September cost-of-living round-up

Regular readers will know we're generally not fans of emerging economies fixing the value of their currencies. Much better to let them float and adjust according to market sentiment than make them overvalued through rigid controls. The always-interesting Peterson Institute for International Economics has laid out the reasons why fixed exchange rates cause so much trouble, citing five recent examples of economic crises (in Bolivia, Egypt, Lebanon, Nigeria and Sri Lanka), all at least partly caused by excessive controls over currencies. The article is well worth a read.

The Institute could have given other examples too, such as our old friend Zimbabwe. Its Reserve Bank was last week forced to let its new supposedly-gold-backed currency, the ZiG, or Zimbabwe Gold (ZWG), plummet more than 40%, making it the world's weakest currency for the month by a distance (see first table below). 

This is a huge blow for Zimbabwe's authorities, who had trumpeted the currency's strength and stability since it was launched in April. The trouble has been that neither investors nor the country's long-suffering people believed them and instead continued to prefer US dollars to yet another government-backed currency that seemed likely to fail. Controls over its value meant the ZiG quickly became overvalued, making it even less attractive, a situation that can only go on so long, especially if the government does as little as Zimbabawe's to support the economy and give substance to the currency value. If the ZiG fails, the dollar will become the country's de facto currency again, but, because of the weakness of the economy and a long drought, there are not enough dollars in circulation.

For expatriate staff working in Zimbabwe, the local currency's losses mean a much better conversion rate when changing foreign currencies, although this boost to spending power will be at least partly offset by high inflation, at least in ZWG terms. However, with the country's economy so dollarised, most foreign assignees in Zimbabwe are paid in US dollars, and dollar-denominated prices are much more stable (latest dollar-based annual consumer price inflation was only 3.7% to end-August). At ECA, we base our Zimbabwe cost-of-living indices on USD. Interestingly, Zimbabwe's central bank has begun to publish both ZWG and USD-based inflation on the home page of its website, acknowledging perhaps that even it is losing faith in its 'golden' currency.

Other heavy fallers in September were the currencies of Angola, Ethiopia and Iran, all of which were among the biggest fallers the previous month. Lower oil prices are the main driver of the Angolan kwanza's recent slide, although hefty debt repayments have also depleted foreign-exchange reserves, reducing the central bank's ability to prop up the currency's value.

The currencies of Malaysia and Thailand were the world's strongest in September (see next table), as indeed they were in August. An excellent all-round economic performance is behind the Malaysian ringgit's strength, whereas a burgeoning trade surplus and low inflation have prompted a positive turnaround for the Thai baht. Thailand's currency would have gained even more if it hadn't been for the central bank intervening in markets to hold its value down - generally a less risky policy than holding a currency value up, but it can still cause problems later.

Sharp-eyed readers will have noticed that we have amalgamated what were previously separate inflation and exchange-rate blog posts. It makes sense to have the information on both expatriate cost-of-living factors together. High inflation or dramatic exchange-rate movements can seem alarming, not least to international assignees on the ground in the countries affected, but in most cases such events are offset to a considerable degree by trends in the other factor. Expatriate cost-of-living conditions can only be truly understood when inflation and exchange-rate movements are considered together.

We have brought all our regular tables into this single monthly blog, therefore, but have added the right-hand column on the high-inflation table (next table below) so that readers can see the likelihood of rapid price rises in countries of concern to them being at least partly offset by currency weakness. Surprisingly to some, perhaps, only one country with inflation above 10%, Surinam, has seen its currency gain against the euro during the last year. There has been no offsetting there, so expensive cost-of-living adjustments could perhaps be needed for expatriate staff. As always, though, it is worth waiting for our next full survey (September 2024, to be published in November) to get the full cost-of-living picture.

Bangladesh was the only newcomer to the inflation table. The recently-ousted government left public finances in a mess, while the revolution itself disrupted production and caused other supply issues, sparking higher price rises. Inflation is also increasing on the back of two currency devaluations, in May and August 2024, which made import costs rise, showing once again how exchange rates and inflation work hand-in-hand where international cost of living is concerned.

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