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COVID FX toll extreme in S. Sudan; Fewer infections lift Rand; CBN mechanism to steady Naira

COVID FX toll extreme in South Sudan

Africa’s central banks have taken varying actions to safeguard stability and protect livelihoods against the effects of COVID-19, from slashing lending rates to deploying scarce dollar reserves. In South Sudan, the central bank has run out of options. It warned that the nation’s currency was devaluing rapidly as a plunge in oil output from 250,000 BPD before the civil war to 180,000 BPD now. This, coupled with volatile fuel prices during the pandemic, has caused the revenue to plummet. The South Sudanese Pound trades at several rates as the central bank has no system to unify money flowing in and out of the country. For example, last week the central bank rate stood at 165 per dollar, while the commercial bank rate was 190 and informal market traders exchanged at 400. The deputy governor said the central bank can do little about this since it doesn’t have enough reserves to intervene. With not even a pretense of intervention, South Sudan’s Pound is destined for further devaluation, limiting the capacity to purchase imports. As a result, the prices of essential products like oil, meat, and cereals will soar and inflation will follow. Support is needed.

Falling infections underpin Rand stability

The Rand gained during the week, dipping below 17 against the dollar to peak at 16.81, as investors celebrated positive trade talks between the U.S. and China while reveling in elevated hope that a coronavirus treatment could soon be available to help curtail the pandemic, even in the absence of a vaccine. At home, South Africans registered the fewest new infections since May at 1,507. The buoyant mood was damped only slightly on Wednesday with a 0.45% weakening in the Rand after annual CPI jumped to a 4 month high of 3.2% for July, from 2.2% in June, as lockdown restrictions continued to ease. While above consensus market expectations of 3.1%, inflation remains well within the central bank’s target of 3-6%. We expect the negative pressure on the Rand will continue to ease in the coming week.

New CBN mechanism to stabilize Naira

The Naira held steady against the dollar in the parallel market during the week, maintaining levels of 472/477, amid new CBN measures aimed at helping to stabilize the exchange rate. The Product Price Verification Mechanism is a check against over-invoicing in the FX market, transfer pricing, double handling charges, and other avoidable costs. In its drive for prudent use of foreign exchange resources, the CBN also barred buying agents or other third parties from accessing its SMIS FX window through so-called Form M transactions. We see the measures contributing to Naira stability in the coming week.

CBK intervention faces mounting pressure

The Kenyan Shilling traded steadily at 107.95/108.15 levels during the week amid strong dollar demand from manufacturers and the energy sector combined with companies paying dividends to foreign investors. The CBK smoothed the volatility by selling dollars, as indicated by a decline in usable foreign exchange reserves to USD 9,175 million (5.6 months of import cover) from USD 9,249 million in the previous week. We expect further pressure on the Shilling this coming week given higher oil prices and demand for dollars to settle end-of-month import bills.

Ugandan Shilling faces manufacturer demand for dollars

The Ugandan Shilling stabilized at levels of 3672/3680 due to subdued demand for dollars from importers combined with inflows from NGOs. However, we foresee pressure returning this coming week as we anticipate increased dollar demand from importers in the manufacturing sectors.

Tanzania downgrade balanced by BOT intervention

The Tanzanian Shilling strengthened for a third week, climbing to 2311/2325 (2318) against the dollar from 2315/2325 (2320) a week ago. The Bank of Tanzania participated as a net seller of dollars for liquidity management aimed at maintaining orderly money market conditions. Last week, Moody’s downgraded the foreign and local currency issuer ratings of the Government of Tanzania to B2 from B1, saying it reflects weaknesses in governance, especially policy unpredictability. However, Moody’s improved its outlook to stable from negative, reflecting Tanzania’s relatively large and diversified economy. The BOT this week challenged banks and financial institutions to fund sectors such as agricultural and tourist businesses to help the recovery from COVID-19. We project a stable Shilling in the coming week, supported by inflows from commodity exports including coffee, cashew nuts, cotton, and gold, matching demand for dollars.

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