Rising Oil Prices Hold Mixed Blessings for African Currencies

LAGOS (Capital Markets in Africa) — In a world of rising U.S. Treasury yields and a stronger dollar, higher oil prices can be a game-changer — for good or for bad.

Oil exporters are the obvious beneficiaries: African crude producers including Angola, Ghana, and Nigeria had budgeted for an average price of around $40 per barrel for Brent crude in 2021, according to Rand Merchant Bank analysts. The price actually averaged closer to $60, providing a windfall for strapped government finances, RMB analysts Daniel Kavishe and Neville Mandimika said in a client note.

For oil importers, higher energy costs give investors just one more reason to sell their currencies. Rising oil prices are adding to expectations of jumps in inflation, stoking bets for rate hikes sooner rather than later at a time when economies are struggling to recover from the Covid-19 slump.

Brent crude prices surged to above $70 a barrel Monday for the first time since January 2020 after Saudi Arabia’s oil infrastructure came under missile and drone attack in an escalation of regional hostilities.

Here’s a look at how major African currencies are coping:
South Africa: South Africa’s rand has weakened more than 5% against the dollar this year, easily the continent’s worst performer. The currency of Africa’s most industrialized economy declined for a fourth straight day on Monday, heading for its weakest closing level against the dollar since Nov. 12. Breakeven rates – seen as a gauge of bond traders’ outlook for price rises – climbed to April 2020 highs, prompting traders to add bets on rate increases. Forward-rate agreements are now pricing in nearly 120 basis points of tightening this year, a turnaround from expectations of a cut at the start of 2021.

Ghana: Ghana’s cedi is the best performer from the continent this year, with a 2.5% gain versus the dollar. The currency has also been helped by dollar inflows into the fixed-income market from non-resident investors. Its gains are more than double that of MSCI’s emerging-market currency index. Oil is Ghana’s third-largest export, improving the country’s terms of trade, Mandimika said. Foreign investors bought 30% of the bonds offered the country’s most-recent government auction, boosting demand for the local currency.

Nigeria: Nigeria’s central bank devalued the currency amid a dollar shortage. The currency of Africa’s biggest oil producer briefly weakened 8% on Monday on the interbank market to reach a record low of 443.15 naira per dollar. That’s brought it closer to the black-market rate. “A stronger oil price will reduce the misalignment of the naira from its fair value,” said Yvonne Mhango, head of sub-Saharan economic research at Renaissance Capital. “This means the naira doesn’t need to devalue as much as we expected early in the year, for the FX market to clear,” she said.

Source: Bloomberg Business News