Regional companies with subsidiaries in South Sudan were last week staring at a substantial drop in profits as well as translation loss on investment after Juba devalued its currency by 84 per cent as the government abandoned efforts to fix the exchange rate.

Last week, the South Sudan Central Bank announced that it will allow the country’s currency, the pound, to trade freely, surrendering to prices charged in the black market.

Already, banks have responded to the change with KCB in Juba quoting the exchange rate at SSP20 to the dollar, reflecting a depreciation of about 85 per cent.

Central Bank Governor Kornelio Koriom Mayik said that they have adopted the black market rate of 18.50 per dollar from a previous fixed rate of 2.96 per dollar, noting that the currency was already devalued, as people were no longer receiving money at the official rate.

In the third quarter of 2015, the South Sudan subsidiaries of three Kenyan banks contributed an average of 15 per cent to the parent banks’ overall profits, with KCB’s subsidiary contributing 17 per cent of the group’s assets and 9 per cent of the group’s revenue. Shareholders’ funds stood at $43 million.

Equity Bank’s subsidiary contributed 12 per cent of the assets and 3.3 per cent of the profit before tax, with the shareholders’ funds standing at $40 million. Co-operative Bank’s subsidiary posted a $2.46 million profit before tax.

The devaluations impact on the earnings of Kenyan companies operating in the country will be felt from 2016, as these firms have already converted their income statements at the average exchange rate during the year.

Standard Investment Bank, in a note to investors, said that there will be no immediate impact on 2015 earnings but it will encourage international humanitarian and development organisations as well as foreign investors to inject more hard currency into the fledgling economy to spur economic activity.

“The conversion of income statement items to Kenya shillings is based on average exchange rate over the reporting period. Next year, earnings conversion at the weakened rate will erode earnings contributions from South Sudan,” SIB said.

Daniel Kuyoh, senior research analyst at Alpha Capital, said that the companies that do business with South Sudan have been hedging against currency movements on the Sudanese pound through the use of dollars.

“We haven’t seen a lot of exposure coming from these firms other than the profit dips largely attributed to slowdown in trade. In fact, through the use of dollars, they are gaining,” Mr Kuyoh said. “In terms of translation losses, these firms will lose if they exchanged their funds, due to the dollar price movement."

Regional firms like SAB Miller, Equity Bank, UAP Holdings, East African Breweries Ltd (EABL), and Co-operative Bank are among companies operating in South Sudan.

Mr Mayik admitted that the South Sudanese pound’s stability may be difficult to maintain in the short term without availability of adequate foreign exchange reserves.

“In the interim, we are going to sell dollars in the market but we also need to understand that this 24-month conflict, coupled with a drop in the oil prices, has had a detrimental impact on our dollar reserves,” Mr Mayik said.

South Sudan Finance Minister David Deng Athorbei said that the devaluation measure is difficult but necessary.

“We have seen a drop in our oil earnings from $100 per barrel to the current $37 per barrel. This means that even though we are still producing oil, the money we earn does not match what we use on our almost 100 per cent import-driven economy. This has caused shocks, budget deficits and dollar scarcity,” Mr Athorbei said.

South Sudan’s currency woes have been blamed on government officials having access to the hard currency brought in as oil revenue.

On Tuesday, Enough Project, a policy lobby launched a report that accused government officials of fuelling the black market currency trade in order to pocket as much as 600 per cent returns.

“Officials with access to the hard currency brought in as oil revenue are in some cases able to leverage the difference between the official and black market exchange rates to turn huge profits on the dollar. At the time of publication, the official exchange rate was 2.9 SSP to the dollar and the black market rate was 18 SSP to the dollar, giving a 586 to 620 per cent return on the dollar,” the advocacy group said.

Economic policy analyst Gabriel Garang Atek said that the devaluation is meant to unite both the parallel and official market.

“A fixed rate is not sustainable as government can’t supply dollars to meet the demand at fixed rate. South Sudan has shown serious appetite to join EAC, and liberalisation of exchange rate is a prerequisite to joining the EAC. However, there were many fiscal and monetary incentives that should have been deployed” he said.