April currency review

Six of the countries whose currencies fell most heavily in March repeated that dismal performance in April. Argentina, Russia, Sierra Leone, Surinam, Syria and Zimbabwe all made our list of largest currency losers (see first table below) for at least the second month in a row. Zimbabwe is on an unbroken six-month streak! Indeed, all six currencies have appeared numerous times and lost much of their value during the last 12 months. As far as cost of living (CoL) for expatriate staff in these countries goes, the exchange rate factor will be at least partly offset by high inflation in five of them. The exception is Russia, where domestic demand weakness has brought inflation back down to low levels. CoL indices there could be notably negative next time around.

Another serial faller, the South Sudanese pound, might well have appeared again but so dysfunctional is the Juba government at the moment that the central bank has not been able to hold a currency auction since 6 April, nor publish up-to-date exchange rates for over a month, so we have no way of knowing present values. 

Talking of chaos, the complexities of Argentina's currency regime are adding to serious economic problems. There are multiple exchange rates for everything from soya bean exports to crypto currency purchases. Rates differ for inbound and outbound tourists, and are different again for investors. There is the 'tech dollar' rate and the 'blue dollar' rate and several others. And they don't appear to be doing any good. All of the official rates overvalue the peso, whose benchmark rate has nevertheless lost exactly half its value in the past year (see last table below). The black market is thriving, offering fairer value exchange rates which are fast diverging from official ones. The confusion and hardships such a situation can cause, where buying something as basic as a new front door is no simple matter, are illustrated beautifully in this excellent piece by Associated Press.

Regular readers will know the difficulties that can come from excessively strict control of a currency's official value. Argentina's problems are just another in a long line of examples. The strictest form of currency management is a peg against another currency, usually the US dollar. This is fine if your economy is dynamic enough, or has sufficient resources (such as the Middle East's copious oil supplies), to back up the value you've artificially placed on your currency, but if not, you are asking for trouble.

Nigeria, for instance, has struggled with a dysfunctional and corrupt economy for years, many of whose problems stem from the naira's effective peg to the dollar. The World Bank urged the authorities to allow a more flexible system again in April, but such alarms have been ignored many times before.

Now, Bolivia, which has effectively fixed the boliviano against the dollar for over a decade, is beginning to see the downsides and may have to drop the peg and devalue soon. Pegging troubles are manyfold, but the main issue is that equating the value of your currency with that of a richer nation inevitably means you overvalue it, so no one wants to buy it. This lack of attractiveness means that free markets would, if they could, push down the value, and gradually your initial overvaluation becomes more glaring over time. As markets work against you, it becomes ever more costly to hold the value of your currency up, because to do so you have to sell more and more precious dollars. Without enough dollars, your country may struggle to import essential items. Bolivia had a decade-long resource boom, with most of its exports priced in dollars on international markets, so for many years it could afford to maintain the peg. Now, the boom is over and revenues have declined sharply from sales of oil and gas. Dollars - and imports - are becoming scarcer, depositors are withdrawing dollars from bank accounts, and a black market for dollars has developed for the first time in years. There is a big chance that a devaluation is coming.

Even developed economies can eventually struggle to maintain currency pegs. There have always been critics of the Hong Kong dollar's peg to its US namesake but debate about the issue has been fairly quiet, until recently. The territory's economic links with the rest of the world are weakening as they strengthen with China - a destabilising shift at the best of times - and investment is falling. Meanwhile, high interest rates in the US mean Hong Kong's monetary policy has to follow suit (because the two dollars are pegged) and local interest rates are consequently too high for current economic fundamentals, retarding growth. Abandoning the dollar peg (probably for a yuan one) would be potentially even more destabilising, so Beijing is unlikely to sanction such a move any time soon, but the longer it waits the more costly maintaining parity with the US dollar could become.

The Zambian kwacha was by far the world's strongest currency in April (see next table). It more than reversed its losses from March, as progress was made towards a new debt-restructuring plan, showing the benefits of a flexible currency regime which allows exchange rates to bounce back when investor sentiment changes. It also confirms why Global Mobility teams are wise to take a deep breath before reacting too precipitously to a big currency fall. They might also find it worth their while to stay aware of which currencies are managed loosely enough to be able to bounce back in this fashion, and which ones are not. Do please get in touch if we can help with that, or indeed anything else mobility related.

Only one other currency, surprisingly the Lebanese pound, gained more than 2% against the euro this time. 

* Sayrafa rate

A planned new common currency for eight countries in West Africa, originally to be launched in 2020, has been delayed again. Russia's war on Ukraine and lingering effects of the Covid-19 crisis have forced Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo to further postpone implementation of the 'eco', according to Cote d'Ivoire's President Alessane Ouattara. Progress with economic convergence, vital for the new union to work, has been slow and the launch date for the eco is not now expected until 2027. In the meantime, all eight countries will remain part of the CFA franc bloc, with their currencies all pegged to the euro. This is a peg that works because burdens are shared by several African nations and the common currency is backed by the Bank of France.

It seems only a matter of time before countries choose to peg currencies not to the dollar or euro but to the Chinese yuan renminbi. We've already noted the potential for Hong Kong to do this one day, but with international use of the yuan increasing steadily, and more and more cross-border payments being settled in China's currency, others might choose this path first. The likelihood would grow if the global trading system were to split into two blocs centring around the US and China, as seems increasingly possible. For Global Mobility teams, greater acceptance of the yuan around the world might soon open up the possibility of using it as an alternative means of pay delivery.

Finally, here is this month's selected currency movements table: