African Currencies Struggle Amid Global Headwinds

While emerging market currencies have broadly benefited from a softer US dollar this quarter, African currencies have bucked the trend, weighed down by local economic challenges. A lack of dollar liquidity, inflationary pressures, and volatile commodity prices have contributed to the weak performance of several African currencies, including the Zambian kwacha, the Angolan kwanza, and the Nigerian naira.

Navigating the Turbulent Tides of African Currency Markets

The Naira's Uphill Battle

Nigeria's naira continues to face significant pressure despite reforms aimed at liberalizing the current account. The currency remains undervalued relative to its long-term neutral value due to ongoing issues around liquidity and dollar supply. While Nigeria has made progress towards current account liberalization since the Tinubu victory in 2023, challenges persist in the form of tight regulations on the banking sector and BDC operators, contributing to risk aversion. Declining Brent crude prices have only exacerbated the problem, as Nigeria's heavy reliance on oil exports leaves the country vulnerable to fluctuations in global energy markets. Experts suggest that the naira should be trading closer to 1,100 per dollar in the absence of distortions, compared to the current rate of 1,544 per dollar. However, without significant policy changes and improved dollar liquidity, the outlook for the naira remains fragile.

The Kwanza's Downward Spiral

The Angolan kwanza has depreciated over 11% this year, reaching 940 per dollar, the lowest level in 25 years. The currency's decline is primarily linked to the country's reliance on oil, which accounts for over 60% of its budget. As global crude prices have fallen, Angola's hard-currency reserves have been depleted, leading the central bank to scale back its interventions and further weaken the kwanza. Despite Angola's efforts to diversify its economy, the country's debt burden and structural issues continue to put pressure on the currency. Experts predict that the kwanza will likely remain weak through the end of the year as the government prioritizes debt repayments over increasing foreign exchange supply.

Zambia's Kwacha Conundrum

The Zambian kwacha has fallen to its weakest level since June, trading at 26.4698 per dollar, amid concerns over fiscal sustainability. Ongoing droughts in the country have increased its external financing needs, with food and power imports depleting its reserves. While the government's revised interbank FX rules have had some success in stabilizing the kwacha, investment confidence remains weak due to new regulatory changes in the mining sector. Zambia, which has a $1.7 billion economic program with the IMF and is considering asking for more help, faces a delicate balance between fiscal reforms and social spending. With copper prices showing little sign of recovery and political uncertainty rising, the outlook for the Zambian kwacha remains clouded.

Global Factors Exacerbating African Currency Woes

The direction of the US dollar and interest rates will certainly influence portfolio flows in and out of African assets, according to experts. However, the effects or trends are hard to generalize, as the region's FX markets are characterized by idiosyncratic risks and unique currency regimes and policy settings. While African currencies will remain volatile in the short term, improvements in global capital flows and local reforms could provide some respite over the medium term.