The currencies of the emerging markets of Africa have long been recognised as a separate forex universe with their own very special characteristics that routinely baffle outside FX desks, especially those from North America and Europe.
“They certainly have drastic differences from the more recognised G7 currency pairs,” explains the forex team at South Africa’s Standard Bank, one of the leading operators in the region.
Since the financial meltdown, Africa’s currencies have more than lived up to their reputation for volatility and surprise. For instance, the nominal CFA franc zone, which is the common currency of several countries in western and central Africa, depreciated by some 15 percent against the US dollar in the run-up to late 2008, with wild swings along the way.
Other sovereign currencies displayed roughly similar volatility, not least the South African rand itself. At the height of the panic, its volatility went off the scale in October 2008 and was heavily sold off as investors dumped assets that were perceived, rightly or wrongly, as risky. And this despite the fact that South African banks had practically zero exposure to toxic assets. Since then however, the currency has made a dramatic recovery in the second quarter of this year as investors begin to see things differently.
Although the most serious banking crisis in some 75 years can hardly be described as normal, this is an environment in which the FX team of South Africa’s 150-year-old Standard Bank feels almost at home. Long-time specialists in the vagaries of the Angolan kwanza, Zambian kwacha, Lesotho loti, Namibian dollar and other regional currencies right on their doorstep, they have practically grown up with them.
On top of its expertise in so-called EM currencies, Standard Bank also claims dominance in rand-trading. As Richard de Roos, head of the FX team explains, these all-round capacities in spot and derivative desks translate into competitive prices for its foreign-exchange management skills. Not least, they also ensure clients have access to sufficient liquidity, the bedrock of successful FX transactions.
Meantime, the region appears to be recovering from the shockwaves of the crisis. Standard Bank’s research, which has often picked regional currency trends ahead of the game, believes the fundamentals suggest a bounce-back. “Although corporate FX transactions have slowed because of reduced business activity and tighter lending criteria in the wake of the crisis, the rand’s dramatic strength over recent months looks promising,” argues de Roos. “It means there’s more scope for exporters to hedge or for importers to lock in their foreign commitments.”
In general, outside experts agree with this view. “We think that emerging market currencies are in the process of reclaiming back the losses suffered in Sept and October last year, and they are likely to reclaim all the losses by the end of this year,” notes a UK report.
On the other side of the coin, as the essential stability of the South African economy becomes more apparent to outsiders, the FX team is developing deeper relationships with foreign direct investors. Some are attracted by the country’s current capital-intensive projects – “the infrastructure drive has a huge FX element”, explains de Roos.
Other foreign direct investment is looking for a return on South Africa’s relatively attractive yields compared with, say, the Eurozone and UK where interests rates are low because of massive central bank-driven lending under so-called quantitative easing programmes designed to kick-start the economies.
Much of this inflow is based on the growing recognition of the rand’s resilience, in part because of exchange controls which buffered South Africa from the worst effects of the credit crunch. Further, it’s widely recognised that these exchange controls are likely to be liberalised only gradually.
“The most consistent source of FX inflow is that of portfolio capital invested in bonds and equity,” adds de Roos.
“Foreigners own around 40 percent of the top 40 shares on the Johannesburg Stock Exchange. And this year we’ve seen a renewed appetite for JSE shares and South African sovereign debt. This is over and above considerable capital injections in the telecoms sector for Vodafone and Bharti”. (Bharti Enterprises is an Indian conglomerate with major telecom interests).
But this is a market full of pitfalls for the uninitiated. Across the region, cross-border transactions are subject to a raft of foreign-exchange regulations that put a high premium on a local knowledge. And that’s quite apart from the exposure to the risks of fluctuating currencies. (It’s only a few years ago – before investors began to see fundamental strengths in African economies – that they were known as ‘yo-yo currencies’.)
As Africa’s EM economies rebound, de Roos predicts that currency flows will head towards those nations that are first out of the blocks. “In the South African economy, for example, we believe that April marked the low point on a monthly basis,” he explains. “We are expecting positive growth in gross domestic product by the final quarter.”
For further evidence, South African Reserve Bank research pinpoints a definite uptick in economic performance on the back of a new-found robustness in regional economies. South African Reserve Bank governor T.T.Mboweni believes that, to some extent, they were innocent victims of the crisis.
“Emerging-market economies in general and South Africa in particular have proven to be remarkably resilient in the midst of this financial market turmoil,” he pointed out recently. “ The impact on South Africa has been indirect , mainly through financial market volatility and the resultant economic slowdown in the US and other major industrialised countries.”
Standard Bank’s own research supports the governor’s assessment. “Given that the African continent consists of a number of emerging markets, most currencies within the region were adversely affected by the crisis,” explains de Roos. “But Africa withstood it far better than it would have in the past because of reduced levels of foreign debt and a number of other improved fundamentals.”
Although the bank’s FX team has insights into the currencies of the African continent that only a resident desk could acquire, Standard is also a global trader with 30 dealing rooms spread across the globe. Its most actively-traded currency pairs are in fact the dollar and euro, but it is also handling greater volumes of Asian currencies. This is because Asia is now South Africa’s largest export region.
“We suspect that the yen and won will gain in importance in coming years,” predicts de Roos. “And we’ve already got a dedicated team for Asian currencies.”
If it turns out to be true, as many commentators argue, that there’s a gravitational shift of global finance to emerging markets, Standard Bank could be in the right place at the right time.