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Rand Jumps 1.6% as ANC Faces Historic Coalition Negotiations

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The South African rand surged by 1.6% on Monday, its most significant one-day gain since December 14.

This rebound is fueled by investor optimism that the country’s coalition talks will culminate in a market-friendly government.

The rise in the rand, coupled with strong performances in South African stocks and bonds, signals a wave of confidence sweeping through financial markets.

For the first time in three decades, the ruling African National Congress (ANC) failed to secure a majority, obtaining only 40.2% of the vote.

This unprecedented outcome has opened the door to various coalition possibilities, some of which were previously deemed unlikely.

Alliances with the left-leaning Economic Freedom Fighters (EFF) or the newly formed uMkhonto weSizwe Party (MKP) are now on the table.

However, investors are particularly hopeful for a coalition with the largest opposition party, the Democratic Alliance (DA), which is seen as more conducive to economic stability and reform.

“Our perception is that the market views a potential coalition with the DA as overall benign albeit fragile,” commented Yvette Babb, a portfolio manager at William Blair Investment Management. “A formal alliance with the DA would be most supportive and perhaps give rise to a rally in asset prices. However, we believe there may be an enduring rise in the South African risk premium given the increase in implementation risks.”

South African assets experienced significant volatility during the initial hours of trading on Monday but ended the day on a more stable footing.

The FTSE/JSE All Share Index concluded the day as the second-best performing equity gauge in dollar terms among the 92 indexes monitored by Bloomberg.

Moreover, South Africa’s dollar bonds were among the top performers in Bloomberg’s index of emerging and frontier sovereign Eurobonds.

Finance Minister Enoch Godongwana assured that the ANC would not make reckless decisions in selecting a coalition partner, emphasizing the importance of maintaining investor confidence and economic policy continuity.

Current coalition discussions involve potential alliances with the EFF, the MKP, and the DA.

The ANC has ruled out a demand by the MKP that President Cyril Ramaphosa step down, considering instead a minority government or a “confidence and supply” agreement to ensure stability.

Citigroup’s economist Gina Schoeman noted that a minority government led by the ANC would create “parliamentary uncertainty and instability.”

A pact with the DA, on the other hand, would be welcomed by financial markets, potentially accelerating economic reforms and privatization initiatives. Many analysts consider this scenario to be more likely.

Despite the setback at the polls, the ANC remains South Africa’s largest party. Investors are cautiously optimistic that a coalition with the DA will emerge, fostering a conducive environment for economic growth.

Sebastien Barbe, head of emerging market research at Credit Agricole, pointed out that while the rand’s current levels are not particularly stretched, the political uncertainty adds to downside risks.

“The higher risk premium that would arise as a result of a coalition between the ANC, EFF, or the MKP is reason alone to not enter such a coalition,” Schoeman said, attributing only a 15% probability to this outcome. Barbe added, “The rand at current levels is not particularly stretched, and the carry is decent, so this may limit some possible depreciation pressure that would come from political uncertainty.”

As the deadline of June 17 for swearing in a new government approaches, investors and analysts alike will be closely monitoring the coalition talks.

The outcome of these negotiations will undoubtedly have far-reaching implications for South Africa’s economic trajectory and investor sentiment in the coming months.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Forex

CBN Resumes Forex Sales as Naira Hits N1,570/$ at Parallel Market

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The Central Bank of Nigeria (CBN) has resumed the sale of foreign exchange to eligible Bureau De Change (BDC) operators.

The decision was after Naira dipped to N1,570 per dollar in the parallel market,

CBN announced that it would sell dollars to BDCs at a rate of N1,450 per dollar. This decision aims to address distortions in the retail end of the forex market and support the demand for invisible transactions.

Following the CBN’s intervention, the dollar, which recently traded as low as 1,640 per dollar, has shown signs of stabilization.

The apex bank’s action is expected to inject liquidity and restore confidence among market participants.

BDC operators have welcomed the move. Mohammed Magaji, an operator in Abuja, noted that the dollar was selling at 1,630 per dollar.

He emphasized the market’s volatile nature but expressed optimism about the CBN’s intervention.

Aminu Gwadebe, President of the Association of Bureau de Change Operators of Nigeria, attributed the naira’s decline to acute shortages, speculative activities, and increased demand due to recent duty waivers.

He praised the CBN’s action as a necessary step to alleviate market pressures.

The CBN’s efforts include selling $20,000 to each eligible BDC, with a directive to limit profit margins to 1.5% above the purchase rate.

This strategy aims to ensure that end-users receive fair rates and to curb inflationary pressures.

The CBN’s ongoing reforms seek to achieve a market-determined exchange rate for the naira. As the naira continues to navigate turbulent waters, stakeholders remain hopeful that these measures will lead to a more stable and liquid forex market.

Market analysts suggest that sustained interventions and increased access to foreign exchange could help reverse the naira’s downward trend.

The CBN’s actions demonstrate a commitment to tackling the challenges facing the foreign exchange market and supporting Nigeria’s economic stability.

