Africa: Oil exporters’ currencies set for big falls - Capital Economics
Africa Economics

Africa: Oil exporters’ currencies set for big falls

Africa Economics Update
Written by John Ashbourne

Risk-off sentiment has already battered the rand, but we think that the Nigerian naira and Angolan kwanza will both fall further later this year when policymakers are forced to accept painful devaluations. The kwanza will probably fall furthest, adding to economic disruptions in Angola.

  • Risk-off sentiment has already battered the rand, but we think that the Nigerian naira and Angolan kwanza will both fall further later this year when policymakers are forced to accept painful devaluations. The kwanza will probably fall furthest, adding to economic disruptions in Angola.
  • The South African rand has been one of the worst-performing EM currencies since 5th March. This mostly reflects the rand’s status as a bellwether of EM-wide sentiment Many of the region’s other major currencies are not purely market-determined, and have yet to respond to recent shock. Indeed, the big African currency moves are probably still to come.
  • The recent big falls in oil prices will deal a heavy blow to energy exporters’ terms of trade. (See Chart 1.) Indeed, we’ve already highlighted Angola as the major African economy likely to suffer the biggest economic shock this year. (We’ve cut our 2020 GDP growth forecast by 2%-pts, see here.) This sharp fall in export earnings comes at a time when Angola’s heavily-managed currency was already under pressure. Despite a devaluation in late 2019, the kwanza remains 36% stronger than the parallel rate. (See Chart 2.)
  • The situation in Nigeria is only a little bit better. The country not as oil dependent as Angola and faces a smaller shock to its terms of trade. (See Chart 1 again.) But it also has a managed currency that the authorities will not be able defend. Give our oil price forecasts, we expect that Nigeria’s reserves will soon fall below the US$30bn that policymakers had previously highlighted as a key threshold. (See Chart 3.)
  • We expect that the kwanza will fall by 18% to AOA600/US$ by the end of 2020, while the naira will end the year down 8% to NGN400/US$. (See Chart 4.) The fall in the latter may, admittedly, be pitched by the authorities as the creation of a new rate rather than a change in the NAFEX rate. Weaker currencies will not provide a boost to competitiveness in Nigeria or Angola. Neither country has significant non-oil exports, or the domestic manufacturing base needed to substitute for imported goods. Inflation will rise in both countries, though the effect may be muted in Angola due to the widespread use of the parallel rate. (See Chart 2 again.) A devaluation will also focus attention on Angola’s large FX debts, which we’ve long highlighted as posing a key economic risk.

Chart 1: Shift in Terms of Trade from Commodity Prices
(CE Est, 2020 vs. 2019, % of GDP)

Chart 2: Angola Exchange Rates (AOA per USD)

Chart 3: Nigeria FX Reserves & Oil Prices

Chart 4: Exchange Rate vs USD (%, Now to End-2020)

Sources: Bloomberg, National Sources, IMF, Capital Economics


John Ashbourne, Senior Emerging Markets Economist, +44 20 7808 4080, john.ashbourne@capitaleconomics.com