Currencies: 2021 Winners vs Losers
A snapshot of frontier countries currencies in Africa, Asia and Europe
The US$ index1 rose by around 4% in the first 3 months of 2021. A large chunk of this rally came after the Georgia senate election results were out. Since the end of Q1, the US$ index has fallen approximately 3%. How have frontier market currencies held up in the year so far?
Below i show the exchange rates of the relative countries vs US$ for both Q1 (grey bars) and Q2 (yellow bars) ending 14th June.
The Ukrainian currency Hryvnia has been the best performer in the selected countries. The currency rose during both quarters irrespective of the direction of the US$. Ukraine started the year from a relatively benign base, the economy has a small service sector and faced a less severe impact from lockdowns. This year Ukraine has seen its exports of agricultural goods, iron ore, and steel all rise substantially. Ukraine increased their foreign reserves2 (US$ 29bn) to its highest level since 2011, equivalent of 4.3 months of import cover, above the 3 month minimum needed to ensure a stable currency.
The Hryvnia has not only risen against the dollar, it has also outperformed its bigger brother the Russian rouble. Whats more, there does not seem to be a single factor explaining the performance of the currency.
Rising oil prices are usually a negative for oil importers like Sri Lanka and Vietnam. Vietnam has stayed flat in 2021. Sri Lanka has large levels of debt which are issued in US$, hence in order to pay interest on the debt, they need US$. While remittances and garment exports have returned to their pre COVID19 levels, the tourism industry (20% of exports and the 3rd largest source of US$) has not. Authorities were able to lower imports after placing restrictions on many foreign goods, as well as lower imported fuel costs as a result of collapsing demand and low energy prices in 2020. This provided little relief to declining foreign reserves during the year. 2021 is unlikely to afford them the same tail wind as oil costs are high and rising. Sri Lankan authorities have indicated they will not seek help from the IMF link to manage their debt problems. The question then remaining is whether Sri Lanka can maintain a sufficient level of foreign currency reserves to meet foreign currency debt repayment obligation as they occur. With this backdrop it is not surprising that the Rupee is the worse performer.
For context, Sri Lanka’s US$ reserves are currently US$ 4bn which is roughly the same amount of debt which is due for repayment in 2021. Good luck!
The West Africa CFA, Serbian Dinar and Romanian Leu have traded very closely together (and in line wit EUR vs US$), which makes sense as these currencies are pegged to the Euro. Romania is scheduled to adopt the Euro officially in 2024, further and counts the Eurozone as its largest trade partner.
Nigeria stands out for the wrong reasons yet again, despite being Africa’s largest oil exporter, the Naira lost close to 3.6% as oil prices gained in Q1. This is bad news as Oil exports are the main source of US$ for Nigeria, and with declining US$ reserves as well as an overvalued currency there is no end in sight. The short story is that like many other African countries, Nigeria must produce more locally, export more and import less in order to help stabilise its currency. Clearly not something that can be done overnight. I remain hopeful.
Angola’s Kwanza on the other hand benefitted from the sharp rise in oil prices during Q1, this is somewhat surprising given Angola’s dire economic fundamentals high levels of debt.
Ghana’s Cedi was resilient during Q1 and Q2 this year. The authorities issued government bonds in US$ in March this year, which increased the US$ reserves. Global bond investors welcomed the issuance, and bought in big sizes, the existing Cedi denominated bonds have also seen a rise in demand since. All of the demand for Cedi assets is positive for the currency. In April annual inflation surprisingly fell to 8.6%, while the central banks economic activity measures rose. Looking at Ghana through the lens of a bond investor, the economy seems to be managing the post-covid recovery well - but this is not the story i hear when i speak to my people on the ground.
Bangladesh’s Taka has been managed3 and has very small to no deviations.
This is the amount if US$, Euro’s or other hard currencies the central bank has available to use to pay the interest on the government debt it has in those currencies.
A managed currency is one whose price and exchange rate are influenced by some intervention from a central bank. This is different to a peg.
Currencies: 2021 Winners vs Losers
Interesting read.