New ECO currency shelved for at least another year 

In a blow to trade prospects for Senegal and seven other countries in West Africa, the much-discussed plans to replace the CFA Franc with the ECO currency look set to remain stalled for at least another year. 

Under the ECO initiative, the countries' central bank reserves would no longer be placed with the French Treasury, and France would no longer have a representative on the central bank that controls the CFA Franc region, known as West African Economic and Monetary Union, or UEOMA by its initials in French. Ultimately, the ECO is envisaged for adoption across the Economic Community of West African States (Ecowas) region, which has 15 member countries including Ghana and Nigeria.

Senegal is among the countries that would benefit most from the ECO, as it would enable the smooth exchange of goods and services within the region and reduce the cost of transactions. Yet Senegal is among 10 member countries that would fail to meet the single currency convergence criteria set out by Ecowas, which include a budget deficit of not more than 4%, an inflation rate no higher than 5%, and debts valued at less than 70% of GDP. These strict criteria are a major challenge to the currency's introduction and, in our opinion, it seems unlikely that they will be met by most countries for at least another year. 

This is a setback for the region’s recovery. In Senegal, economic output has been mixed. Industrial production increased by 9.2% in January compared with the same month last year, according to the National Agency for Statistics and Demography, while remaining well below the months of October and November, which recorded jumps of 14% and 16.1%, respectively. The agency said January's strong showing was due to robust performance in the mining, manufacturing, water and electricity production sectors. Manufacturing production surged by 6.8% in January compared with the same month a year earlier, mainly because of an increase in refining and coking, and chemical and pharmaceutical production. On the other hand, the agro-food sector plummeted by 14.4% because of a steep fall in the production of food products.

Reserves boost buoys Naira, briefly, as rates held

The Naira held steady this week at 486 to the dollar on the parallel market as the Central Bank of Nigeria maintained its benchmark lending rate at 11.5%. Governor Godwin Emefiele said this would allow the bank to “deploy liquidity into employment generation and output-stimulating sectors of the economy,”  and help to consolidate the country's recovery process after the pandemic. The CBN cut rates twice last year to try to stimulate an economy hobbled by the Covid-19 pandemic and oil price crash. 

Emefiele also addressed speculation about unifying the country's multiple foreign exchange rates but insisted that Nigeria had not changed its FX management policy during the past month. The International Monetary Fund and World Trade Organisation have been pushing Nigeria to unify its exchange rates. Vice-President Yemi Osinbajo said on Tuesday that payments made as part of Nigeria’s federal allocation would use the NAFEX rate, when he was asked about reported plans for a unified flexible exchange rate rather than a pegged one.

On the I&E Window, the currency appreciated to 394 to the dollar on Monday, as gross external reserves broke a run of declines to climb to $34.59bn on March 23 from a low of $34.41bn on March 18. Gross reserves stood at $35.37bn on Dec. 31, underlying their slide this year. The Naira's bullish run was short lived and the currency closed yesterday at 408.75 on the I&E Window. We expect the calmer mood to continue in the coming week, with trading around 486 on the parallel market and in the 408 to 415 range on the I&E front.

Cedi in retreat mode as rates held amid inflation pressure

The Cedi weakened slightly to 5.76 levels from 5.75 at the end of last week. Ghana's money markets remain very liquid as the Bank of Ghana continues with its $50m fortnightly Foreign Exchange Forward Auction to support the currency, yet the mood is risk averse. The Bank of Ghana maintained its policy rate at 14.5% this week in a bid to contain emerging short-term inflation pressures from rising crude oil prices. "Risks to inflation in the near-term are broadly balanced, but there are emerging short-term pressures emanating from the rising crude oil prices and the direct and secondary price effects of the revenue measures announced in the 2021 budget," the bank’s monetary policy committee said. "Monetary policy would need to remain vigilant to monitor these risks." The MPC lowered the rate by 150 basis points in March last year, following the emergence of the country's first coronavirus cases. The rate was then maintained in May, July, September and November, as well as in January this year. We expect the currency to weaken further towards 5.80 levels in the coming week amid concerns over inflation as oil prices continue to rise.

Rand weaker amid fears of another Covid-19 wave

The Rand traded slightly weaker at 14.90 to the dollar from 14.68 last Friday during a shortened business week as markets closed for Human Rights Day on Monday. Business confidence remains subdued amid fears of a third wave of Covid-19 infections and further lockdowns. Retailer confidence has nosedived, dropping 12 index points to 37 in a trade survey published this week by the Bureau of Economic Research for the period between Jan. 18 and March 1. The decline had been expected given the temporary momentum in the final quarter of last year from pent-up demand for alcohol, festive season sales, and the vital social grant top-ups, which had all petered out by the first quarter. In the longer term, market sentiment towards the Rand remains bullish, supported by deep liquidity in the financial markets and signs of growing trade, especially with China. Still, we project further pressure on the Rand in the coming days on the risk of a fresh pandemic resurgence. 

Suez canal blockage harming Egypt revenue; pound slides

As one of the world's biggest cargo container ships lies on its side in the Suez Canal, blocking all international marine traffic, Egypt stands to lose significant revenue for every day that the waterway remains closed to traffic. Nearly 19,000 ships, or an average of 51.5 ships per day, with a net tonnage of 1.17 billion tonnes, passed through the canal during 2020, according to the Suez Canal Authority. The canal has been a boon for Egypt’s struggling economy in recent years, with the country earning $5.61bn in revenue from the waterway last year. Egypt’s Pound depreciated to 15.75 to the dollar from 15.68 at last Friday's close. We project further pressure on the currency from the disruption to shipping in the coming days.

Remittances to Kenya surge 18.9% in February

The Shilling remained steady at 107.75 to the dollar, from 107.70 a week ago, as strong dollar demand from manufacturers along with importers of energy and general merchandise was matched with dollar supply from tea exports and remittances from the Kenyan diaspora. Remittance inflows jumped by 18.9% to $260.2m in February, compared with $219m in the same month last year, the Central Bank of Kenya reported last Friday. Kenya's usable foreign exchange reserves increased to $7.41bn (4.55 months of import cover) on March 18,from $7.35bn on March 11. The central bank extended relief measures on loan restructurings by commercial banks to ease pressure from struggling borrowers. The policy first instituted in March last year has been extended to July. As month end approaches, we expect to see an increase in dollar demand from importers and forecast a slight weakening of the Shilling.

Uganda inflation creeps higher; expect pressure on Shilling 

The Shilling remained steady, trading in the 3,660/3,670 to the dollar range this week, supported by money market inflows from offshore investors and exporters of agricultural produce. The annual headline inflation rate increased slightly to 3.8% in February from 3.7% the previous month, the Ministry of Finance reported Monday, citing higher prices for second-hand vehicles, alcoholic beverages, medical services, and vegetables. We expect a stable Shilling in the coming week, with a slight increase in dollar demand in the approach to month-end import transaction payments. As the country's economy is being opened up to foreign direct investments – in particular in the oil and gas sector – we are longer term positive on the Shilling.

Tanzania's first female president sworn in 

The Shilling traded flat against the dollar in the 2314 to 2324 range this week, as inflows from minerals dealers and non-governmental organisations matched dollar demand from importers. Samia Suluhu Hassan was sworn in last Friday as Tanzania's first female president following the death of John Magufuli on March 17. The nation is in 21 days of official mourning. The former vice president may cut a different leadership figure than her predecessor. Turnover on the Dar es Salaam Stock Exchange increased almost 20-fold this week. For the FX markets, we foresee a stable Shilling in the coming week as end-month demand for dollars to settle import transactions will be balanced by increasing revenue from commodity exports including gold.