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Q1'22 FX Outlook - SSA Currencies: Kicking the can down the hill

SSA Currencies: Kicking the can down the hill

In 2021, base effects drove commodity prices to record highs, providing relief for resource-dependent economies. In addition, stimulus measures shored up remittances, although increased adoption of cryptocurrencies narrowed the flow of currencies through official channels in developing economies. However, the greatest risk SSA currencies had to deal with was the winding down of policy support in advanced economies. With the United Kingdom being the first major country to hike interest rates, the accelerated pace of quantitative tapering in the United States (US) posed a major risk to several emerging economies, which had to deal with both rising domestic inflation and risk-off sentiments. As a result, rate hikes had to be implemented despite the overarching pro-recovery objective.  

In 2021, a dark horse - the Angolan Kwanza - emerged the best performing currency across our coverage countries. Strengthening by 14% y/y, the comeback in the Kwanza can be linked to the recovery in oil prices and the hawkish stance by the Angolan apex bank. The Naira, on the other hand, lost 6% as low oil production, dampened remittance flows, and sour foreign appetite stifled FX supply amid mounting FX demand, low interest rates, and higher oil prices. Meanwhile, higher oil prices exerted pressure on the Kenyan Shilling as Kenya remains a net-importer of petroleum products. In South Africa, the strengthening of the dollar and the shift in the US’ monetary policy stance dragged the Rand.

Going into 2022, we see politics influencing currency returns, as Nigeria approaches its pre-election year while Angola and Kenya head to the polls. This, in addition to global macro headwinds, could add layers of pressures on these currencies. Going forward, we see room for upward adjustment of benchmark rates or further devaluations to stem the ensuing risk-off sentiments in the course of the year.

SSA: Macro dynamics could induce weaker returns in 2022

In 2021, the reflation trade boded well for several asset classes, as Brent Crude recorded its fastest gain in 5 years. Contrary to historical evidence, an unusual feature of the prior year is the coexistence of a stronger dollar and higher commodity prices, especially oil. While anticipation of a hawkish response to inflation strengthened the dollar, the global economy was awash with liquidity, which found its way into stock exchanges and alternative assets, including commodities.

Going into 2022, these dynamics could change as the withdrawal of policy support culminates to rate hikes, rising treasury yields in advanced economies, sell-off in emerging markets, and rate hikes by central banks. Already, bearish momentums have been observed in global stock markets, indicating the flow of funds out of risky assets. However, supply chain disruptions, green initiatives, and geopolitical tensions could spur oil and metal prices, while risk aversion could cause the US Dollar to strengthen in the current year.