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November currency review

If the government of Tajikistan had read this blog over the last few years it would have known that devaluing a fixed currency does little good long term without also making other major changes. Devaluations are often engineered to close gaps between overvalued official exchange rates and fairer-value parallel ones, but they generally only achieve this briefly unless other reforms are made to make the local currency more attractive to invest in. Numerous examples, such as with Venezuela, Nigeria and Zimbabwe, have appeared in this blog over the years where countries have made big devaluations without also making other necessary changes, such as allowing the currency to float freely, strengthening the economy, providing projects worth investing in or improving the business environment, only to see the gaps they had reduced between official and street exchange rates rapidly widen again. So it was with Tajikistan this month. On 4 November the official rate was devalued by 10% from USD 1 / TJS 10.3 to TJS 11.3, matching the black-market rate of many months.

The only problem is, the black-market rate has shifted in response (largely because the central bank has signalled its concerns through the devaluation about dwindling foreign-exchange reserves) and has already weakened to around USD 1 / TJS 12. Therefore, the devaluation has achieved nothing and the 'logic' behind the decision to do it still holds. So what do the authorities do now, another devaluation? This blog's experience suggests that would just be throwing good money after bad, unless they are prepared to make other dramatic changes as well. Don't hold your breath, but do expect inflation to rise even higher than its current 8.5%.

Countries experiencing largest currency losses in November

Country

Currency code Movement v EUR
2 - 30 Nov 2020 (%)
Inflation
(%)
Argentina ARS -6 37.2
Armenia AMD -5 1.3
Georgia GEL -5 3.8
Haiti HTG -7 25.7
Kyrgyzstan KGS -7 7.2
Seychelles SCR -10 1.9
Tajikistan TJS -12 8.5
Zambia ZMW -6 16.0

Other big fallers in November included the Seychelles rupee, which is struggling to hold its value as demand for hard currencies surges. At least with the rupee being allowed to float, the economy should be able to adjust quite naturally, although here too inflation is likely to increase significantly.

The Argentinian peso gave further ground too, having lost nearly a third of its value against the euro in the last 12 months (see final table below). This was in spite of a big interest-rate hike in November and shows the extent of the country's economic problems.

A shortage of local currency, rather than foreign, caused the Liberian dollar to be the world's strongest currency this month, as our next table shows. It is somewhat surprising that such a shortage of local dollars could have such an impact, given that hard currencies, including US dollars, are widely accepted in Liberia, but with wages and other public sector bills having to be paid with local currency, the problems are real. However, they should be temporary if the central bank quickly prints more banknotes, at which point the exchange rate could weaken rapidly again.

Countries experiencing largest currency gains in November

Country

Currency code Movement v EUR
2 - 30 Nov 2020 (%)
Inflation
(%)
Brazil BRL +5 3.9
Liberia LRD +12 17.1
Norway NOK +5 1.7

Although it might not always be apparent to global mobility teams, as they try to keep up with paying international assignees in crisis-hit locations such as Lebanon, say - don't forget that ECA is always here to help! - but volatility of both exchange rates and inflation has steadily declined over recent decades. An interesting report from the National Bureau of Economic Research in the US recently pinpointed why, and it's down to convergence of economic and monetary policy across nations worldwide. Increased orthodoxy is good, it seems, for economic stability. However, the authors also ask whether reduced uncertainty can survive the Covid-19 pandemic.

One country to have benefitted economically from more textbook policy is Egypt. Although the government of President Abdel Fattah el-Sisi has brutally suppressed opposition and reduced freedoms, its economic management has been more admirable, spearheaded by exchange rate reforms four years ago which devalued the Egyptian pound AND allowed it to float freely. The many rewards are now being felt and include greater investment, higher remittances, bigger foreign-exchange reserves, faster GDP growth, lower inflation, better credit ratings, a stronger banking system, lower borrowing costs, reduced unemployment, greater government scope to deal with Covid-19, and - Tajikistan take note - the disappearance of the black market and the mafia that controlled it. Amazing what a bit of joined-up policy can achieve. 

Increased orthodoxy is producing quick results in Turkey too. Last month we reported on the damage the government's strange policy decisions were doing to the lira. Now, with a new team in charge of the central bank, interest rates have been immediately lifted and forward guidance about future policy given. The lira gained 4% against the euro in November as a result, although it has a long way to go to make up the losses of the last year.

Selected currency movements (v EUR)
Country Currency code % movement to 30 November 2020 v EUR since: Latest official annual inflation (%)
    2/11/20
(1 month)
31/8/20
(3 months)
1/6/20
(6 months)
2/12/19
(12 months)
 
Argentina ARS -6 -9 -21 -32 37.2
Australia AUD +2 0 +3 +1 0.7
Brazil BRL +5 +2 -6 -27 3.9
Canada CAD 0 0 -1 -6 0.7
Chile CLP -2 +1 -2 +1 2.9
China CNY -1 +4 +1 -1 1.7
Egypt EGP -2 +1 -6 -5 4.5
India INR -1 -1 -6 -11 7.6
Indonesia IDR +2 +3 -3 -8 1.4
Japan JPY -2 +1 -4 -3 0.1
Kenya KES -3 -2 -10 -14 4.8
Korea Republic KRW 0 +6 +4 -1 0.1
Mexico MXN +4 +8 +3 -10 4.1
Nigeria NGN -1 +1 -6 -13 14.8
Norway NOK +5 -1 +2 -4 1.7
Philippines PHP -2 0 -2 -3 2.5
Poland PLN +3 -2 -1 -4 3.1
Russia RUB +2 -2 -14 -22 4
Singapore SGD 0 +1 -2 -6 -0.2
South Africa ZAR +4 +9 +7 -11 3.3
Sweden SEK +2 +1 +3 +3 0.3
Switzerland CHF -1 -1 -1 +2 -0.6
Turkey TRY +4 -7 -19 -32 11.9
United Kingdom GBP +1 0 +1 -5 0.7
United States of America USD -2 0 -7 -8 1.2
Venezuela VES -50 -67 -80 -96 1813.1
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