Goldman Sees Frontier Markets Extending Currency Devaluations

Colleen Goko
·3 min read
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(Bloomberg) -- Frontier nations will need to go further in devaluing their currencies even after a cascade of adjustments carried out already this year, according to Goldman Sachs Group Inc.

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Egypt, Pakistan and Lebanon led the way early in 2023 in letting their currencies slide, with Zimbabwe, Nigeria and Angola following suit this quarter amid an erosion of foreign exchange reserves across frontier markets. Few except for Nigeria have gone sufficiently far, Goldman’s Kamakshya Trivedi and colleagues wrote in a note to clients dated Wednesday.

“By our estimates, only the Nigerian naira has likely moved enough,” the Goldman analysts wrote. “The other currencies would have to move further in the current environment of higher for longer developed market rates — in particular, the Argentine Peso and Egyptian Pound.”

Some of the adjustments are too recent to draw firm conclusions, the analysts cautioned. Whether these currencies had moved enough depend on the extent to which they have suppressed imports, boosted exports and drawn in new portfolio flows, Goldman said.

Naira Official, Parallel Rates Converge as Nigeria Eyes Reforms

Weaker currencies fan inflation and increase the domestic burden of dollar debt. But in a world of higher rates they allow for a significant discount relative to fundamentals, which can attract portfolio inflows.

“The initial currency moves are credit-positive, though momentum needs to persist,” the Goldman analysts said. “However, the currency moves themselves are unlikely to be enough to sustain this credit outperformance, and would need to be followed by additional reforms.”

Here’s a look at some managed currencies in frontier nations and their current status:

Argentina

Argentina has been burning through international reserves to prop up the peso, implementing measures that have included creating a number of different exchange rates for groups and authorizing import payments in Chinese yuan. But an upcoming election has delayed any decisions in the South American nation.

Investors see ending the byzantine currency controls as a key priority for the next administration to attract investment, slow inflation that’s over 114% and bring back some degree of economic normality. Optimism the October vote will usher in a market-friendly administration has spurred a rally in bonds, but it’s unclear how quickly the incoming government will be able to solve the country’s financial woes.

Bangladesh

Bangladesh’s central bank will allow the currency to float freely for the first time from next month, fulfilling demands from the International Monetary Fund to unlock funds from a $4.7 billion loan program.

Bloomberg Economics expects the taka to fall about 25% against the dollar after the currency begins to trade freely as of July 1.

Malawi

Malawi’s central bank has been conducting periodic sales to help determine a market exchange rate for the local currency. The kwacha depreciated 3% Wednesday to trade at 1,054 per dollar. The last foreign exchange auction on June 19 determined market selling price would be up to 1,063.86.

Burundi

The Burundian franc was devalued in May after the nation reached a staff level agreement with the IMF the month before.

Shortly after, the nation’s central bank announced it would replace the high-value bills with new ones, in a bid to better manage currency supply.

--With assistance from Julia Leite.

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