The currencies of SSA economies have generally weakened over the past month. The South African rand has fallen the furthest. (See Chart 1.) This is in part due to the country’s large current account deficit, but also the fact that the rand is the only currency that is allowed to freely float The one currency to buck the recent trend has been the Ghanaian cedi, which has strengthened significantly after the authorities announced they had approached the IMF for support. But the cedi is still down by more than 30% compared to this time last year, and it is annual changes in the exchange rate which affect inflation rates.

This currency weakness presents a challenge to central banks in SSA economies, many of which are already facing high levels of inflation. (See Chart 2.) But the impact of currency weakness will not just depend on how far exchange rates have fallen over the past year. If a country imports a lot, its inflation rate will tend be more vulnerable to exchange rate movements. Few SSA countries publish the weight of imported goods and services in their consumer price indices. But Kenya, Ghana and South Africa have the highest ratio of imports to GDP, so are most likely to see inflation rise as a result of depreciating currencies. (See Chart 3.)

Eoin Treacy's view

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From the perspective of foreign investors Ghana has been an attractive investment destination because of its stable democracy, less corrupt bureaucracy and outsized growth. However the deterioration of the Cedi over the last 18 months suggests the country is experiencing growing pains. The strength of the currency from its August lows suggests that it has stabilised and that a period of consolidation is getting underway. Broadly speaking though, all frontier markets are more likely than not to have soft currencies, for obvious reasons.  South Africa is more developed but has a governance problem.

The UK listed African Opportunities Trust, which has been quite active in Ghana, moved from a discount to NAV of over 20% in early 2012 to a premium of 11% earlier this year when by any measure it was looking expensive. It has since fallen back to a discount of almost 6% but will need to break the progression of lower rally highs to suggest demand is returning to dominance.