Currency Risk in Africa: easing in 2018, but reserves have melted
The exchange rate risk is still relevant on the African continent, as evidenced by the depreciation of the Angolan kwanza by more than 30% since the partial liberalisation of the exchange rate regime in January 2018. The shock of falling commodity prices, particularly oil prices from summer 2014 onwards, destabilised many African countries. In the wake of the poor performance of its main economies (Nigeria, South Africa, Angola), the region’s growth slowed to its lowest level for 20 years in 2016. In addition to the slowdown in activity, commodity price developments have resulted in deteriorating terms of trade1 and downward pressure on most African currencies.
The exchange rates of exporters of oil (led by Nigeria and Angola) and of mineral resources (Mozambique, Zambia) have been under intense pressure, which in many cases has led to signifi cant depreciations, despite the use of foreign exchange reserves to mitigate their magnitude. Since 2013, the majority of African currencies have lost more than 20% of their value. For companies, these depreciations resulted in accelerating price increases for imported products, and an increase in their foreign currency-denominated debt burden. For those exporting and/or importing from these countries, currency instability has also meant higher costs for crossborder transactions. In some cases (Nigeria, Angola, Democratic Republic of the Congo), liquidity shortages have made it more diffi cult to repatriate profi ts, as well as to trade within borders. Capital controls (Egypt) and/ or import controls (Algeria), implemented to curb pressures on the foreign exchange market, have also had direct consequences on business operations.
In 2017, this depreciation movement eased as a result of the rise in commodity prices, but – as indicated by the exchange market pressure index deployed in this study – downward pressures remain signifi cant in some countries (Democratic Republic of the Congo, Ethiopia, Angola, Liberia, Guinea). For the countries that are the most dependent on income from natural resources, imbalances relative to the severe deterioration in fiscal and current account balances between 2014 and 2016 continue to exert pressure on exchange rates. Moreover, with the erosion of international reserves during this period, vulnerability to new external shocks must be monitored closely.
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