January 2024 FX outlook: African central banks rally for exchange rate stability

Jan 10, 2024|Dumebi Oluwole
Key questions
  1. In December, the Nigerian naira, Kenyan shilling, and South African shed 27% of their value YTD compared to the USD. What factors drove the exchange rate performance in Nigeria, South Africa, and Kenya? 
  2. What is the outlook for each currency for January 2024? 

2023 African currencies faced significant challenges amid the global monetary tightening cycle. In this light, the Stears Africa FX monitor tracks the exchange rate performance of sixteen African countries, including the CFA franc for the West African Economic and Monetary Union (WAEMU). This valuable resource is essential for investors, businesses, and professionals seeking to monitor African countries' historical performance, attractiveness, and overall economic health. 

In addition to comprehensive data coverage, Stears offers monthly macroeconomic round-ups, providing in-depth analyses of key economic indicators and currency performance. This report specifically delves into insights regarding the economic standing of the "Big Three" Sub-Saharan African economies: Nigeria, South Africa, and Kenya for the year-end 2023.

In December 2023, the official rate of the Nigerian naira, Kenyan shilling, and South African rand experienced large swings, depreciating by an average of 27% compared to 25% in November. Relative to December 2022, the official rate of the naira, shilling, and rand have lost 50.6%, 21.3%, and 8.6%, respectively. 


As mentioned in the November 2023 analysis, lingering forex supply conundrums, the movements of the USD and treasury yields, alongside the release of key macroeconomic reports like inflation, GDP, and trade, influenced the performance of each currency.  

However, as reflected in our previous analyses, central bank decisions have also significantly influenced the stability of all three currencies. The aggressive swings in these currencies in 2023 underscore the importance of central bank policies in shaping market sentiment and currency performance. This will focus on our assessment of each currency's m-o-m (December vs November) and y-o-y (2022 vs 2023) performance against the greenback and our outlook for January 2024. 

A glance at the past: central bank responses

The global economy witnessed a paradigm shift in 2023 as interest rates increased from near zero to over 5%. 

Central banks, primarily led by the US Federal Reserve, muscled up to combat rising inflation on food and energy commodities caused by the lingering Russia-Ukraine war from 2022. For instance, although inflation had slowed from its 40-year high of 9.1% in 2022 in the US, it remained above the Fed’s target of 2% through 2023, keeping interest rates high. 


Positively, inflation seems under control globally, signalling a return to lower interest rates from 2024. The IMF estimates global inflation at 6.9% in 2023 and expects 5.8% in 2024, compared to the peak of 8.7% in 2022. Moreover, inflation is edging closer to the 2% target in advanced economies like the United States and the United Kingdom, reducing to 3.1% and 3.9%, respectively, in November 2023. 


Still, global interest rates are higher than in previous years, indicating a stronger USD against other currencies and reduced attractiveness of domestic securities in emerging and developing markets, primarily domiciled in Africa. The continent is home to 72% of the world’s least-developed countries.

 The reduced investor attractiveness means decreased foreign-currency inflows and, in some cases, capital outflows as investors take advantage of better yields in more stable economies like the US. For instance, Nigeria's foreign portfolio investments are down by 80% between Q3’2023 and Q2’2022. Meanwhile, South Africa’s portfolio investments fell by $2.3 billion between Q2’2023 and Q3’2023. As a result, downward currency pressures have intensified amid stubbornly high inflation, forcing central banks in emerging economies like Nigeria, Kenya, and South Africa to tighten monetary policy, increasing interest rates to record highs. And we expect this trend to continue in 2024. 

The naira’s free-fall 

The table above shows Nigeria has increased rates by 750 basis points to 18.75%—the highest level since 2006. In Q4’2023, the Central Bank of Nigeria (CBN) increased the yields on OMO bills, allowing the increase in the monetary policy rate transmit to other fixed-income securities like treasury bills. OMO bill yields increased to 15% in December 2023 from 10% in December 2022 for the one-year tenor. Meanwhile, the 364-day treasury bill rate increased by 7.4 percentage points to 12.2% in December 2023 from 4.8% in January 2023.  

