Currency Volatility

SSA local currencies have not been immune to the COVID-19 pandemic and its disastrous economic side effects. Throughout 2020, SSA currencies have seen their US dollar exchange rates spike and drop like an emergency room doctor’s heartbeat chart. And those are the lucky ones. Other African currencies have seen their value against the dollar steadily fall, month on month, with no cure in sight.
These really are volatile and uncertain times. Take the Ugandan shilling: after crashes in 2016 and 2018 it was fairly stable through 2017 and 2019, yet it spent 2020 bouncing from UGX3670/$ (in January) to UGX3900/$ (March) to UGX3700/$ (September). The South African rand has also been yo-yoing between ZAR14/$ (in January) and ZAR19/$ (April), while Mozambique’s metical (flat around MZN60/$ to the greenback since 2017) has spent the year steadily losing value, dropping to MZN72/$ by October, with no signs of recovery.

“We’ve seen extreme volatility and extreme depreciation this year,” says Gerald Katsenga, Head of Corporate Sales, ARO Markets at Absa. “That creates an opportunity for exporting companies, which can convert their dollars or hard currency at a much weaker rate and generate extra cash flows. Importing companies, on the other hand, are now not able to meet their budget rates because when those budgets were set, SSA local currencies were relatively stronger (say, ZAR13.25/$ to the dollar in January 2019), but you’re now spending, say, ZAR17 for a single dollar.”
At times like these, businesses and central banks tend to hold on to what they have. “Very limited hard currency was coming into the market, so local regulators in countries like Nigeria, Tanzania, Kenya and elsewhere responded by changing their regulations on foreign exchange,” says Katsenga. “In Zambia, for example, mining companies that are exporting were given a directive that they needed to pay tax in USD instead of in kwacha (the local unit). In addition, the government passed another circular restricting government ministries from dealing directly with commercial banks.”
That, of course, drained the liquidity from the interbank market, keeping dollars stuck in central banks and leaving businesses with volatile (and weakening) kwachas, cedis, shillings and rands in their corporate pockets.

Pandemic or no pandemic, regulation or no regulation, business in SSA had to continue. But businesses that trade internationally were left with an unexpected problem. “When I’m importing, I want to keep the value of my assets and my liabilities close together in terms of the currency,” says Katsenga. “I’ve got my imports, which I pay for in dollars, and my sales, which I’m paid for in local currency. I want to create some certainty in my cash flows, so I’ll lock in a rate so that I know exactly how much I’m going to pay – both now and in a few months’ time – for my dollars. But in a market like Mozambique, which has banned the use of derivatives (including forwards and swaps), I can’t do that now.”
If you’re an MNC exporting into Mozambique, where the metical faced persistent depreciation, that means that when you give your in-country clients 90-day payment terms on their invoices, when they eventually pay you after three months, you’ve lost on the value you were expecting to get in dollar terms.

There’s another complication: “The pandemic has also seen central banks across SSA aggressively lower their interest rates in line with the global trend of rate cuts, which means, in addition to flight to safe haven dollar assets, local assets lost their high yield appeal to foreign investors,” Katsenga says. To create certainty for our clients in an environment with sharp weakness in SSA currencies and to alleviate that foreign exchange risk, Absa’s FX teams innovated – using those historically low interest rates as their secret weapon.