In modern times, the different waves of economic
crisis have blown similar torrents. Initially, the crisis begins with huge uncertainties
that always convey indeterminate levels of risk, such that the probable
measures of the impact of the crisis are unknown and incalculable. This was the
case when the invisible coronavirus emerged; it was also the same when we were
faced with the subprime mortgage crisis of 2007. Financial crises always come
with concealed risks, sudden apprehensions of toxic jeopardy, and doubts about
the efficacy of economic and fiscal machinery made available to tackle the
extraordinary challenges of the catastrophe.
One important observation I made about every financial crisis is
the swift twirl and turns in bilateral currency rates. There is always a
massive dollar appreciation in the early stages of a financial crisis. This can
be due to dollar shortages or in some instances different countries are struck by
the emerging crisis at different time intervals. Emerging markets currencies
have been battered since the onset of the coronavirus pandemic; This was due to dollar scarcities, perceived safe-haven status of the dollar, and sharp
losses in the value of commodities. The South African Rand lost about 32% of its
value against the US dollar as it reached an all-time record low, however, the
rand has recovered more than 60% of its
losses and its setting its eye on the pre-covid19 levels. The CFA, a common
currency used by many Francophone countries lost almost 7% but has gained back
more than 80% of its losses The story is not different for other emerging
market currencies like the Brazilian Real and Mexican Peso.
However, this is not the case with the Zambian
Kwacha, which lost about 30% of its value to the COVID-19 pandemic and it’s
still holding on to its losses. The Egyptian Pound also lost about 15% of its
value to the dollar and is not seeing any respite yet in spite of recovery
in crude oil prices. The Ghanaian Cedi lost about 8% of its value and hasn’t
retraced a bit. The Nigerian Naira seems to be the hardest hit as it lost over
35% of its value in both its inter-bank and parallel market rates.
Obviously African and other Emerging market
currencies went on a losing streak due to a sell-off in risk assets because of
the complications of the coronavirus pandemic. Dollar scarcities and the safe-haven status of the US Dollar were the headlines for massive depreciation in
major and floating currencies around the world. However with new supplies of US
Dollar notes from the US Federal Reserve and interest rates in the US falling
to zero levels; this simply implies the US Dollar has lost its rate advantage over other
currencies. Consequently, there has been a sharp recovery of most currencies
against the US Dollar. However, there are important questions we need to ask at
this juncture which are; have we seen the bottom for African Currencies in this
coronavirus times? Or is the recent recovery in emerging markets currencies a
correction for the second leg of currency depreciation in African and Emerging market currencies?
Most African economies are heavily reliant on
commodities and tourism and are broadly exposed to international trade conditions.
This implies a correlation between African currencies and global risk assets.
Even though Crude Oil prices have been stabilizing, there is still a risk of a
further fall in Crude oil prices going forward which means there are further
risks to a decline in African currencies. The effects of the coronavirus
pandemic on growth expectations and capital valuations have been a significant devaluation
of expectations on capital performance globally. These factors will eventually
weigh in on Emerging Market assets and could ignite the second round of a
sell-off in African currencies.
One of the biggest risks to African currencies is
the re-emergence of the US-China trade war. The frail ceasefire between the
US and China on the trade front is been challenged by bickering from both sides
and it includes blames on the coronavirus, the sovereign status of Hong Kong
and there is a cold war brewing on the technology front. Obviously, the damage done
by the COVID-19 economic crises is so enormous that it makes it certain that it
would be too burdensome on the global economy to accommodate the effects of a
trade war at this time. However, tensions are increasing daily and the risks
of a continued US-China trade war are at a possible high. If global trade
tensions persist and materialize it will become a burden African currencies
will bear.
A likely victim of the coronavirus pandemic is The United Kingdom and European Union trade agreement. The UK and EU announced they
are making little progress in reaching an agreement even though both parties
have an end of year deadline to strike a Post-Brexit trade deal. The UK
government has made it clear it will not seek a further extension to the
negotiation with the EU. The recent developments in the UK and EU fronts are
making No-Deal Brexit risks to reappear. The chances of a No-Deal Brexit have
been dramatically increased in the last one week. The eventuality of a No-Deal
Brexit would have a downward impact on the global economy and would cause a
sell-off in risk-sensitive currencies and assets.
In financial markets, risks and volatility correlate
together. The more volatile a financial asset is, the more risky the asset is
said to be. Comparing the volatility of African capital market assets and currencies
with other emerging markets and developed markets assets and currencies in the
last ten years, assets of African markets and currencies have been more
volatile when market sentiments turn negative. African currencies have been
more vulnerable because the flight of funds out of African markets has been
rapid to developed markets when sentiments turn sour in the global economy. In
other words, African currencies are more risk-sensitive than their other brothers
and sisters in emerging and developed market economies.
The coronavirus economic crisis might be the biggest
crisis African countries might experience, there have been unprecedented
selling of relatively risky assets of African countries like bonds and shares
in African capital markets by foreign investors and the funds shipped to safer
havens such as the US, Japan, and European Markets. This has caused a reduction
in real money flows and holdings in most African economies.
The variation between Bond Yields and Credit Default
Swaps (CDS) in the developed countries and African countries has widened
largely in the last few months since the coronavirus pandemic surfaced. A Bond
Yield is the cost of borrowing by governments or other bondholders as the case
may be, while CDS is the cost of insuring the bonds against default. The
widening in Bond Yields and the increase in CDS shows investors believe that
African government debts are more prone to default. Widening Bond Yields have a
consistently negative impact on local currencies. The spiky sell-off in African
currencies is a consequence of foreign investors shipping out their funds.
However since weakness in African countries was not
country-specific issues, but were due to detrimental measures that accompanied
the coronavirus pandemic, the weakness in African currencies would be minimal
going forward and we will see some more recoveries of lost value in some cases.
This is because of the low-interest rates in the US and a bond-buying program
by the US Federal Reserve, which will limit the strength of the US dollar in
the immediate future. The possibilities of negative rates in the US are also a
gift to African currencies as this would limit the possible slide in their
value. This would also incite investors to move funds from the low yielding
developed markets into African markets.
African currencies will still lose some grounds but
at a decelerated pace.