However, with forex supply shortages persisting amid FX liberalisation efforts, the CBN’s tightening measures mutedly impacted the currency's value. At the NAFEM window, the average daily turnover, a gauge of FX market activities, declined by 23% to $89.3 million in December from $115.4 million in November. As a result, the naira maintained its free fall, ending up as one of the worst-performing currencies in the world in 2023.

In December, the naira touched a record low of ₦1,039/$ before closing the month at ₦899.89/$  per the CBN (NFEM). Compared to November and a year ago, the official rate, as reported by the CBN (NFEM), fell by 7.5% and 50.6%, respectively. Meanwhile, the FMDQ’s NAFEM rate touched a record low of ₦1,235/$ (intraday) on December 28 before closing the month at ₦907/$. 


At the parallel market, the naira oscillated between ₦1,100/$ and ₦1,300/$, as predicted in the November FX analysis. The parallel market rate closed at ₦1,210/$, down 4% from November’s close of ₦1,165/$. Compared to a year ago, the parallel market rate is down by a whopping ~40%, widening the premium between the official rate to 34% from 8% in June. 

The Kenya shilling’s two-year losing streak continues



Meanwhile, under its new leadership, the Central Bank of Kenya (CBK) changed its monetary policy framework to inflation targeting, embarking on two surprise rate hikes in June 2023 and December 2023 to address inflation and exchange rate depreciation. The Central Bank rate (CBR) is now 12.5%, 550 basis points higher than 7% in 2022 and the highest level since 2012. 

Still, the Kenyan shilling continued its two-year decline as the CBK allowed the currency to trade to its fair value amid thin forex reserves, ahead of the country’s Eurobond repayment ($2 billion) in June 2024. Kenya’s foreign reserves are down 24% to $6.71 billion from $8.82 billion in 2021. 

As our November 2023 analysis predicted, the Kenyan shilling depreciated by 2.3% to close at KES156.9/$ in December 2023. Compared to December 2022, the shilling has shed 21.3% of its value. Although the daily depreciation in the shilling slowed at the beginning of December to 0.02% from 0.1%, towards the end of the month, the currency witnessed sharper declines between 0.2% and 0.4%. 

 The initial slowdown in the currency depreciation was primarily due to the IMF’s positive remarks on the Kenyan government reforms after its mission in November. The multilateral agency pledged additional financial support of $682 million to the Kenyan government to support its reform efforts and Eurobond debt repayment obligations in June 2024. The Kenyan government planned a debt buyback of $300 million by December 24 but has since backpedalled on the decision, increasing pressure on the shilling despite the interest repayment of $68.7 million. With the dwindling reserves and a relatively strong USD, the U-turn contributed to the shilling’s steep depreciation in December. 

The rand’s shaky movements


In contrast to the CBN and CBK, the South African Reserve Bank (SARB) was more conservative with rate hikes in 2023 as it began increasing rates in November 2021, before the US Fed started its tightening cycle in 2022/23. The SARB’s conservative rate changes also kept borrowing costs stable and avoided overheating the economy as output levels were squeezed due to the power crisis. South Africa’s manufacturing PMI stayed in the contraction region (below 50 points) from February till December 2023. 

After the three consecutive rate hikes by 125 basis points between January and May 2023, the SARB resorted to leaving rates unchanged at 8.25% till year's end. The performance of the South African rand remained choppy, influenced by the USD’s movements, seasonal upswings in global gold prices, and the release of key macroeconomic reports, including GDP, inflation, budget performance, and trade.

The rand closed at R18.58/$ in December 2023, gaining 0.8% relative to November’s close of R18.73/$. Between December 11-13, the rand traded at circa R19/$, sitting within the  R18-19 range forecasted in the November 2023 analysis. Compared to December 2022, the rand depreciated by 8.6%. 

The rand’s performance was supported by the decline in producer price inflation to 4.6% in November 2023 from 13.5% in January 2023.  Cooling headline inflation to 5.5% in November 2023, a reverse from the five-month high of 5.9% recorded in October 2023 amid higher global gold prices, also positively anchored the rand’s depreciation rate. With the US Fed planning rate cuts, gold prices increased 13% YTD, partly supporting the rand's performance. Of the three currencies tracked in this report, the South African rand performs best compared to the Nigerian naira and Kenya shilling. 

