FREE

Q2'23 FX Outlook - Stuck between China and the West

Global financial contagion tops risks in Q1’23

In Q1’23, the dominant global theme was a global banking contagion scare, as the largest bank failure since 2008 was recorded. From Silicon Valley Bank to Credit Suisse, the echoes of a banking contagion filled the atmosphere. Although regulatory intervention helped in stemming the tide, the subsequent expansion in sovereign spreads of frontier economies to crisis levels had a negative passthrough to African currencies. The decision of the Fed to continue tightening in March further compounded downside risks.

 

Amid these risks, all currencies under our coverage weakened in Q1. The Ghanaian Cedi led the pack, slipping by 14% q/q to ₵11.70/$. Recall that in our , we had established that investors had priced in a 28% weakness in the Cedi over the next one year. This is amid sustained uncertainties about external debt restructuring. Already, African banks have booked impairments, possibly following the outcome of Ghana’s domestic debt exchange programme. We expect the Cedi to remain under pressure until talks with external bondholders are concluded.

 

Next to the Ghanaian Cedi, the Kenyan shilling has come under immense pressure. According to media reports, the shilling encountered its longest losing streak (-23%), which lasted for 60 days. This weakness stems from depletion of its external reserve stock to an 11-year low of $6.6 billion, equivalent to 3.66 months of import cover. The Kenyan authorities engaged in import deals with oil companies in the Middle east to ease demand for FX by oil marketers. This could enable oil marketers buy oil in shillings rather than dollars. While the Kenyan President has tried to discourage hoarding of the dollars due to its arrangements, the fundamental low supply of FX could send the currency to new lows.

 

The South African Rand underperformed in Q1’23. Apart from global financial contagion risks, its power outages and grey listing by the Financial Action Task force (FATF) plunged the rand to a new low of R18/$ before a brief recovery. Tagged the global financial watchdog, the FATF grey-listed South Africa for recognizing crypto as a financial product. The implication of this listing is it makes it difficult for South Africa to obtain loans from foreign banks and this could weigh on the currency in the near term.

 

Dwindling oil production resulted in a weaker Angolan Kwanza and Nigerian Naira. Maintenance work in an offshore field (Dalia) led to a two-month decline in Angola’s oil output. The Nigerian Naira closed slightly weaker, both in the official and parallel markets amid a local currency cash crunch, an uptick in oil production, and depletion in external reserves.