LONDON/NAIROBI (Reuters) – Angola’s kwanza tumbled to a record low on Friday as the central bank sought to close a widening gap between official and black market rates in an overhaul of the southern African country’s foreign exchange regime.
FILE PHOTO: Locals walk along the central bank building in the capital Luanda, Angola. June 7,2016. REUTERS/Ed Cropley/File Photo
Africa’s second-largest oil producer was pushed into an economic crisis by the sharp tumble in oil prices in mid-2014, which prompted Luanda to strike a deal with the International Monetary Fund last December and embark on several reforms – one of which is to fully unshackle its foreign currency market.
Yet faced with limited foreign currency reserves and subdued oil prices, a recent sharp depreciation in the parallel market rate has ramped up the pressure on policy makers to adjust the official rate, analysts and traders said.
The kwanza’s official rate weakened more than 6% AOA= on Friday to 438 to the dollar, taking its decline to near-16% since the start of the month.
“The kwanza really is on the move. We’ve seen a change in policy from the central bank here, they normally have a very tight control over the foreign exchange market in Angola because there is such a shortage of dollars onshore,” said Milo Thorold, FX trader at INTL FCStone in London.
“In the past few weeks they removed some restrictions about where the local banks are allowed to trade(…). What we are seeing now is local banks pricing where they want.”
On Friday, the kwanza stood at 540 to the dollar in the parallel market – 23% above the official rate, according to Absa.
“The official exchange rate came under immense pressure the last couple of months as the parallel market rate started depreciating at a rapid rate, whilst the official exchange rate’s rate of depreciation was much slower,” said Pieter du Preez, senior economist at NKC African Economics.
FX SALES SLOW
“To eliminate any distortions in the market the central bank needed to react to keep the spread between the official and parallel rate at a manageable level,” he added.
Absa Africa strategist Samantha Singh said one driver for the Kwanza slide was a crackdown on illegal mining and informal commerce limiting the amount of dollars finding their way onto the street.
President João Lourenço, who was elected in 2017 after 38 years of rule by José Eduardo dos Santos, has said he wants to revive the economy by opening up to foreign investment, privatising state assets and diversifying away from oil, which accounts for more than 90 percent of exports.
Yet the journey has not been easy. Angola’s economy is expected to contract this year due to a decline in oil production and recover only mildly next year, the International Monetary Fund forecast in its World Economic Outlook released on Tuesday. This is well below growth rates across sub-Saharan Africa forecast at 3.2%, according to the IMF.
To attract foreign investors, it was key to have a foreign exchange market that “works properly”, central bank governor Jose Massano said earlier this week in London.
“Part of our macro stabilization program is to normalize the foreign exchange market. (…) Our currency has been depreciated against the dollar as part of that process,” Massano said, adding it was now down to the market rather than the central bank to set the rate.
Analysts expected the new regime of letting banks determine the price to be beneficial in the long run. However, in the short term, FX sales have slowed in recent months, also making it more difficult for authorities to bridge the gap between the parallel and official rates.
Pressure on foreign currency reserves contributed to the push to let the Kwanza slide, many suspected. Foreign reserves are crucial to a country’s ability to support its currency as well as meet its import bills and external debt repayments.
Absa’s Singh calculated the central bank sold $6.8 billion into FX markets in the first nine months, an average of $725 million a month. In 2018, policy makers flogged all $13.5 billion – or $1.13 billion a month, she added.
Gross reserves fell to $16.1 billion in August from $16.7 billion at the start of the year.
(GRAPHIC – Angola FX reserves: here)
Reporting by Karin Strohecker and Libby George in London, Omar Mohammed, Maggie Fick and Duncan Miriri in Nairobi, Editing by William Maclean