This week’s article highlights the top five currencies to avoid in the near term:
Ghanaian Cedi
The decent of the Ghanaian Cedi is well documented in 2014. The currency was the continent’s worst performing currency in 2014, plummeting 26% against the dollar. The country fiscal policy has been lax, as emphasized by the IMF’s initial commentary following Ghana’s request for a $1.5 billion bailout as part of greater stabilization plan. The country’s budget deficit of 10% of GDP in 2013 is a manifestation of a country that is struggling to meet cost-cutting and revenue-boosting goals promised to the IMF. The country was once hailed as an up and coming economic giant. But the government is struggling to capitalize on a pseudo tax break from low oil prices as a net importer. It has not escaped the
pain of falling commodity prices as the country stalls in its efforts to boost the mining sector. All indications from the IMF and the country’s leadership point to efforts to turn the corner. But changing a lax financial culture and waiting on commodity prices to increase does not lend to a promising outlook for the Cedi in the near term.
Zambian Kwacha
Zambia’s commodities industry is still booming despite a drastic slide in copper prices. But the question remains for how long the industry can survive the decent. The Zambian currency is a good indication that things are challenging in the current environment. As the price of copper dropped nearly 20% between the end of January 2014 and the end of January 2015, the Zambian Kwacha nearly dropped a staggering 18% against the dollar. The government took aggressive measures to combat dollar growth and popularity within the country in 2012 when it banned the use of the US dollar for domestic transactions and in 2014 when it added a regulation that forced businesses to remit foreign currency profits back home into local currency. The efforts have achieved little in protecting the Kwacha. It is hard to bet on the Kwacha despite the government’s desire to do something better to protect the 12% growth in financial services from 2014. Also what will a new president mean for the country’s economic policies going forward?
Nigeria Naira
The fall of the Nigerian Naira began in early May after the kidnapping of the 2000 Nigerian girls and the #BringBackOurGirls campaign around mid- to late-April. If a political miscue in the government’s response to Boko Haram’s acts of terrorism created the initial bad taste in investors’ mouth, the fall in the oil price was a bitter addictive to economic brew in the country. The currency tumbled 13% in the last six months as the Brent crude oil price nearly plunged a remarkable 58% in the same time period. The government is limited in options as timing is a huge factor. First, the 2015 proposed budget was based on a revised benchmark oil price of $65 per barrel, which is 32% higher than the current price. Elections are in February and politicians naturally must play to the masses than to actual needs of the economy at hand. Accordingly the Nigerian Central Bank appears prepared to hold interest rates around 13% and stall a necessary increase until after the presidential election. The myriad of timing constraints and the overall oil environment does not bid well for the currency of Africa’s biggest oil producer.
South African Rand
Africa’s second largest economy struggles mainly from internal disruption as the African National Congress’s reelection has not reenergized the economy. Foreign investors continue to call for structural changes within the South African market. The country relies heavily on the mining sector but relationships with mining companies has slowly deteriorated due to employee strikes, reactive government policies and responses (that often frustrate mining companies), and an all-inclusive rising cost of doing business in the country. Low GDP growth expectations and a fall in commodity prices are further deterring factors for betting on the South African Rand. The Goldman Sachs Commodity index dropped more than 40% in the last six months and the South African Rand – unable to fight the tailwind – fell 10% in the same period. Little is coming from the government and the market to suggest a change in the near term.
Uganda Schilling
The Ugandan shilling sadly is an easy currency to target for this list with its current start to 2015. The currency has fallen almost 4% since the start of the year in addition to the approximate 11% it fell against the dollar during 2014. This year’s early fall is due to a drop in coffee exports and a widening trade deficit. The country should currently benefit from lower oil prices as it receives pseudo tax break as a net oil importer. But these low prices similarly work against the country’s desire to expand its oil sector. A Brent crude oil price below $50 provides little incentive for foreign investors to invest directly in the oil industry in the country or invest in sectors that would support the oil industry. The tourism sector has also missed its targets as potential tourists are scared by increasing safety concerns in East Africa and the country’s decreasing patience for particular groups of individuals within its border (including gays).
Positive outlook but tricky downside dynamics
Mozambique Metical
Betting on Mozambique is betting on a booming giant. But the country is budgeting on the potential of a gas bonanza in the future. Yet the gas price is not working in its favour, particularly at a time when the country requires a great amount of infrastructure investment. The price has not been above $6.00 since February 2014. A new norm was assumed by mid-2014 in $4.00 range but now prices sit below $3.00, equating to drastic 37% drop in the last two months. Then why bet on Mozambique? The country has investors heavily locked into infrastructure projects that it can still support from a large pot of foreign aid. Running a large deficit is less a faux-pas in economic management as foreign donors remain adamant in their support of the country. All indications from donors suggest that financial support will remain, especially after a successful presidential transition, and that the government is intent on seeing infrastructure projects to fruition. Those commitments and the potential for a rebound in gas prices suggest that the Mozambican metical is priced cheaply and has nice upside, even if it may take a while. But no one knows how long “a while” may be and, as one big former investor in the country described it, delays in project completion should easily be anticipated, undercutting the upside in the near term.
Ethiopia Birr
Ethiopia arguably should be a benefactor in the current oil and gas environment. Government insiders suggest that the country could save $500 million on refined petroleum imports in the current environment. However that number is exaggerated as it does not account for the potential volume increase of imports. Regardless of the volume considerations, the country has a pseudo tax break from lower oil prices and is prepared to use it to further invest in infrastructure to support other sectors, especially manufacturing, and boost Ethiopian exports. Exports should benefit from lower transport prices. But, as the government continues to warn us, these numbers are all things considered except any “major disasters.” Local sentiment is that the government could devalue the currency again to boost its exports (and consequently devalue the wealth of local individuals in one night). In other words, it is hard to bet on a currency that (1) locals fear could be devalued by the government, (2) could immediately suffer once oil prices rebound, and (3) endures in a very strict foreign exchange environment.
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