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January currency review: Angola devalues - and there's more to come

ECA International

The central bank of Angola has taken the first steps towards its long-stated aim of unifying official and black-market exchange rates. However, it may never reach its stated destination.

Having announced on 2 January that it had abandoned the kwanza's peg to the US dollar, the central bank took another week to move the exchange rate, initially from USD 1 / AOA 165 (where it has sat for nearly two years) to AOA 184, and then a week later to AOA 203. Overall, the kwanza has fallen 23% against the dollar (and 27% against the euro - see first table), making it the world's weakest currency in January.

More incremental devaluations are sure to follow, but at what pace and to what extent?

That depends on how much social and political pressure the authorities can stomach when inflation (already high at 26.3%) surges even higher. The more the kwanza is devalued the more import costs will rise. While this is a big issue for foreign staff working in Angola because of the high proportion of imported items they tend to buy, it will affect local nationals to a lesser extent, because domestic produce (especially food) usually takes up more of their spending. However, locals will certainly feel the pinch as well.

Two other things might allow the central bank to go further in devaluing the currency.

Firstly, there has been a shortage of foreign currency for many months already in Angola (part of the reason for the devaluations taking place) and importers have often had to go to the black market to source their dollars to bring in goods, so those items will already be priced accordingly. Inflation might not rise as fast as many fear, therefore.

Secondly, government revenues from oil exports (which are priced in dollars) should increase dramatically in kwanza terms following the devaluations, allowing leeway to redistribute income to ease the hardships caused by higher cost of living. It must be said, though, that Angola has a poor record when it comes to spreading its oil wealth among its people.

Even if the regime is generous, however, with the black-market exchange rate currently at USD 1 / AOA 470, the size of the exchange-rate-unification task is enormous and the gap may prove too big to bridge before the government loses the will in the face of what is likely to be growing opposition.

Countries experiencing largest currency losses in January
Country
Currency code Movement v EUR
1 - 29 Jan 2018 (%)
Inflation
(%)
Angola AOA -27 26.3
Argentina ARS -7 24.8
Gambia GMD -6 7.9
Iran IRR -8 9.6
Liberia LRD -6 13.1
Philippines PHP -6 3.3
Ukraine UAH -6 13.7

In last month's currency review, we expected the Sudanese pound to be the world's weakest in January, but the authorities there have not so far carried out the devaluation they said would happen in the first week of the month. Their reluctance shows how difficult it can be to face down opposition to devaluations, which inevitably - at least in the short term - hit people in their pockets. We will keep you posted on any change.

In yet another strong month for the euro, only two currencies, the Colombian peso and the Norwegian krone, gained as much as 3% against it, both of them because of the resurgence in oil prices.

Countries experiencing largest currency gains in January
Country
Currency code Movement v EUR
1 - 29 Jan 2018 (%)
Inflation
(%)
Colombia COP +3 4.1
Norway NOK +3 1.6

In other currency news, the central bank of Morocco has widened the permissable band around the US dollar within which the dirham is allowed to trade, from +/- 0.3% to 2.5%. A more flexible exchange-rate regime has been planned for some time and the recent move is likely to be followed by others, probably producing a gradual devaluation of the dirham and an increase in inflation.

With most of its previous 'solutions' to Venezuela's economic crisis having arguably made the situation worse, the government may have surpassed itself this time, by proposing to create a crypto-currency (called the 'petro')  to replace the bolivar. Criticism was swift and almost universal, with the most obvious flaw being that none of the other so-called crypto-currencies, such as Bitcoin, which are currently taking their owners on roller-coaster rides around the world, are actually currencies. They are (hair-raising) investment vehicles at best, and the petro would be certain to raise more hair than most. Not great for budgeting, but then what's new in Venezuela? Perhaps sensing the proposal might be a non-starter, the government later announced a devaluation of the DICOM rate instead. The DICOM is the weaker of the country's two official exchange rates; it stood at USD 1 / VEF 3 345 on 24 January but has been devalued to VEF 11 311 as of 30 January. Even this move may be fairly meaningless, however, because DICOM is poorly funded and often inaccessible (although its rate is still used for foreign credit-card transactions), leaving the black market as the only viable option for those needing dollars and other hard currencies. The black market rate is now USD 1 / VEF 255 900!

And in Iceland, whose currency, the krona, is prone to occasional wild swings in value, economists and the government are working together to try to find the best exchange-rate system for Icelandic conditions, with the particular aim of reducing volatility. Whatever they decide, you'll be able to read about it in this blog.

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

Selected currency movements (v EUR)
Country Currency code % movement to 29 January 2018 v EUR since: Latest official annual inflation (%)
    1/1/18
(1 month)
30/10/17
(3 months)
31/7/17
(6 months)
30/1/17
(12 months)
 
Argentina ARS -7 -19 -17 -43 24.8
Australia AUD 0 -1 -5 -9 1.8
Brazil BRL +1 -3 -6 -16 2.9
Canada CAD -2 -3 -5 -9 2.1
Chile CLP -1 -1 +2 -7 2.3
China CNY -1 -2 0 -7 1.8
Egypt EGP -3 -7 -5 -10 21.9
India INR -3 -4 -5 -8 5.2
Indonesia IDR -2 -5 -6 -16 3.6
Japan JPY 0 -2 -4 -10 0.5
Kenya KES -3 -6 -4 -14 4.5
Korea Republic KRW -4 -1 -1 -5 1.5
Mexico MXN +2 -3 -11 -2 6.8
Nigeria NGN -4 -7 -22 -34 15.8
Norway NOK +3 -1 -3 -7 1.6
Philippines PHP -6 -5 -7 -19 3.3
Poland PLN +1 +3 +3 +5 2.1
Russia RUB -1 -3 0 -8 2.5
Singapore SGD -2 -2 -2 -7 -0.6
South Africa ZAR 0 +10 +3 -3 4.7
Sweden SEK 0 -1 -3 -4 1.7
Switzerland CHF 0 0 -2 -9 0.8
Turkey TRY -3 -5 -13 -13 11.9
United Kingdom GBP +1 +1 +2 -3 3
United States of America USD -4 -7 -6 -16 2.1
Venezuela VEF -4 -7 -6 -16 2616
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