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Q3'21 FX Outlook - SSA Currencies: Resilience in uncertainty

During the first half of the year, vaccine-powered demand in advanced economies, Eurobond issuances, and multilateral support buoyed reserve levels and stabilized currencies within the region. However, the eruption of a more contagious Delta variant could hurt SSA currencies through the trade channel. The investment channel could also be drained by premature withdrawal of policy support and monetary policy normalization in advanced economies. However, we believe the recently increased Special Drawing Rights (SDR) allocation could support SSA currencies.

African central banks are increasingly buying into the Central Bank Digital Currency (CBDC) initiative. While South Africa launched a wholesale CBDC trial earlier in the year, Nigeria and Ghana are set to roll out theirs within the next two months. As opposed to the fluctuations associated with private digital currencies, such as Bitcoin, a CBDC could serve as a store of value. As the CBN picks October 1st as the launch date of its CBDC, the  “e-Naira”, all eyes are on the numerous benefits of the digital currency. Giving an insight into its modus operandi at the last MPC meeting, the CBN Governor stated that individuals could convert naira balances from their accounts to their digital wallets. While this could improve efficiency in our payments system, this could also help foster the apex bank’s financial inclusion goals. However, low internet penetration remains a possible barrier to wider adoption.