SSA Currencies: Kicking the can down the hill
What shaped the past week? Global:
Global markets traded in a positive manner this week, driven by the latest corporate earnings reported around the globe. Starting in Asia, during the week, the Japanese Health Ministry cleared the oral treatment drug of Pfizer for COVID-19 which could have boosted sentiment across major markets in the region as the Japanese Nikkei-225 and the Shanghai Composite rose 0.93% and 3.02% w/w respectively. Furthermore on the macro-front, Malaysia saw its GDP expand by 3.1% y/y in 2021, with the local market rising 3.58% w/w. On a similar note, the Eurozone, saw significant buy-side activity across European markets, also driven by investors’ positive reaction to the latest batch of corporate earnings; companies such as AstraZeneca PLC, ThyssenKrupp AG, and Unilever PLC all posted annual rises in the latest earnings reports. Meanwhile, responding to the drawn out rise in consumer prices, the European Commission has raised its prediction for the growth of inflation in 2022 from 2.2% to as much as 3.5%. Amid this, stock markets like the German DAX, French CAC, and London FTSE-100 rose 2.72%, 1.38%, and 1.67% respectively for the week. Finally in the U.S., while it was another week of positive closes, we acknowledge that interest was marginal at best. According to a preliminary report by the University of Michigan on Friday, Consumer confidence dropped in February compared to the previous month, reaching its lowest level in over a decade. The Index of Consumer Sentiment came in at 61.7, marking an 8.2% drop m/m and a 19.7% plunge y/y and we believe that this may have lowered investor sentiment in the market. For the week, the S&P 500, Dow Jones, and Nasdaq Composite were up 0.40%, 0.9%, and 0.37% respectively.
Domestic Economy:
The Central Bank of Nigeria (CBN) announced the Race to 200 (RT200) FX initiative on Thursday, with the goals of increasing non-oil exports and repatriating $200 billion export proceeds over a three to five-year period. The initiative is built on five pillars. The first is a value-added export facility, which provides concessions and long-term funding to exporters who can add to the value chain beyond the exportation of raw material. Such exporters will be supported in establish or expand production plants. Second, the Non-oil Commodities Expansion Facility will aid in the expansion of local commodities that are not widely exported and will ensure raw materials are available to be processed by the plants established in the first pillar. Third, the Non-oil FX rebate scheme will provide rebates to exporters who repatriate funds through the Investors & Exporters window. Following that, a dedicated nonoil export terminal will be built to bypass congestion at existing ports and to facilitate agricultural exports. Finally, a biannual non-oil export summit will be held with relevant stakeholders to discuss sector challenges and opportunities.
Equities: The local market recorded marginal lossbonds es this week, as the NGX eased 0.16% w/w despite all sectors closing in the green. Starting in the Banking Space, the sector rose 2.34% w/w as interest in ACCESS (+2.94% w/w), ZENITHBANK (+2.09% w/w), and FIDELITYBK (+2.81% w/w) propelled the space higher as it ended the week at the best performer. Up next, the Consumer Goods space rebounded this week, as interest in FLOURMILLS (+10.62% w/w), GUINNESS (+24.61% w/w) and in smallmid cap names across the space, saw the sector rise 1.35% w/w. Moving to the Industrial Goods space (+0.06% w/w), interest in
WAPCO (+0.94% w/w) and JBERGER (+1.92% w/w) fueled gains across the sector. Finally, the Oil and Gas space closed in the green as well, rising 0.29% w/w, on the back of interest in ARDOVA; the oil marketer saw its stock rise 1.57% w/w.
Fixed Income:
Bullish sentiments persisted in the bonds and NTB segments this week, while minimal activity resulted in a flat close in the OMO segment. However, we saw buy side interest primarily at the long to mid end of the benchmark curve in both the NTB and bonds segments. The average yield on benchmark fell 5 basis points w/w while, the average yield in the NTB market fell 9 basis points w/w.
Currency: The Naira gained N0.33 at the I&E FX Window to close at N416.00
What will shape markets in the coming week? Equity market:
We saw a slight recovery in the banking space today, however, market traded bearish as most of the sectors closed in the red. We expect the new week to start off with mixed sentiment, amid cherrypicking activities.
Fixed Income:
In the coming week, we expect the bond market to trade on a tepid note ahead of Wednesday’s bond auction, while activity in the T-bills and OMO markets should pick up given current system liquidity levels.
Currency: We expect the naira to remain largely stable across the various windows of the currency space as the CBN maintains interventions in the FX market.
SSA Currencies: Kicking the can down the hill
In 2021, base effects drove commodity prices to record highs, providing relief for resource-dependent economies. In addition, stimulus measures shored up remittances, although increased adoption of cryptocurrencies narrowed the flow of currencies through official channels in developing economies. However, the greatest risk SSA currencies had to deal with was the winding down of policy support in advanced economies. With the United Kingdom being the first major country to hike interest rates, the accelerated pace of quantitative tapering in the United States (US) posed a major risk to several emerging economies, which had to deal with both rising domestic inflation and risk-off sentiments. As a result, rate hikes had to be implemented despite the overarching pro-recovery objective.
In 2021, a dark horse - the Angolan Kwanza - emerged the best performing currency across our coverage countries. Strengthening by 14% y/y, the comeback in the Kwanza can be linked to the recovery in oil prices and the hawkish stance by the Angolan apex bank. The Naira, on the other hand, lost 6% as low oil production, dampened remittance flows, and sour foreign appetite stifled FX supply amid mounting FX demand, low interest rates, and higher oil prices. Meanwhile, higher oil prices exerted pressure on the Kenyan Shilling as Kenya remains a net-importer of petroleum products. In South Africa, the strengthening of the dollar and the shift in the US’ monetary policy stance dragged the Rand.
Going into 2022, we see politics influencing currency returns, as Nigeria approaches its pre-election year while Angola and Kenya head to the polls. This, in addition to global macro headwinds, could add layers of pressures on these currencies. Going forward, we see room for upward adjustment of benchmark rates or further devaluations to stem the ensuing risk-off sentiments in the course of the year.