency valuations. On the other hand, growth and volatility go hand-in-hand. After all, if one is looking for currency certainty one could look to the stability provided by the CFA franc, but doing so would mean accepting as a consequence that African currency union’s subpar economic performance.

Angola, at present, looks so far to be maintaining currency stability this year while also exhibiting good growth – an attractive feature for investors. This is largely due to its dependence upon oil exports and its relatively small population – which makes the impact of oil revenues much more powerful than in giant Nigeria, where oil revenues are spread out over a vastly larger population. Still, with Chinese demand for oil slackening, Angola is not without risk altogether.

 

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.