Emerging market currencies struggling


Emerging market currencies weathered a storm after a relatively calm first quarter of the financial year but struggling at the start of the second quarter due to stunted global market performance and domestic events that triggered currency weakness and subsequent volatility entering the second quarter. 

The South African rand had entered the first quarter at the 8 rand to the dollar mark, having weakened after the November 2012 Marikana Massacre, when police forces opened fire and killed more than 40 striking mineworkers. 

“The rand weakness post-November last year, which was related to the labour unrest in Marikana hasn’t gone away. So the rand is weakened effectively for two reasons: global reasons and South Africa-specific as well. Which means that the rand, trading where it is at the moment, is much weaker than it would have been otherwise,” said Chris Holdworth, a strategist at Investec Securities in South Africa, on CNBC Africa this afternoon. 


The rand began to slip again in early May after global gold and platinum demand began to slow down. Major companies such as [DATA AMS:Anglo American Platinum] and [DATA ANG:Anglo Gold Ashanti] began to record losses week after week. 

This has been dubbed South Africa’s worst performance since the 2009 global recession as the volatile rand, labour unrest in the mining sector and poor demand for gold and platinum keep the rand from a significant strengthening against the dollar. 

The rand began trading at 8 rand to the dollar in early May before quickly tumbling to a four-year as it traded at 10 rand against the dollar on 30 May. It is currently fluctuating between 10 rand and 10.40 to the dollar today. 

On the other hand due to Kenya’s peaceful elections the Kenya shilling advanced more than 0.4 per cent to 85.25 to the dollar in April, its best since 15 March in the same year. The shilling had an overall increase of 0.8 per cent in the first quarter. 

Analysts expect the shilling to weaken in the medium to long term after the Kenya Monetary Policy Committee cut lending rates by 100 basis points. The cut is yet to take full effect on the economy. 

The stability of the Kenyan shilling might, however be tested once again following the trials of both President Uhuru Kenyatta and deputy president William Ruto at the International Criminal Court. Ruto and Uhuru face charges of failing to bring the perpetrators of the 2008 election violence and killings to justice and providing the necessary reparations. 

Ignatius Chicha, head of markets at Citibank in Kenya, explained that the good first quarter performance was largely on the back of positive sentiment following the peaceful presidential elections, which gave investors more confidence in Kenyan markets. 

“Investor sentiment was mixed in the period under review. Local investors adopted a wait and see strategy in the run up to the general elections, converting various categories of assets into liquid cash and hedging that cash by holding it as inventory or foreign exchange,” Chicha explained. 

“On the other hand, off-shore investors (with liquidity looking for return) took advantage of the depressed prices on the stock market and high yields, that where prevailing, in the fixed income market at that time.” 

Chicha also added that the offshore inflows assisted in the shilling’s rally after the elections. 

The start of second quarter, however, saw the Kenyan shilling significantly weaken. “The market turned a net seller of US Dollars to the Central Bank, when flows from the off shore investors hit the market. This deprived the market of the US Dollars,” said Chicha. When dollars returned in the market, demand for the currency kicked in, causing the shilling to depreciate. 

Despite the weakened shilling, the World Bank predicts that Kenya’s growth will hit the 7 per cent mark in the next few months especially after discoveries of alternative energy in oil and gas reserves in the country. 

“Going into the second half of the year, the currency is largely expected to remain stable but with a bias towards a depreciation. The Central Bank will continue to monitor the markets proactively intervening via Open Market Operations (OMO) instruments and direct sales of Foreign exchange into the market.” 

Similarly in Nigeria, despite the country’s Central Bank’s tight monetary policy, the naira began to weaken against the dollar a lot more dramatically in the latter part of the first quarter. The Nigerian Petroleum Company had announced a drop in crude oil revenue due to a drop in production. Daily crude oil production had dropped from 2.4 million barrels a day to fluctuating between 2.1 and 2.3 million barrels a day. 

Majority of the reason behind the naira’s weakness against the dollar was due to domestic issues ranging from Nigeria’s heavy importation of processed goods such as wheat and rice. 

During the country’s monetary policy committee meeting in May, the Central Bank of Nigeria left the policy rate at 12 per cent, a record high for the country. The unchanged rate was a means of curbing inflation and prevents economic risk amid the government’s battle with Boko Haram insurgents in the North and the rise in oil theft. 

Inflation managed to stay under the 10 per cent mark for four consecutive months but the naira fell to its weakest against the dollar in June, closing at 160.50 naira to the dollar on 23 June. 

“The local currency has suffered as part of the emerging markets, as investor sentiment has changed against emerging markets with the looming end to Quantitative Easing (QE) in the G8 countries,” added Chicha. “In the long run, it’s all about market confidence.”