More currency headaches...

What is a "tenge"

The “tenge” is the currency of Khazakhstan and on Wednesday it fell 23% after the government abandoned its peg to the US dollar. It is important to be aware of the tenge’s fall because while it is the most dramatic, it is certainly not the only emerging market currency suffering from a decline in commodity prices and fears of a slowdown in China: the Turkish lira is at an all-time low, the Malaysian ringgit is at a 17-year trough and the South African rand recently broke through 13 to the dollar for the first time since 2001.

Blame China?

The widely reported catalyst for the rout in emerging market currencies was last week’s decision by the People’s Bank of China to devalue the yuan by 2% in one day. This is not strictly correct. Slowing growth, declining exports and a strong dollar mean that for the past year China’s central bank has actually been propping up the yuan. On 11th August the PBOC announced changes that withdrew some of that support. Then, after fears that the yuan was on the brink of a rout, the PBOC ordered traders to sell the dollar and buy the yuan, effectively propping up the currency that it was being accused of devaluing.

Technicalities aside, what does this all mean?

Less growth and a weaker yuan mean that countries that sell lots of stuff to China (most of Africa) are going to have a hard time. Some countries, like Kazakhstan, will follow China and let their currencies devalue in order to keep their exports competitive. But that’s not a good option for South Africa, which needs a stable currency to attract foreign investment and a reasonable exchange rate to pay for all the energy and equipment that it imports. This means that the reserve bank’s decision to raise interest rates to protect the rand makes at least partial sense (click here for a round up of African central bank policies).

...Or you could just chop down trees.

Amongst other more effective ways to support its currency, the Nigerian government has apparently taken the bizarre step of chopping down trees in Abuja because moneychangers from the North of the country operate black market exchanges in the shade underneath them. A series of central bank decrees designed to support the value of the local currency has increasingly restricted how Nigerians can use their banks and has lead to a growth in black market activity. The naira has lost a fifth of its value this year due to the collapse in the price of oil and political uncertainty in the run up to the elections.

Where to from here?

We don’t do exchange rate forecasts, but we are happy to share Bloomberg’s list of “Ten Currencies that May Follow Tenge in Tumble Triggered by China”. Four of these are from Africa, while the others are the currencies of Saudia Arabia, Turkey, Malaysia, Turkmenistan, Tajikistan, Kyrgyzstan and Armenia (yes, there are 11 in Bloomberg’s top 10).

#6 Egypt – pound: trading in derivatives indicates expectations of a 22% fall in one year
#8 Nigeria – naira: trading in derivatives indicates expectations of a 20% fall in one year
#9 Ghana – cedi: oil exporter with fiscal imbalances, rising inflation and increasing debt

#10 Zambia – kwacha: heavily exposed to China as copper accounts for around 70% of exports.

(Sources: Bloomberg, FT, Economist, Business Day, Nedbank and Investec) 

DR ANDREW LOUW CFA

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