What follows is a brief analysis of the behavior of currencies in 3 important African economies.
The persistent trade deficit that is the norm in Ghana seems to be increasing. That deficit contributes to price inflation and the two conditions combine to weaken the currency.
The Ghana Central Bank is fighting back by raising interest rates which are already high. The cedi is likely to remain weak until the general pattern of Ghanaian trade changes. One of the reasons for Ghana’s growing trade deficit is the increase in equipment imported to support oil production which has not yet reached the desired production levels. When oil production will grows to the point at which it reduces the need to import, and when Ghana develops additional sources of high value export earnings, then a lower trade deficit will become the norm.
Although investors should build currency weakness into their assessment of Ghanaian deals and projects, they should also build the ability to raise prices locally into financial forecasts, and consider Ghana as a possible export platform.
The shilling has fallen only about 1% in the last year and a half through March 2014. Since then it has stayed within a narrow range.
Kenya’s trade surplus is rising and so are international reserves. The Kenyan Central Bank has kept interest rates steady and treasury bills have fallen slightly. It seems a radical devaluation is not likely, though the shilling/dollar rate might move outside the 86-88 range where it has been for about the last 18 months.
Recent inflation has been falling on a quarter on quarter basis. Nigeria’s trade surplus increased during 2013. Interest rates held within a narrow band during 2013 and have fallen a bit in 2014. Naira has stayed between 155-165 for 2 years. While the naira could lose a little ground vs the dollar simply due to much lower US inflation, many investors consider it stable for investment purposes.