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African markets remain calm in the wake of Brexit

Saturday July 02 2016
nse

An Nairobi Securities Exchange employee monitors the electronic trading on board. African markets have been largely insulated from the impact of the Brexit on their currencies, stocks and bonds, even as several central banks said that they were ready to manage their currencies to avoid a sharp decline. PHOTO | FILE

African markets have been largely insulated from the impact of the Brexit on their currencies, stocks and bonds, even as several central banks said that they were ready to manage their currencies to avoid a sharp decline.

Last Friday, currencies, stocks and bonds plunged across Africa after the UK’s vote to leave the European Union triggered a slump in oil and other commodities and sent investors scurrying for safe havens.

Data from Bloomberg shows that $400 million Rwanda’s Eurobond, yield jumped by 27 basis points to 7.59 per cent. The bond was issued in April 2013 at 6.85 per cent. Ethiopia’s $1 billion 2024 Eurobond yields climbed 10 basis points to 7.98 per cent.

The bond was issued in 2014 at 6.625 per cent. Nigeria also saw its dollar bond due in 2023 rising 24 basis points, to 7.32 per cent. However, this past week, the international bond market has been relatively calm, gaining 1.5 points since the Brexit news broke.

Samir Gadio, head of Africa strategy at Standard Chartered Bank, said that the bonds markets is marginally weaker but has found its level.

“Investors will remain cautious for the time being until there is more clarity in the market,” Mr Gadio said.

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Marcus Courage, the chief executive of Africa Practice, a strategic advisory and communications consultancy, said that yields on dollar bonds have risen in Kenya, Ghana, South Africa and also in Nigeria.

“As volatility increases, and the dollar strengthens borrowing is likely to become more expensive for African businesses and governments. This could put plans by African governments to tap bond markets on hold,” Mr Courage said. 

The Kenyan shilling has remained relatively stable, with pressure from importer dollar demand being cushioned by the prospect of the Central Bank selling the dollars to shore it up.

On Thursday, the unit was trading at 100.90 to the dollar, compared with last Friday’s close of 101.20.

READ: Kenya says ready to intervene amid Brexit

The Ugandan shilling traded slightly weaker as importers and commercial banks built positions to hedge against the uncertainty sparked by Britain’s vote to leave the European Union.

“We are still seeing some uncertainty in the market as a result of the Brexit. We expect some rising demand next week to cushion against the uncertainty,” Stephen Kaboyo of Alpha Capital said.

The Tanzanian currency also strengthened slightly in the week as firms sold dollars to pay their taxes.

“We expect the shilling to continue strengthening against the dollar next week, but the local currency could come under pressure from mid-July if demand for dollars starts to pick up momentum,” said Moses Kawiche, a trader at CRDB Bank.

Mr Gadio said that that the relative stability of the African currencies reflects the fact that the African markets are heavily managed by central banks.

“I think we could be seeing low liquidity in these markets alongside lower foreign participation. We haven’t really seen any outflows or pressures in these markets,” Mr Gadio.

There are still concerns that African currencies could come under pressure as the investors adjust their portfolios. The rand and the naira continue to be exposed. The South African unit, which recorded an 8.78 per cent fall to the dollar on Friday, has gained marginally but is yet to recover from last week’s position.

The Governor of the Reserve Bank of South Africa Lesetja Kganyago said he was confident that Brexit would not cause a recession, despite several firms that have cross listed on the London Stock Exchange being exposed.

“We won’t see a recession at this stage, but there is no doubt that it will slow the South African economy given the weak growth that we already have,” Mr Kganyago said.

The financial market volatility caused by Britain’s decision to quit the EU, which sent the rand tumbling, could hurt investment flows into South Africa but the muted response from investors offers a glimmer of hope for Africa’s second largest economy.

“What we have seen in the past is that the response in the short term on the currency side is almost muted. However, if we have a longer period of uncertainty, then the African currencies tend to react in a lagged way to emerging market currencies. It will take persistent risk for more to happen,” Mr Gadio said.

Nigeria, which saw its forex reserves fall marginally to $26.34 from $26.42 billion last month, has also seen its currency take a slight hit from the Brexit shock. Its Central Bank lifted the currency controls last week and auctioned $4 billion on the spot and futures market to clear a backlog of dollar demand.

The naira is currently trading at 282 units to the dollar, marginally down from the 281.4 last Friday, while at the parallel market the naira was quoted at 352 a dollar compared with 335 to the dollar last week.

Its stocks also recorded marginal losses this week on fears that demand for riskier assets will evaporate, slowing down the flow of foreign funds into Nigeria.

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