Record lows for Naira, Cedi and Shilling as fuel shortages worsen; Fitch lifts Uganda outlook; Tanzania defies rising rates trend: AZA FX Week Ahead


African fuel shortages look set to worsen
Africa’s fuel shortages look set to get worse. Bloomberg reported oil exporting nations have started diverting shipments usually bound for Africa to higher paying European nations instead. At the same time, domestic producers are struggling. In Libya, for example, an 11-year conflict among tribal groups has caused extended shutdowns of port and oil facilities, causing production to plummet to around 200,000 barrels a day from 1.2 million a year ago. One bright spot emerged this week after two oil exploration companies made significant discoveries in Namibia, estimated at around four billion barrels-worth, which has the potential to double the country’s GDP by 2040. Yet we expect the broader pressure on fuel supplies to hurt businesses further, push inflation higher and increase the need for government spending.

Naira returns to record dollar low
The Naira depreciated against the dollar this week, revisiting its record low 611 from 607 at last week’s close. The move has in part been driven by traders who bought stablecoins as an alternative to dollars seeking to convert back to at a higher Naira rate, pushing up bids in the parallel market. Meantime, long queues at filling stations have resurfaced due to a drop in local gasoline supply. Nigeria’s government has urged people not to panic buy, stating that it has enough supply to cover the next 34 days. However, the scarcity of fuel is likely to persist given the widening gap between subsidised pump prices in Nigeria and non-subsidised prices in neighbouring countries, which is creating incentives for smuggling. We expect the Naira to remain at these record-low levels in the coming days.

Cedi hits record low as fuel import bill grows
The Cedi lost ground against the dollar again this week, sliding to a record-low 7.95 from 7.92 at last week’s close. Ghana’s monthly fuel import bill increased to $450m in May from $250m in January, Bloomberg reported, citing people familiar with the situation. Against that backdrop, the central bank is rationing the supply of dollars and licensed distributors can’t plug the shortfall in the informal@ market, the people said. Meanwhile this week, Newmont’s African unit sold 3,500 ounces of gold to the Bank of Ghana under the central bank’s gold purchasing programme. The initiative is designed to help stabilise the Cedi, which has lost more than a fifth of its value this year. We expect the currency to remain around this level in the week ahead, supported by the central bank’s $100m FX auction.

Rand gains as inflation spurs rate hike prospects
The Rand strengthened against the dollar this week, trading at 15.92 from 16.03 at last week’s close, defying a more cautious outlook for risk assets. South Africa’s annual inflation jumped to 6.5% in May from 5.9% in April, exceeded the central bank’s inflation target range of 3%-6% and raising the prospect of a larger than 50 basis point hike at the next monetary policy meeting. Investors will be keeping a close eye on the US Federal Reserve in the week ahead for signs of its next rate rise, with any expectation of an increase of 75bps or higher leading to more Rand outflows and weakening the currency beyond the 16 to 16.20 range. 

Egyptian Pound steady amid Lebanon gas deal
The Pound was steady against the dollar this week, trading at 18.74—in line with last week’s close. Egypt on Tuesday signed a deal to ship 650 million cubic metres of natural gas a year to Lebanon via Syria in an effort curb Lebanon’s crippling gas and electricity supply issues. This week’s interest rate decision will likely continue dictating the Pound’s direction in the near term. We expect the currency to continue trading in the range of 18.70 to 18.80. 

Kenyan Shilling slides to fresh dollar low
The Shilling weakened to a fresh record low against the dollar this week, trading at 117.50/117.70 from 117.20/117.40 at last week’s close. The latest slide comes amid increased market volatility globally and rising inflation, with the Kenya Association of Manufacturers also blaming it on a shortage of dollars—something that central bank Governor Patrick Njoroge denies. The Shilling’s depreciation has been tempered by a rise in remittance inflows, particularly from the US. Cumulative inflows jumped by 18.6% to just under $4bn in the 12 months to May, compared to $3.4bn during the same period a year earlier. We expect to see the Shilling come under sustained pressure in the immediate term amid investor caution ahead of August’s presidential election.

Ugandan Shilling gains as Fitch lifts ratings outlook
The Shilling strengthened against the dollar this week, trading at 3735 from 3739 at last week’s close. Credit rating agency Fitch Ratings revised its outlook on Uganda’s B+ sovereign credit rating to stable from negative, citing the country’s sustained economic recovery and its efforts to reduce its fiscal deficit. Fitch noted that while rising inflation and tighter financing conditions could stunt the near-term growth outlook, it believes increased investment in the country’s oil sector will boost growth over the medium term. We expect the Shilling to weaken in the near to medium term with the real economy and government debt ratios worsening.

As Tanzania defies rising rates, Shilling may weaken further
The Shilling depreciated to its lowest level against the dollar since March 2019, at 2333 from 2330 at last week’s close. Tanzania agreed a $1bn loan from the IMF this month to support the country’s five-year plan to develop the economy. Meantime, the central bank this week said it plans to continue supporting economic growth through a looser monetary policy environment, in contrast to tightening conditions elsewhere on the continent and globally. Against this backdrop, we expect the Shilling to depreciate further in the coming weeks, with rising debt levels adding to concerns.