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 aren’t 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 decision by the US Federal Reserve Bank (Fed) to keep its benchmark interest rate unchanged on Thursday gave African policymakers some breathing room as it ended speculation their local currencies would depreciate further against the dollar.
African central bankers were closely watching the Fed ahead of a rate setting meeting this week as local currencies, which have mostly fallen against a globally stronger dollar this year, slid further on speculation the US bank will hike interest rates for the first time in nine years as its economy recovers.
The Fed left interest rates un touched citing worries over global market and the low US inflation rate.
A rate hike by US would have sucked money out of emerging and frontier markets as investors move into dollar denominated assets.
Bloomberg quoted Kenya’s finance minister, Henry Rotich, saying that the US had a responsibility to prevent such a move that would have hurt emerging markets.
“Emerging markets and frontier economies like us are being affected by interest-rate hikes or by what’s happening with the strengthening of the dollar,” Rotich said on Wednesday.
Like many other African currencies, the Kenyan shilling has depreciated against the dollar this year, shedding 14 percent so far, due to falling commodity prices globally and growing import demand locally.
Other African currencies such as the Ghanaian cedi, the Zambian Kwacha, the Nigerian naira and the South African Rand have also tumbled against the greenback.
Most sub-Saharan Africa economies have grown at higher than the world average rate over the last decade as capital flowed from the US economy during and after the 2009 financial crisis. They also benefitted from increased export of commodities to China’s growing industries.
With a possible reversal in capital flow back to the US as its economy recovers and a slowdown in China, Africa’s boom is quickly coming to an end and depreciation currencies on the continent is a symptom of this change.
“A lot of countries would face depreciation of their own currencies if the US raises rates rapidly just because of improvements in its own economy, which would cause a reversal of capital back to the US,” Japanese Finance Minister Taro Aso said on Friday.
“I think there are many countries that won’t welcome capital flight,” he added.
In light of the unchanged interest rates in the US, analysts polled by Bloomberg expect African central bank to mirror this in their rate moves this month as the uncertaininty of a rate hike by the Fed still remains in coming months.
The Fed said its still on course to start raising interest rate before the end of this year.
South Africa’s central bank Governor Lesetja Kganyago said earlier this month that the uncertainty arising from the Fed decision was “not good for anyone” and it would be better if it was done with as soon as possible.
