October 2023 FX Analysis: Naira, Rand and Shilling decline

Nov 01, 2023|Dumebi Oluwole
Nigeria, South Africa, and Kenya have experienced significant currency depreciations against the greenback. The official rate of the naira, shilling, and rand have lost 66%, 32%, and 27%, respectively, between 2017 and 2023. 


The sharp declines are primarily due to global economic shocks within the period, like the COVID-19 pandemic in 2020 and the Russia-Ukraine war in 2022, which triggered higher inflation, interest rates and expensive imports. More so, stiff-necked domestic FX policies (e.g. import restrictions) and lean dollar inflows in key economies like Nigeria and Kenya contributed to the currency depreciation. The chart above shows that the naira has witnessed more downward pressure than the shilling and rand.



So far this year, we’ve seen even steeper currency devaluations than last year, especially in Nigeria and Kenya, as global monetary policy tightening took centre stage, strengthening the value of the US dollar against a basket of other currencies. The naira, shilling and rand have shed 50%, 18% and 9%, respectively, compared to 2022. 

As the US Fed increased interest rates by 500 basis points (bps) from near zero to 5.25%-5.50% in its 2022/23

The naira’s great fall


The currency crossed the ₦1,000/$ benchmark on September 28 at the parallel market. It continued depreciating in October to an all-time low of ₦1,310/$ because of FX supply shortages, speculative buying, and bruised investor sentiments. On October 31, the parallel market closed at ₦1,260/$. At the official market, the naira shed 18% between September and October. On average, the official rate stood at ₦796/$ in October, down from ₦762/$ in September. 

FX market participants continued to price in forex market distortions as the FX reform momentum quietly died down without proper follow-throughs from policy authorities. When the reforms were instated in June, the spread between the official and parallel rates was around 2%. Now, it stands at ~50%.

Additionally, lingering concerns about the Central Bank of Nigeria's (CBN) credibility continued to impact the exchange rate performance negatively despite announcements of the government’s commitment to clearing its FX backlog (estimated at $9.7 billion) and boosting FX supply by the new CBN governor and Minister of Finance. 

Regardless, the tides are changing, albeit gradually, as the CBN has decided to follow through on its reforms. On October 12, the CBN lifted its almost decade-long 43-item FX import restrictions list. And on October 23, the government announced an expected $10 billion inflow ($7 billion from securitising NLNG dividends and $3 billion NNPCL-Afrexim bank support fund) to ease the forex illiquidity. 



Resultantly, the naira steadied at  ₦1,300/$, as predicted on the Stears Daily Africa FX monitor, before appreciating by about 8% to around ₦1,160/$ on October 30, 2023, due to improved FX supply. A piece of evidence is the $80 million bump in FX reserves between October 20-30 and the 3x increase in market turnover at the NAFEM window from $79 million on October 20 to $259.84 million on October 27. 

However, the momentum was shortlived as the reality of FX supply concerns set in. By October 30, the NAFEM rate crashed by 20% to ₦993/$ before appreciating marginally to close at ₦815.32/$ on October 31. The daily turnover thinned out to $74.7 million on October 31 from $259.8 million on October 27. 

The Kenyan shilling (KES) is moving to its fair value


Unlike the naira, the shilling maintained its two-year downward trajectory through October 2023, depreciating by approximately 0.1% daily. The currency trades at approximately KES151/$, falling by ~20% YTD. 

On the domestic front, a vital driver of the shilling’s depreciation is reduced FX interventions by the Central Bank of Kenya (CBK). The new CBK governor explained that the Kenyan shilling has been overvalued (currently 20%) for years. The previous CBK leadership intervened heavily in the market to keep the currency artificially strong at KES 108-110/$. 

However, the CBK, under its new leadership, has decided to allow the shilling to trade towards its fair value by reducing FX interventions from an already lean FX reserves position. This comes from pressing fiscal needs like the incoming Eurobond repayment in 2024 and the increasing strength of the USD, which has spiked interest payment costs on dollar-denominated debt. This indicates further depreciations in the KES. 

Allowing the currency to move to its fair value will reduce speculative activities and shrink the chances of a prominent black market that could worsen FX market distortions. More importantly, it indicates better FX transparency that will increase investor and business confidence and likely encourage more dollar inflows into the economy.