Having assessed the monetary policy responses of central banks in Nigeria, South Africa, and Kenya and the December 2023 exchange rate performance, let’s look at the outlook for January 2024.

Outlook for January 2024 


We expect the typical lull in economic activities at the beginning of January to influence the performance of the naira, keeping rates steady at current levels. The parallel market will remain within the ₦1,100-₦1,300/$ band while the official rate will remain above ₦700/$. 

The CBN is expected to have it's first and highly anticipated monetary policy meeting under its new leadership on January 23 and 24. We expect the apex bank to maintain the path of orthodoxy by hiking interest rates around 100-200 basis points and strengthening the monetary policy transmission mechanism. We also expect a clear direction on how the CBN plans to raise forex to clear its FX backlog and intervene substantially at the official window. The pronouncements on dollar inflows and the policy direction on the FX backlog will be the most significant, affecting the naira positively. Hiking rates might be a good signal to the FX market, but with inflation at 28.2%, returns are still negative, meaning higher rates will only have a marginal effect on the naira. According to Stears' pan-African inflation model,  Nigeria’s average annual inflation is projected to hover between 27.59% and 31.85% in 2024, underscoring the complexity of the economic challenges ahead.

Should the CBN follow this path, we could see the naira gradually regain its strength as speculative attacks reduce. This will be supported by the positive outlook from rating agencies like Moody’s, which upgraded Nigeria’s sovereign credit rating in December. Still, a substantial influx of dollars is what truly matters for the naira to rebound. Without this, the naira’s free fall will continue, possibly faster than anticipated, on low investor confidence. The official rate could trade above ₦1,000/$, while the parallel rate could hover around ₦1,400-₦1,500/$, further fuelling inflation. 

Kenya and South Africa

The movements in the USD will largely influence the South African rand and Kenyan shilling in January. With the USD possibly weakening on lower interest rates, the rand and shilling could trade within R18-19/$ and KES157-KES159/$ in the near term. This is because investor appetite towards better yields in emerging and developing economies would resurface, increasing dollar inflows. The table below shows that Kenya and South Africa offer positive yields compared to other peer African economies. 


However, while the movements of the USD will largely dictate the performance of the Kenyan shilling, the macroeconomic and policy events leading up to Kenya’s Eurobond repayment in June 2024 hold an even stronger power on the performance of the shilling in January. The forex markets were rattled when the government halted its debt buy-back of $300 million, causing the currency to shed about 0.3% in one day. 

Meanwhile, we expect the CBK to remain hawkish following its surprise rate hike of 200 basis points in December to support the Kenyan shilling and stabilise commodity prices. However, the CBK’s policy stance may have temporary but positive impacts on the currency. After the rate hike on December 5, the currency depreciated by an average of 0.02% daily, down from 0.1% until December 19, when the depreciation rate became steeper. Again, the performance of the shilling will be largely affected by economic events leading up to the Eurobond repayment. 

We expect the Kenyan government to be cautious with its policy pronouncements to avoid speculative attacks on the currency, relying heavily on external funding from multilateral and bilateral institutions like the IMF, World Bank, and Trade Development Bank. As these funds trickle in before June 2024, the shilling should receive respite. The shilling will likely trade at KES156-KES159/$ in January. 

Meanwhile, the government’s response to inflationary pressures and the power sector crisis stifling output growth in South Africa will also dictate the rand's performance. Noteworthy is also the expected positive performance of global gold prices throughout 2024. This is because investors are expected to tilt towards safe-haven assets like gold when yields on dollar-denominated securities start to decline. We expect the rand to trade within R17-19/$ in January. With inflation trending lower, within the SARB’s target of 3-6%, the apex bank is expected to remain conservative with altering interest rates.  

The forecasts and data underpinning these insights are from the Stears Africa FX Monitor, which provides an indelible view of the exchange rate performance of sixteen African countries (including the West African Economic and Monetary Union). 

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