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Despite being top oil producers in Africa, Nigeria and Angola have surprisingly witnessed the worst currency performance year to date, with the Nigerian naira losing more than 40% of its value in 2023.
Angola’s local currency also suffered a significant devaluation, losing approximately 39% of its value since the beginning of the year, despite the surge in global crude oil prices.
A report by CardinalStone Research attributes this currency depreciation in African nations to low foreign currency liquidity, which continues to put pressure on their currencies.
Throughout the year, the Egyptian pound lost 20% of its value, despite government efforts to secure funding support from the International Monetary Fund (IMF), which included devaluing the Egyptian currency. Kenya’s shilling also experienced a 15.2% decline in purchasing power due to weak foreign exchange inflows and increased demand for imports amid fiscal pressures.
Ghana’s cedis depreciated by 10.5% year-to-date, even though the country implemented several exchange programs to boost its local economic performance following a debt crisis.
Zambia saw its kwacha lose 10.4% of its value after a debt default and eventual settlement with international creditors, while Rwanda experienced a 10.5% year-to-date decline in its exchange rate.
In contrast, Mozambique’s metical and Uganda’s shilling remained relatively stable, with minimal fluctuations. The Mauritian rupee saw a 3.1% decline in its exchange rate, followed by a 5.9% drop in the Botswana Pula.
Despite reform efforts, African currencies continued to depreciate in August, driven by pent-up foreign exchange demand in sectors like manufacturing and energy, particularly in Zambia and Kenya, as well as similar pressures in Egypt and Nigeria.
CardinalStone Research predicts that African currencies will likely remain under pressure in September, primarily due to fiscal inadequacies and elevated foreign currency demand.
The investment firm expects further depreciation over the next 12 months, as external imbalances highlight the need for more foreign inflows and tighter monetary policies to support carry trade.
Analysts noted that African sovereign credits faced new challenges in August, including concerns about military coups, wider yield spreads, and a strengthening US dollar. The US dollar index (DXY) rose by 1.7% in August, indicating a possible “higher for longer rate” environment, which has implications for African currencies.
CardinalStone also cited China’s ongoing COVID and property crises, as well as uninspiring performances in countries like Kenya, Nigeria, and South Africa, as factors influencing currency sentiment.
Despite reform initiatives in some countries, August saw setbacks, such as Kenya partially reinstating fuel subsidies to stabilize retail fuel prices, and Nigeria experiencing tight liquidity conditions and concerns about the Central Bank’s net international reserves.
South Africa faced fiscal concerns due to increased spending on public wages and a decline in tax receipts. These factors contributed to a 3.7% decline in the Bloomberg African Bond Index in August.
Navigating African local currency sovereign credits is expected to be challenging in September, with ongoing global uncertainties and the potential for negative pass-through effects from a stronger US dollar. CardinalStone Research anticipates that investors will carefully select instruments in countries with relative fiscal prudence, given the elevated borrowing costs compared to pre-tightening levels.
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