Another driver of the Kenya shilling’s performance is the rise in global oil prices. Brent crude rose by 20% to $92 per barrel (pb) in October from $77pb at the start of the year. Higher global oil prices mean an increased import bill and a wider current account deficit narrowed by 33% between Q2’2023 and Q2’2022.

An upward review of petrol prices by the Energy and Petroleum Regulatory Authority (EPRA) and the attendant increase in transportation costs also tend to follow when oil prices rise. Earlier in October 2023, the EPRA increased fuel prices in Kenya by an average of 25%, leading to an uptick in transport inflation to 3.5%. Essentially, market participants price in the pass-through effect of a higher import bill on Kenya’s depleting FX reserves. Kenya’s external reserves are currently down 4% to $6.8 billion from $7.08 billion in September.

The rand’s relative stability


Among the three countries, though, the movements in the USD and US treasury yields was the primary driver of the performance of the South African rand, which has lost 10% YTD. 

South Africa practices a free-floating exchange rate system where the demand and supply of forex predominantly determine the currency's performance. In this market regime, forex market participants price in critical domestic and global events to either go long or short dollar positions vis-a-vis the rand. 

In October 2023, the average exchange rate stood at R19.05/$, down by a meagre 0.4% from the previous month's R18.97/$. Specifically, on October 5, the rand touched R19.46/$, edging close to the R20/$ benchmark before appreciating 3.5% to close the month at R18.80/$. 

The gradual uptick in the rand’s value resulted from the rise in global gold prices by 8% between October and September, which offset the USD’s impact on the rand. Gold is South Africa’s second most traded export commodity, accounting for 14% of total exports. Higher global gold prices favour South Africa’s balance of trade and forex inflows, hence the marginal bump in currency value.  

Other noteworthy events like rising inflation concerns as South Africa’s September 2023 inflation rate increased to 5.4% (the report was released on October 18) from 4.8% in August, and the 5.4% increase in the producer price index influenced the rand’s performance.  However, their negative impact has often been immediate and temporary. 

Outlook for November


We expect the CBN to continue its FX interventions at the forex market and start clearing the FX backlog. Due to these moves, we are likely to see a steady cool-off period in the depreciation of the naira, with marginal appreciations at the parallel market between 1-10% daily. 

A strong and immediate appreciation of 20-50% (how much the naira has depreciated in the year) is unlikely, but we will see both the official and parallel rates converge gradually. October 31, the NAFEM rate traded ₦815/$ per the FMDQ, while the parallel rate oscillates between ₦1,100-₦1,300/$. 

Also, the CBN and FG see the fair/true value of the naira at ₦650-₦750/$. Chances are efforts will be made to push the naira towards this rate in the short-medium term. However, while FX supply may improve to support investor confidence, conflicting signals are beginning to sprout as there are plans to clamp down on speculators and reduce arbitrage and rent-seeking behaviour. 

The CBN and Ministry of Finance have announced steps to automate the FX market transactions around the official rate and institute an excise tax penalty on FX transactions outside the official window. The ideal situation is to solve the fundamentals of supply and demand to reduce thriving parallel FX market activities, and speculators will become extinct. 

More importantly, transparency and credibility on FX moves and policies by the CBN are paramount to regaining investor confidence so that dollar inflows are consistent. Defending the currency in times of reforms is expected by investors and multilateral and bilateral lenders alike to avert a painful currency free fall like in Southeast Asia in 1997

Kenya & South Africa

The KES will maintain its losing streak, edging closer to KES155-160/$. Meanwhile, the rand maintains its current trend, trading R18-20 against the greenback. 

The performance of the USD will primarily drive the movements in the shilling and rand as the markets will weigh the US Fed’s decision at its meeting today (November 1) and the attendant monetary policy move by the South African Reserve Bank (SARB) and CBK. 

More so, geopolitical tensions and their impact on global commodity prices could bloat import costs for both countries, especially Kenya, and influence currency movements. For Kenya, the risk of the Isreal-Hamas war escalating to involve key export trading partners in the Middle East, like Pakistan and Egypt, is a solid threat to the Kenyan economy, particularly with tea, coffee and horticulture that account for over 30% of total export earnings. 

For South Africa, though, the lingering global geopolitical tensions are bound to force investors towards safe-haven assets like gold, increasing prices and supporting market sentiments towards the rand on higher export earnings. 

The forecasts and data underpinning these insights are from the Daily Africa FX monitor with an indelible view of the naira, rand, and shilling’s performance from different views ranging from five days to YTD. 

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