The U.S. dollar is slapping the little guys in the face: frontier and emerging currencies. Taking it just from early last year alone, this hard currency is slashing most of the global currencies, precisely Africans’. The South Sudan Pound just got an 80% free fall last month; the South African Rand lost 18% to the USD; the Nigeria central bankers have pumped dollars on a few occasions so they can stabilize the declining Naira madness; not to mention our one and only Francs Rwandais (FRW) recent volatility.
Today, most African nations are getting hit from left and right.
Frontier markets can’t keep up with the dollar’s speed. This one has gained more than 10% compared to most African currencies over the past 12 months. That is a big problem for African corporations and governments that have debts denominated in U.S. dollars because paying off that dollar debt becomes even more expensive since they are paying with their respective weakened local currencies. Note that more than 50% of African nations hold well more than 60% of government debts denominated in U.S. dollars according to the IMF and World Bank data.
African markets stocks are relatively cheap for US investors who want to take advantage of the tremendous upside potentials in this frontier market. But they shy away due to currency loss because when they want to convert their profits back into the dollar, this conversion slashes off some if not all of the gains.
The rest of the problems are the sinking prices of oil. Some African nations such as Nigeria and South Sudan rely on oil exportation to make a handsome chunk of dollars. But not last year; definitely not so much this 2016 either. With oil prices sharply falling from $100 to a 12 years record low-$30 a barrel as of yesterday’s closing prices-we are seeing countries like Nigeria and South Sudan’s GDP getting hammered.
The bottom line is, policy makers should very seriously take into the equation this hard currency exchange risk as they borrow money to finance public projects. It has historically proven to be a bargain as nations strive to post economic gains.
I have to give it to the Rwandan financiers, who are financing some of the public debts through the local bourse – the Rwanda Stock Exchange. These treasury bonds are being offered in FRW and I think it eliminate the above discussed exchange risks not to mention the improvement of the local financial markets.
Have something to add to this story? Share it in the comments.