By contrast, Tanzania's Shilling is among the least vulnerable to depreciation in 2021 (i.e. we project depreciation between 1.0% and 5.49%, year-on-year). The currency is buoyed by a relatively diversified economy and resilient capital inflows even as downside risks prevail. 

On the whole, risks are skewed to the downside for sub-Saharan currencies with one potential, and significant, tailwind being the anticipated rollout of mass Covid-19 vaccination within H1 2021. Widespread and successful rollout would accelerate the return to near normalcy in business operations

*Note: High vulnerability would entail projected depreciation in double digits. Muted vulnerability would entail projected depreciation below 1%.

Naira official rate to slide toward parallel market levels

We expect the Naira’s official rate to average 408 to the US$ in 2021, posting a 6.81% depreciation compared to the average exchange rate of 382.0 in 2020. Our forecast is anchored on the following:

• Anticipated rebound in demand for oil in the global market will be tempered in line with OPEC’s downgraded projection of 6.54 million barrels per day as the global economy picks up from the Covid-19 induced slump
• Nigeria reduced its projected oil output for 2021 by 19.3% year-on-year to 1.86 million barrels per day. The Federal government has also slashed the benchmark price of oil assumed in the 2021 budget to US$ 40 per barrel compared to US$ 60 in 2020 
• On the monetary policy front, the Central Bank of Nigeria has minimal, if any, wiggle room for the tightening needed to help prop up the Naira. We expect a neutral stance with the benchmark rate being retained at 11.5% through H1 2021. There is a likely bias for an expansionary adjustment within H2 2021 to support economic growth
  
  

What would make us more positive?

Our best-case scenario anticipates the Naira weakening 4.71% to an average 400.0 to the US$ in 2021. Materialization of this scenario could be precipitated by: 

• The unlikely possibility that the Central Bank of Nigeria defies fundamentals and hikes the benchmark rate by at least 100.0 bps in Q1 2021. Such a move would be anchored on inflation fears with both core and headline inflation on a sustained uptick 
• A rebound in global demand for oil which exceeds OPEC’s projected increase for 2021. This scenario could be brought about by the prospect of a mass global rollout of Covid-19 vaccines in Q1 2021 and a return to normalcy in business
• A peripheral factor would be rising international pressure compelling the government of Nigeria to address the demands raised by the EndSARS movement, bringing the protests to a halt by the end of Q1 2021 

What would make us more negative?

Our worst-case scenario anticipates the Naira depreciating 9.95% to an average 420.0 to the US$ in 2021. Materialization of this scenario could be brought about by: 

• Central Bank of Nigeria switching from the present neutral stance to a more accommodative one, slashing interest rates by 50.0 bps or more within H2 2021. This would happen in the unlikely event that Q1 2021 GDP growth registers a contraction that is larger than 3.0%, which would imply the economy is caught in a recession with the prospect of an L-shaped recovery
• Faltering of the rebound in global demand for oil due to resumption of lockdowns and restricted movement in Europe and the US 
• The government maintains an abrasive approach to the EndSARS movement. Protests prolong into Q2 2021, worsening the political risk profile

Rand at risk from state enterprises, current account deficit

We expect the Rand to average 17.62 to the US$ in 2021, posting a 5.38% depreciation compared to the average exchange rate of 16.72 in 2020. Our forecast is hinged on the following:

• We expect the South African Reserve Bank to retain the repo rate at 3.5% through 2021, bringing an end to the accommodative adjustments seen in 2020
• Reforms of debt laden State Owned Enterprises, such as Eskom, are slow and undermine the agreement South Africa entered with the International Monetary Fund for the July 2020 US$ 4.2 billion credit facility
• The current account balance is poised to enter negative territory to register a deficit of 1.7% of GDP in 2021, compared to a surplus of 0.5% in 2020

What would make us more positive?

