Moutusi Sau
Senior Associate, Program Research Analyst, Center for Financial Markets
Moutusi Sau is a senior associate at the Milken Institute's Center for Financial Markets in Washington, D.C. She conducts research and helps execute programmatic activities on Milken Institute projects involving new tools for access to capital, strengthening capital markets in developing countries, and housing finance reform.
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African currencies resilient amid taper turmoil
By: Moutusi Sau
February 05, 2014
As the U.S. Federal Reserve continues to taper its bond-buying program, emerging markets are doing what they can to remain attractive to investors. India, Turkey, South Africa, and other nations have raised interest rates, but international capital is flowing back to the more secure terrain of the Japanese yen and U.S. dollar.

In this context, declines in emerging market currency values make those economies even more vulnerable to instability as capital exits. Worldwide, all currencies, including those of advanced, emerging, and developing nations, have dropped an average of 3.51 percent since then-Chairman Ben Bernanke hinted at the FedaEUR(TM)s tapering plans in the spring. EM currencies, though, have underperformed the global average. From May 1 through the first week of February, they fell 8.27 percent relative to the dollar. A well-known subset of EM, the so-called BRICS countries of Brazil, Russia, India, China, and South Africa, did even worse. On average, BRICS currencies fell 11.6 percent against the dollar.

Considering this stark decline, sub-Saharan Africa (SSA), excluding South Africa, has proven to be a relative bright spot. SSA currencies have slumped, but not as dramatically as their EM peers. As others have noted, sub-Saharan AfricaaEUR(TM)s financial sector remains relatively uncorrelated to international markets. Though small and illiquid, several African stock exchanges, such as those in Nigeria, Kenya, and Tanzania, boasted returns of 30 percent or more over the past year. Similarly, the regionaEUR(TM)s currencies have outperformed their global peers recently. If the extreme outliers are removed aEUR" that would be the Somali shilling (+42.78 percent) and South Sudanese pound (-26 percent) aEUR" the regionaEUR(TM)s currency mix averaged a 4.62 percent loss compared to the dollar from May 1 through February 5.

Currency declines relative to the U.S. dollar


One factor contributing to SSAaEUR(TM)s good showing is these countriesaEUR(TM) foreign exchange reserves. These assets help analysts gauge whether a central bank has a sufficient buffer to absorb external shocks and continue to meet obligations to investors. In 2013, sub-Saharan African countries built up currency reserves at a much faster rate than the BRICS. According to the IMF, BRICS increased their reserves by 1.57 percent in 2013. SSA, on the other hand, expanded its holdings an impressive 21.77 percent.[1]

A number of African policymakers seem to be taking responsible steps to protect their economies from the volatility of international capital flows. The Central Bank of Nigeria, for example, has just raised its capital reserve ratio amid erratic monetary flows and a diminishing oil revenue account. The East African nations of Kenya, Tanzania, and Uganda have been preparing for the effects of tapering for months, deliberately building their foreign reserves. On average, these neighbors increased their reserves by 16 percent last year to a combined $14 billion.

SSAaEUR(TM)s relatively strong showing deserves attentionaEUR"and praise. When discussing African statistics, however, disclaimers are essential. It is important to note that, as with stock market returns or rapid GDP growth, skyrocketing reserve figures reflect advances from a low base. In absolute terms, of course, the BRICSaEUR(TM) reserves are massive compared to those of most African countries, but the story here is that these countries have wisely taken steps to prepare for financial shocks. So far, these steps appear to have paid off.


1. Unfortunately, this aggregate does not include data for Nigeria and Ghana, both important economic actors in the region. Data for developing economies is often imperfect, and at present the IMF has no 2013 reserve figures for Nigeria and Ghana.