The rand has taken a beating in the world currency markets over the last two years, but is in fairly good company when measured against other African currencies.
Governments across the continent are stacking on debt to cover budget deficits, which has raised borrowing costs and contributed to currency weakness.
But the rand is among the worst of the lot. ETM Analytics pointed out last week that the rand on a trade-weighted basis is at its lowest level ever, measured against the basket of currencies representing our major trading partners.
Gareth Brickman, the Africa analyst at ETM Analytics, provides a laundry list of reasons for the rand’s poor performance, from Eskom blackouts to weaker commodity prices and government profligacy.
The rand-US dollar exchange rate has weakened 46% in the last two years, more than double the fall in the Kenyan shilling and Nigerian naira. In practical terms, this means the rand buys 26% less US dollars over the last two years.
The Ghana cedi-US dollar exchange rate is down 125% against the US dollar since May 2013, against 40% for the Zambian kwacha.
Two of the better performing currencies in Africa are the Kenyan shilling, down just 18% against the US dollar over the last two years, and the Nigerian naira, down 22%.
Worst of the lot is the Ghana cedi, which has been hammered by out-of-control government spending, central bank money-printing as well as weaker gold, oil and cocoa prices – its main export commodities. The Ghanaian Chamber of Mines reported that mineral revenues declined 16.7% last year, with gold making up 98% of receipts. Like SA, Ghana is experiencing severe electricity supply disruptions, while inflation is dangerously high at 17.1%.
Ghana’s central bank has mimicked the money printing habits of the West in an effort to stimulate economic growth. The central banks of Kenya, Nigeria and Zambia have been more restrained, though their currencies have also taken on water due to rising government debt and budget deficits.
Rand-USD, Ghana cedi-USD and Nigerian naira-USD currency comparison
Source: Share Magic
“Each country has different localised reasons for their weakening currencies, but the one factor in common is increased debt in some form or another. Most governments in Africa have expanded their budgetary spending, tolerating wider deficits and higher debt loads. The demand power generated by this leveraging exacerbates current account deficits, making their currencies vulnerable,” says Brickman.
The Kenya Central Bank raised interest rates 300 basis points over the past month to stem the slide in its currency, which threatens to usher in another bout of rampant inflation. Kenya’s consumer inflation touched 19% in 2011, aggravated by drought, falling commodity prices and rising import costs.
Ghana and Nigeria have tightened exchange controls over the last year, while SA has moved in the opposite direction, relaxing exchange controls for residents in the latest budget.
Zambia, too, is experiencing something of a currency crisis. The kwacha has blown out several times in recent years. “Zambia is an open economy with low levels of exchange reserves, leaving it highly exposed to temperamental foreign capital flows and fluctuating prices for copper, which accounts for about 70% of its foreign earnings. A decline in these earnings has driven the Zambian trade account into deficit, increasing the kwacha’s vulnerability,” says Brickman.
Another common theme across the continent is high local borrowing costs. Zambia’s six month bill yields are now 19.5%, nearly double the rate of 2012.
Ghana six-month bill yields are currently 25%, as against 11% in 2012. The country is still able to tap international bond markets, but at very high rates and shorter maturities. Zambia is also looking at tapping the Eurobond market to cover its budget deficit. Ghana has an IMF programme in place, which allows it to access the Eurobond market, but on highly prejudicial terms. Zambia is reluctant to have the IMF come in and scrutinise its spending, as any assistance would come with serious budgetary constraints.
History has shown that these currencies can depreciate rapidly in just a matter of months. Brickman says most African countries are under pressure to tighten up their budgets in the coming years. “If they don’t, you will see it reflected in weaker currencies, which will further fuel inflationary pressures. An improvement in commodity prices would provide some currency relief, but I don’t think we are going to see this playing much of a factor in coming quarters.”