Our best-case scenario anticipates the Rand weakening 4.07% to an average 17.40 to the US$ in 2021. Materialization of this scenario could be precipitated by: 

• National rollout of a Covid-19 vaccine within Q1 2021, latest Q2 2021, allowing the government to relax remaining safety restrictions, such as the reduced overnight curfew, and precipitating further improvement in the business environment and creating a tailwind for the economy
• Inflow of diaspora remittances, though likely to decline from the expected US$ 840 million in 2020, remaining resilient in 2021. Our base case is for inflows to stand at about US$ 664 million in 2021, compared with US$ 890 million in 2019
• Trading under the Africa Continental Free Trade Area, whose kick-off in July 2020 was derailed by the Covid-19 pandemic, proceeds as planned in January 2021 and allows South Africa, which has a relatively more advanced industrial base, to diversify further into the vast African market
  

What would make us more negative?

Our worst-case scenario anticipates the Rand depreciating 6.76% to an average 17.85 to the US$ in 2021. Materialization of this scenario could be brought about by:

• Muted inflation pressure due to subdued oil prices in the global market and weak demand domestically staving off any likelihood of tightened monetary policy in 2021. As such, the headline inflation figure would trend within the target 3.0% - 6.0% band
• Heightened momentum in efforts to nationalize the South African Reserve Bank, sending signals of attempts to undermine the autonomy of monetary policy formulation
• Poor performance by the ruling ANC in the 2021 municipal elections, presenting a challenge on two fronts:
  • To the leadership of Cyril Ramaphosa, which has largely been perceived to be pro-investment
  • To policy continuity, particularly at a time the country faces a deep economic downturn
    
    

Post-election Ghana faces policy constraints

We expect the Cedi to average 6.20 to the US$ in 2021, posting a 6.89% depreciation compared to the average exchange rate of 5.80 in 2020. Our forecast is hinged on the following:

• The monetary policy rate, at 14.5%, stands at the lowest point it has been at in eight years. With this in mind, the Bank of Ghana will most likely maintain a neutral stance in 2021
• We anticipate that Budget 2021, due to be tabled before the National Assembly in March 2021, will set the oil benchmark price at between US$ 40 and US$ 45 per barrel, a significant downgrade from the US$ 62.2 per barrel adopted in the 2020 budget

What would make us more positive?

Our best-case scenario anticipates the Cedi weakening 3.45% to an average 6.00 to the US$ in 2021. Materialization of this scenario could be precipitated by: 

• The possibility that the Bank of Ghana increases the benchmark rate within Q2 2021 given headline inflation rising to an average 10.8% (vs. 10.4% at the close of Q4 2020) would have significantly breached the target ceiling of 10.0%
• The planned issuance of a US$5.4 billion sovereign bond in 2021 is fully or oversubscribed, albeit at a premium owing to risk-off sentiment. The Cedi benefits from inflow of hard currency

What would make us more negative?

Our worst-case scenario anticipates the Cedi depreciating 15.52% to an average 6.70 to the US$ in 2021. Materialization of this scenario could be brought about by:

• The likelihood that weak performance by the country’s main exports, oil and cocoa, pushes the current account deficit to 3.8% of GDP in 2021 compared to 2.9% in 2020
• Policies post-election and Covid-19 reversing gains made on the fiscal consolidation front. The fiscal deficit to GDP ratio closes 2021 at 9.3% of GDP compared to 7.3% in 2019 and 16.4% in 2020

Widening Kenya trade deficit points to weaker Shilling
 
We expect the Kenyan Shilling to average 112.70 to the US$ in 2021, posting a 5.70% depreciation compared to the average exchange rate of 106.60 in 2020. Our forecast is hinged on the following:

• Resumption of business will see imports rise faster than exports, eroding the gains realized on the external front during the lockdown period. We expect the merchandise trade deficit to deteriorate to an average of 9.7% of GDP in 2021 from the present 8.3%
• A rise in the global price of oil to average US$47 per barrel in 2021 inflicts rising pressure on the country’s import bill and further adversely impacts the external balance
• The Central Bank of Kenya maintains a neutral monetary policy stance through 2021

What would make us more positive?

