SSA Foreign Exchange in H2-2020: To recover to pre-COVID-19 level?

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Analysis of SSA foreign exchange condition in H1-2020 showed a broad-based weakness against the US dollar, as the outbreak of COVID-19 triggered sharp capital outflows (especially portfolio investments), exposed the fragilities in each country’s external account and negatively impacted economic activities across the region.

Notably, the CFA franc was the lone gainer against the dollar in H1-2020, supported by its link to the euro.

Additionally, a critical milestone was achieved in the transformation of the West African CFA franc to eco, in H1-2020. This was as the French Council of Ministers adopted a bill ratifying the end of the CFA franc in the eight francophone countries that form the West African Economic and Monetary Union (UEMOA). However, no further progress was made on the implementation of the new currency amid the COVID-19 pandemic.

Looking ahead, we expect currency market conditions within the region to improve in H2-2020, as external (commodity demand and price recovery) and domestic (easing economic restrictions) dynamics begin to improve and portfolio investments recover.

Also, concessional loans from the IMF and World Bank should further support local foreign exchange conditions, adding to respective countries’ external reserves and making them more resilient to speculative attacks. However, with lingering uncertainties around the outlook for COVID-19, we do not expect most of the currencies to recover to pre-COVID19 levels.

Lastly, we expect the conversation around the implementation of the eco to pick up in H2-2020 as countries within the region start to re-open for business.

United Capital Research