AZA Finance FX Week Ahead: Botswana eyes coal expansion amid Europe energy crisis

Botswana is the latest African country looking to develop its fossil fuel industry to plug gaps created by energy supply constraints. The landlocked southern African nation is seeking $2.5bn of funding to build a plant that can convert its large coal deposits into synthetic fuels. Botswana’s plan comes ahead of the UN’s COP27 climate conference, where African countries will push back against rich nations’ calls to limit new fossil fuel developments, in part because financing for energy transition promised at COP26 in Glasgow last year has failed to materialise.

Tanzania and Uganda are pressing ahead with building the world’s longest heated pipeline to transport crude oil, saying it is vital for their economic development in the face of pressure from the European Union citing human rights abuses and concern for the environment and climate (see Tanzania below). Botswana’s economy is expected to grow around 4.5% this year due to higher commodity prices, and while the Pula has depreciated by almost a fifth against the dollar over the past 12 months (currently trading at around 13.3), we would expect the currency to gain if the country is able to secure investment for the coal-to-synthetic fuel plant.

Cedi plunging to record low 14 may see some reprieve


The Cedi sold off sharply, tumbling to a fresh record low 14.01 from 12.50 at last week’s close as the country experiences its worst economic crisis in years.

Ghanaian MPs this week called on President Nana Akufo-Addo to fire Finance Minister Ken Ofori-Atta in a bid to restore market confidence, which has been battered by high inflation and a rapidly depreciating currency.

The first tranche of a $1.13bn cocoa loan landed this week, amounting to about $790m. While the money will be used to purchase cocoa beans, the funds should also help shore up the Cedi. The US Agency for International Development said it was committing $261m in loans to Ghanian farmers to finance seed acquisition, fertiliser procurement and processing. Given those inflows, we expect the Cedi to recover some losses in the short term.

Record weak Naira is heading lower 
The Naira declined to a fresh record low on the unofficial market, trading at 761 from 746 at last week’s close as dollar demand continues to outstrip supply. Petrol scarcity has resulted in long queues at the pumps in Lagos and Abuja, with some filling stations selling above the pegged rate for gasoline. This has caused economic activity to slow as petrol shortages push the cost of transportation and commodities higher. The Nigerian National Petroleum Company said the fuel scarcity was due to severe flooding that has impacted 27 of Nigeria’s 36 states, restricting the movement of fuel tankers. Given that backdrop, coupled with the ongoing FX supply issues, we expect the Naira to continue weakening in the near term.

Rand heads for 17 levels after neutral budget 
The Rand strengthened slightly against the dollar, trading at around 18 from 18.09 at last week’s close as global risk-on sentiment lifted emerging market currencies and snatched back some of the greenback’s recent gains.

South Africa’s Finance Minister Enoch Godongwana this week delivered his mid-term budget speech, which was overall neutral for the currency. Positives such as expectations that the budget deficit will narrow to 3.2% in the 2025-2026 financial year from 4.9% in the current financial year were overshadowed by loadshedding concerns, which is dragging on economic growth. As the Rand continues to move in line with global risk sentiment, we could see it trade with a 17 handle, with the next key support level at 17.80.

Egypt currency basket plan driving weakest Pound lower
The Pound slipped to a fresh record low against the dollar this week, briefly hitting 19.71 before recovering marginally to 19.70 as the country draws closer to finalising an IMF deal.

Egypt’s central bank is working on a new currency indicator that would be based on a basket of currencies, in part because the local unit has strengthened against other major currencies this year such as the euro. We expect the Pound to continue its gradual downward trend against the dollar in the week ahead as the central bank pursues a more flexible exchange rate.

FX supply strains weigh on record low Kenyan Shilling
The Shilling dropped to a fresh record low against the dollar, trading at 121.15/121.35 from 121.05/121.25 at last week’s close as ongoing dollar demand from the oil and energy sectors bumps up against slower FX supply. Further weakness was offset slightly by the country’s foreign exchange reserves, which remain adequate for 4.13 months of import cover at $7.3bn.

Diaspora remittances stood at a cumulative $4bn in the first nine months of the year. We expect to see continued pressure on the Shilling in the near term due to high inflation and bruising import costs on items such as food and fuel.

Boosted Ugandan Shilling faces Ebola and inflation pressure 
The Shilling depreciated slightly against the dollar, trading at 3810 from 3796 at last week’s close. Uganda’s central bank said the country is grappling to rein in double-digit inflation as economic weakness filters through to the domestic economy. Annual inflation rose to a decade-high 10% in September having been just 2.7% in January.

Ebola cases also rose this week, with infections spreading to the capital Kampala. The country is expected to start vaccine trials in the next fortnight in an effort to get the outbreak under control. We expect the Shilling to weaken in the near term due to the ongoing Ebola crisis and inflationary pressures.

Tanzania investment inflows supporting Shilling
The Shilling weakened marginally against the dollar, trading at 2332 from 2330 at last week’s close. The International Energy Agency urged Tanzania and Uganda to halt construction of their crude oil pipeline project, saying the world will not meet its climate goals unless new fossil fuel developments are shelved.

The European Union has already expressed concern about the impact of the pipeline project on the environment, though the two East African nations have hit back saying it is vital for their economic development. We expect the Shilling to strengthen in the near term as Tanzania attracts private sector investment, including for the Bagamoyo Port development. Plans to boost rice production should also support the currency.

Note to journalists:
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Issued by AZA. This Newsletter is produced as a service to our clients. It is prepared by our dealing professionals and is based on their understanding and interpretation of market events. AZA cannot be held responsible for any losses of whatever nature sustained as a result of action taken based on comments contained in this publication.

Gavin Serkin
[email protected]
+44 20 3478 9710

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