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Nigeria’s FX Inflows Leap 57% as CBN Steers Economic Confidence

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Nigeria’s foreign exchange (FX) inflows have surged by 57% over the past year, signaling newfound stability for the Naira.

Analysts attribute this growth to the Central Bank of Nigeria’s (CBN) consistent policies, which have bolstered investor confidence and enhanced market stability in Africa’s most populous nation.

Data from the CBN reveals that FX inflows rose to $8.86 billion in February 2024, compared to $5.66 billion in February 2023.

This increase is a testament to the effectiveness of the CBN’s strategic measures. Similarly, foreign exchange turnover skyrocketed 180% year-on-year to $240.64 million in February 2024.

“The upsurge in FX inflows reflects the positive impacts of increased interest rates and the relative stability of the exchange rate,” said Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting.

He noted that high interest rates in Nigeria are attracting investors seeking better returns compared to developed countries.

The CBN has actively engaged with foreign investors, addressing concerns and providing insights into monetary policy actions.

Olayemi Cardoso, the CBN governor, emphasized that investor confidence has been restored, partly due to the bank’s clearance of a $7 billion foreign exchange backlog.

New investments into Nigeria also increased significantly, reaching $1.24 billion in February 2024, compared to $0.33 billion in January 2024. This uptick is indicative of a more stable and attractive investment climate.

Analysts point out that improved oil production and higher global oil prices have significantly boosted FX earnings.

Also, government policies aimed at attracting foreign investment, along with strategic management of the exchange rate, have played pivotal roles in this economic revival.

The CBN’s efforts to diversify the economy and boost non-oil exports are starting to yield results.

Increased diaspora remittances, facilitated by better official channels and incentives, have further contributed to the rise in FX inflows.

While challenges remain, the positive trend in FX inflows suggests a more robust and stable economy, encouraging further investment.

Consistent and transparent economic policies are expected to enhance investor trust, stabilizing the Naira and fostering a more favorable exchange rate environment.

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Naira Hits Five-Month Low Amid Dollar Demand Surge

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Nigeria’s naira extended its losing streak to a fifth consecutive day as it slipped to its weakest level since March despite the Central Bank of Nigeria’s (CBN) interventions.

The naira closed at 1,577.29 per dollar on Monday, down from Friday’s N1,563.8 per dollar on FMDQ.

This decline comes despite the CBN’s efforts to stabilize the currency by injecting $122.7 million through dollar sales into the market.

However, analysts argue that these amounts were insufficient to balance the robust domestic demand for the greenback.

“The CBN has been in the market selling $50 million from time to time, which is not enough,” commented Carlo Morelli, senior portfolio manager at Azimut Investment SA.

Morelli attributes the persistent pressure on the naira to capital outflows and a lack of investor confidence in the currency, despite the central bank’s commendable efforts in tightening monetary policy and reducing naira liquidity.

Central Bank Governor Olayemi Cardoso has aggressively raised interest rates in an attempt to curb inflation and stabilize the naira.

The benchmark borrowing rate now stands at 26.25%, following an increase of 14.75 percentage points since May 2022.

However, the currency has weakened by approximately 70% against the dollar since exchange-rate controls were eased last year.

“Restoring foreign exchange broad confidence is the last step, and the huge volatility in May delayed the return to normalcy,” Morelli added.

“Many foreign investors are still waiting for more evidence of stability before considering Nigeria investable.”

The naira’s decline makes it the second-worst performing currency tracked by Bloomberg in 2024, trailing only the Lebanese pound.

The recent depreciation has been fueled by both seasonal dollar demand and ongoing investor skepticism.

The central bank’s next policy decision, set for July 23, is expected to address these issues. Monday’s data showing annual inflation quickened to 34.2% in June suggests that another rate hike might be on the horizon.

In a bid to bolster the naira, the central bank has increased Nigeria’s foreign exchange reserves to $35 billion as of July 8, the highest level since May 30, 2023.

This boost is attributed to recent loans from the World Bank and the African Export-Import Bank.

Omobola Adu, an analyst at BancTrust & Co. Investment Bank, noted that recent pressure on the naira has also stemmed from corporates and individuals preparing for foreign vacations.

“Boosting the supply of FX into the country remains crucial for the government to alleviate pressure on the naira,” Adu stated.

He suggested that a eurobond or local dollar bond sale later this year, along with increased support from multilateral institutions, could help shore up reserves.

Despite these challenges, Central Bank Governor Cardoso remains optimistic, asserting that the worst of the currency’s volatility is over.

He reiterated this sentiment on Thursday in Lagos, addressing business leaders and highlighting improvements in crude output and capital inflows as positive signs.

Nigeria, Africa’s largest crude producer, relies heavily on oil sales, which account for at least 80% of its export earnings.

The country’s combined crude oil and condensate output rose to 1.5 million barrels per day in June, the highest since February, according to the upstream petroleum regulatory commission.

“While the naira may be undervalued, for the naira to stabilize and perhaps regain ground, large portfolio and capital inflows are needed,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.

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