Naira will weaken further, says Renaissance Capital

Naira will weaken further, says Renaissance Capital

Monday, July 13, 2015 1:25 pm


Naira: bleak days ahead

Naira: bleak days ahead

Renaissance Capital has just released its forecast on eight Sub-Sahara African (SSA) currencies, most of which have in recent months come under significant pressure.

The forecast found the Kenyan shilling to be especially vulnerable (as it is an overvalued currency that depreciated by less than the EUR/$).

However, Nigeria’s limited policy space, implies the naira should weaken more than the shilling. Macro imbalances and dollar strength place overvalued currencies at risk of sizeable depreciations, and imply the undervalued Ghanaian cedi and Tanzanian shilling, may remain so, for longer.

Here are some highlights of the forecast:

KES is especially vulnerable

We found the Kenyan shilling (KES) to be one of the most vulnerable to a significant depreciation. This is because it is overvalued (given the deviation of its real effective exchange rate (REER) from the 10-year average) and its depreciation was smaller than the EUR/$ depreciation. The KES vulnerability explains the 300-bpt rate hike in recent weeks, by Kenya’s central bank. We believe policy tightening will slow the KES depreciation, but it will not halt it because weak exports, growing imports and a slowdown in financial inflows will weigh on the currency; as will US rate hikes that are due in the short term. Our Kenya REER suggests that the KES is c. 20% overvalued. We believe ongoing monetary tightening will keep the KES from hitting 120/$1. We thus revise our YE15 shilling forecast to KES109/$1 vs KES100.7/$1 previously.

Limited policy space increases NGN’s vulnerability

The naira (NGN) is also c. 20% overvalued but because its depreciation was in line with the EUR/$1 depreciation, it is less vulnerable than the KES, by our parameters. But given that Nigeria’s monetary policy is already exceptionally tight and fiscal policy is contractionary, we see little scope for further policy tightening to defend the NGN. Plugging of leakages may be improving FX reserves ($31.9bn on 7 July, according to the central bank). But as long as the price of the biggest source of FX inflows, oil exports, remains low, we are reluctant to attach any significance to this. Plus reports of pent up FX demand ($4bn, is one estimate from discussions with local banks) implies liquid FX reserves are lower than the official number. This is why we see the NGN depreciating by c. 18% to NGN235/$1 (vs 7% for KES) over the next six-to-12 months.

Ghanaian cedi and Tanzanian shilling are most likely to retrace. Our analysis suggests that the Ghanaian cedi (GHS) and the Tanzanian shilling’s (TZS) depreciation, in the year to May, was overdone. We came to this conclusion because both currencies are undervalued and their respective depreciations exceeded that of the EUR/$1. For these reasons, we think there is upside risk for both the GHS and TZS. By that we mean we could see the two currencies retrace (strengthen) from present levels. We believe it is because the GHS is undervalued that we saw its swift appreciation following positive news from the IMF on 30 June, on the country’s fiscal performance. That said, we believe a dollar that is likely to strengthen further from current levels, particularly when US rate hikes begin, implies undervalued currencies like the GHS and TZS may remain so for longer, i.e. their retracement/recovery is likely to be delayed.

Zambia’s fiscal imbalance puts the kwacha (ZMW) at risk of becoming undervalued like the GHS. Our analysis reveals that the ZMW was fairly valued in May (the end of our REER analysis period). And that it depreciated by less than the EUR/$1 depreciation. The 7% depreciation of the ZMW since May implies that the Zambian currency may now be a little undervalued. Zambia’s sizeable fiscal imbalance (c. 8% of GDP, according to the IMF) places the ZMW is at risk of a significant depreciation, a la Ghana. This means, like the GHS, the ZMW is likely to become significantly undervalued.

Of the East African Community’s three biggest economies, Uganda’s currency is the most likely to revert to its ‘fair value’, when we compare its REER to that of Kenya and Tanzania. Our analysis shows that the Ugandan shilling (UGX) was fairly valued and had depreciated by a little more than the EUR/$ depreciation in May (the end of our REER analysis period). However, the UGX has since depreciated by 17% against the dollar, which leads us to believe the UGX is now undervalued. Uganda’s central bank has called for a monetary policy committee meeting one month earlier than expected, for the week of 13 July. We expect the central bank to further tighten monetary policy in defence of the UGX. Once the dollar stabilises, we expect the UGX to be one of the first of SSA’s undervalued currencies to retrace and move back towards its ‘fair value’

*For more info, please contact Iain Gibson: on +971 553 387 748. email: [email protected]


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