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Naira Notes Reprieve Signals Gradual Depreciation

Naira notes reprieve signals gradual depreciation

The Naira appreciated against the dollar, trading at 731 from 735 at last week’s close, as the shortage of available local currency notes continues to create an artificial shield against the dollar in the unofficial market. Nigeria’s central bank this week said it would extend its notes exchange deadline until the end of the year, in line with an order from the Supreme Court. Putting old notes back into circulation is intended to ease the cash crunch, which has put a strain on business transactions nationwide. The central bank also introduced new open banking guidelines this week in a bid to boost innovation and competition and improve access to financial services. Given the additional clarity on the official acceptance of old Naira notes, we expect to see the currency weaken against the dollar. However, this is likely to happen only gradually, given that the central bank has already mopped up a sizeable portion of the old notes in preparation for replacement with new ones.

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Cedi under pressure as Ghana ends historic fuel subsidy

The Cedi declined against the dollar, trading at 12.70 from 12.29 at last week’s close. Ghana removed its fuel subsidy for the first time in 30 years in a bid to ease pressure on the government’s finances as it seeks a $3bn emergency IMF loan. Following the recent domestic debt exchange programme, Treasury bill rates dropped to 24% from 35%. Annual inflation at 52.8% in February eased slightly from 53.6% in January as food price increases decelerated. Ghanaian President Nana Akufo-Addo said the IMF will present the country’s loan request to its executive board by the end of this month. Until then, we expect the Cedi to remain under pressure, potentially touching 13 before it recovers. 

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Rand rally dislodged by global banking concerns

The Rand weakened against the dollar, trading at 18.41 from 18.32 at last week’s close, with gains earlier in the week cut short by a broad risk-off mood triggered by global banking concerns. The Rand had rallied to 18.12 amid news that the severity of the country’s ongoing power cuts had been reduced by two levels. The positive domestic momentum ended as Credit Suisse came under the spotlight after disclosing ‘material weakness’ in its financial reporting controls. We expect the Rand to continue trading in line with global sentiment, retesting last week’s low of 18.72 should global banking concerns spread.

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Record core inflation in Egypt keeps Pound under pressure

The Pound weakened against the dollar, trading at 30.90 from 30.74 at last week’s close, as annual inflation data exceeded market expectations. Prices rose at their fastest pace in 5 ½ years in February, with headline annual inflation hitting 31.9% from 25.8% in January. Core inflation—which ignores volatile items such as food—reached 40.26%, the highest level since the central bank began publishing the data in 2009. Despite an optimistic GDP forecast of 4.2% for the current fiscal year, the finance ministry widened its budget deficit target to 6.8% of GDP from 6.1%. Against this backdrop, we expect to see the Pound depreciate further as Egypt continues to grapple with a shortage of dollars.

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Kenya Shilling at new low amid Saudi credit deal

The Shilling fell to a fresh record low against the dollar, trading at 129.70/129.90 from 128.30/128.50 at last week’s close amid continued high FX demand from petroleum importers. In a bid to ease the dollar squeeze, Kenya’s government signed a deal with Saudi Aramco to supply Kenya with diesel and petrol on credit for six months, reducing the need for dollars in the short term. Meanwhile, Kenya reported that export earnings from tea increased by 1.5% to more than $1bn in 2022 as rising prices and the weaker Shilling resulted in higher FX inflows, despite a decline in volumes. The country’s FX reserves dropped again to a new low of just under $6.57bn, enough for only 3.67 months of import cover. We expect further stress for the Shilling in the near term as high dollar demand persists.

 

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Uganda Shilling weakens even as inflation eases  

The Shilling weakened against the dollar, trading at 3740 from 3698 at last week’s close. Annual inflation in Uganda eased for a fourth straight month in February, with prices rising 9.2%, compared to 10.4% in January—the slowest pace of price increases since August last year. This was mainly the result of slower price rises in education (4.1% vs. 12.8% in January) and furnishings and household equipment (9% vs. 13.4%). Food price increases slowed to 20.9% from 22.9% a month earlier. Energy and Minerals Minister Ruth Nankabirwa Ssentamu said the country will start generating nuclear power from 2031 with help from China. The first project is planned in Buyende, north of Kampala. We expect the Shilling to continue weakening in the near term. 

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Tanzanian Shilling steady ahead of US Vice President visit

The Shilling was unchanged against the dollar, trading at 2340, in line with last week’s close. US Vice President Kamala Harris is expected to visit Tanzania later this month during a three-country tour of the continent. The meeting should help strengthen business ties and US investment, as well as support climate adaptation and resilience efforts. Tanzania is seeking to attract more investment as it moves towards launching the Tanzania Electronic Investment Window, which will make it easier for investors to apply for investment permits and interact with relevant government departments. Given global risk-off sentiment, the Shilling may experience some marginal weakening in the coming days, though we don’t expect any sustained volatility. 

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West African sovereign borrowers struggle to raise cash

The West African banking sector is experiencing a liquidity squeeze triggered by the central bank’s efforts to tame inflation, which is having a significant impact on the securities market. Guinea Bissau and Mali were able to raise only a fraction of the cash sought at last week’s bond auction, and Togo suffered this week, raising just XOF9.68bn, less than half the XOF25bn that the country had been seeking. The five-year deal closed with a weighted average yield of 6.76%. Mali’s gold exports rose 8.4% last year as production levels increased. The country’s military government said it will delay a constitutional referendum this month that was seen as a first step to restoring democracy. 

 

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Issued by AZA Finance, this Newsletter is produced as a service to our clients. It is prepared by our dealing professionals and is based on their understanding and interpretation of market events. AZA Finance cannot be held responsible for any losses of whatever nature sustained as a result of action taken based on comments contained in this publication.

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