Our best-case scenario anticipates the Shilling weakening 4.88% to an average 111.80 to the US$ in 2021. Materialization of this scenario could be precipitated by: 

• Diaspora remittances maintaining a resilient uptick to close 2021 at an aggregate US$ 3.6 billion (up from a projected US$ 3.0 billion in 2020)
• Kenya successfully concluding talks with the International Monetary Fund, renewing access to a stand-by credit facility in the order of US$ 1.5 billion 
• Foreign exchange reserves remaining robust, above 4 ½ months of import cover, giving the Central Bank capacity to smooth out volatility
• Kenya securing widened access to the post-Brexit UK market, bolstering export revenue in 2021

What would make us more negative?

Our worst-case scenario anticipates the Shilling depreciating 6.57% to an average 113.60 to the US$ in 2021. Materialization of this scenario could be brought about by:

• Kenya’s revenue outturn falling below the FY2020/21 target by at least 21.9%, pushing the external debt service-to-revenue ratio above the 23.0% mark, the threshold for sustainability. This would amplify jitters around susceptibility to debt distress and trigger capital flight
• The ongoing Building Bridges Initiative heightening political temperatures and creating an environment of premature campaigns ahead of the 2022 general election, compelling investors to adopt a wait-and-see stance
• Key exports, tea and horticulture (40.0% of export revenue), perform poorly in 2021 and the slack in tourism prolongs, depressing inflow of export revenue

Tanzania policies on investment and Covid weigh on Shilling

We expect the Shilling to average 2,356.0 to the US$ in 2021, posting a 1.55% depreciation compared to the average exchange rate of 2,320.0 in 2020. Our forecast is hinged on the following:

• A broadly adverse regulatory environment in line with the reforms undertaken in the mining sector over the last three years, which included raising the royalty on gold from 4.0% to 6.0% and imposing a government entitlement to 16.0% stakes in mining companies. Continuation will suppress the appetite for a more substantial investment in the country
• The tourism sector, at about 15.0% of GDP, suffers prolonged effects of Covid-19 disruption. This weakens demand for the Shilling overseas, weighing down the strength of the local currency in 2021
• Tanzania’s handling of the Covid-19 pandemic remains a liability for the country. Travel advisory statements, such as one issued by US in September 2020, undermine the country’s attractiveness in the near to medium term

What would make us more positive?

Our best-case scenario anticipates the Shilling weakening 1.08% to an average 2,345.0 to the US$ in 2021. Materialization of this scenario could be precipitated by: 

• Tanzania tapping into the US$ 25.7 million window for debt relief from the International Monetary Fund, freeing up more resources to address any emerging pressures on the external balances side. Our base case is for the current account balance to widen to a deficit of 4.4% of GDP in 2021 compared to 3.2% in 2020
• Bank of Tanzania’s foreign exchange reserves, at 5.8 months of import cover presently and likely to decline to 5.2 months in 2021, remain adequate compared to the 4.3 months prescribed threshold, to stave off any emerging pressures on the local currency

What would make us more negative?

Our worst-case scenario anticipates the Shilling depreciating 3.02% to an average 2,390.0 to the US$ in 2021. Materialization of this scenario could be brought about by:

• President John Magufuli’s style of leadership evoking mounting concerns over authoritarian leaning, with development partners withholding funding to the economy. This is particularly a key risk coming on the back of the 2020 election
• Additional travel advisories disfavour the country and threaten an adverse impact on inflow of foreign currency earnings in 2021. Additional advisories could be brought about by the country’s handling of the Covid-19 pandemic
• Demand for Tanzania’s main exports (gold, coffee and cashew nuts) soften and lead to deterioration in the external position. Our base case is for the current account deficit to close 2020 at 3.2% and widen to 4.4% in 2021