What African Startups Can Learn From African Currencies Floating Against The Dollar
This year will perhaps go down in history as one of the worst for emerging markets and one that saw countries who otherwise would not ditch the currency peg, float their local currencies. Economies of most African Countries and indeed emerging markets have churned out series of economic policies geared towards reversing the slide of their currencies against the dollar. But with commodity and oil prices taking a continuous hit and the American economy buoyed by the election of Donald Trump looking stronger, the impression is that things might even get worse in 2017.
Nigeria of course did “float” the naira but we know what just happened was that the CBN devalued it and then went on to manipulate the market such that we have a multiplicity of rates across several markets.
So how does African Startups prepare against the inevitability of a further currency depreciation? Let’s look at these charts before we respond.
Note: Chart sloping upwards signals depreciation and downwards appreciation against the dollar respectively.
Egypt abandoned its currency peg in November after decades long policy of a fixed currency failed to work due when faced with significant pressures. Before now, Egypt relied on forex inflow from tourist to shore up their dollar reserves. However, the Arab Spring and ensuing political crisis have reduced tourist visit into the country. They had no choice but to float eventually.
Has floating worked? For now no! The Egyptian pound is weaker than it was before the float but has in the last few days strengthened as the forces of demand and supply runs its course. It is likely to get weaker in the coming months as we do not see any major investment inflow that can strengthen the currency. Best case scenario is that it could stabilize. The Egyptian Pound has depreciated by about 58% year to date.
The Ghanaian Cedi is also weaker against the dollar year to date and is likely to close the year weaker than it opened in 2016. The currency has weakened 11.8% against the dollar and has weakened against the dollar in the last 5 years to date. The Cedi was 1.6 to $1 five years ago and has now weakened to about 4.31 as at December 2016. That is about 63% of its value lost already. It is unlikely to recover that loss but could stabilize following the election of a new president. Let’s just hope his economic polices don’t suffer the same start as his Nigerian counterpart.
Kenyan Shilling has also depreciated by about 14% in the last five years to date. From about 83.6 shillings five years ago against the dollar to 102 shillings today. Could things be better? We doubt that. The economy relies on tourism and also has a strong startup community but we think it is also at a losing battle against the Dollar, at least on the long run.
The South African Rand has fared better this year gaining 10% so far against the dollar and is on the line to close the year on the positive note. But that isn’t the real story here. The Rand has lost over 50% of its value in the last 5 years against the dollar. From about 7 Rands to the dollar 5 years ago, it is 14 Rands to the dollar currently. South Africa has a strong economy and still attracts billions of dollars in foreign investments. The key for them would always be to grow exports and to its neighbors up North and in the East are easy preys. No wonder they are aggressively exporting businesses to Nigeria and other Sub Saharan countries. The dividend of taking such a risk is ensuring that South Africans eat what they produce and export what the produce. It’s a fine mix save for Zuma who isn’t doing the best of jobs at managing the economy.
Nigeria claims to have float its currency back in June even though most believe the situation is not actually so. What we have now is a currency that is tightly controlled by the CBN. Nevertheless, the currency has depreciated by almost 40% against the dollar since its float and is over 50% if you consider the black market rate. The Nigerian Government preaches grow the naira and patronize local made goods. Easier said than done especially with the ease of doing business showing to ease but getting worse. It’s actually the way forward and it’s good the government acknowledges this. However, how it is going about it is a shame. You can’t be running a capitalist economy like a communist one.
What this means for business?
The above scenarios all tell a similar story. When your currency floats against the dollar, it is a constant losing battle except you have an economy with a strong export potential and produce goods and services that are not cyclical in nature (e.g commodities). This strongly influences the type of business entrepreneurs should focus on in the coming years. To avoid the cyclical nature of the markets, which is characterized by boom and bust cycles, startups will have to pursue business ideas that portends strong and durable foreign exchange earnings. The market is no longer Nigeria! We have to build businesses that have strong export potentials. If it doesn’t then we should make an effort to have a hybrid of an export oriented market and one that serves the local market. Startups that provide services must ensure that their input cost are not dollarized while ensuring that their income base has a mixed for local and foreign earnings.
For retail investors looking to invest this year, companies with strong export potentials will have to be the way to go. These companies have spent years building capacity over the years thus have created a strong competitive advantage. They are well positioned to take advantage of the government’s export incentives and with sound management will reward shareholders with dividends.
Investing in other asset classes that earn income denominated in forex is also ideal in these times. Investments such as the Federal Government’s planned Eurobonds offering, corporate bonds linked to dollar interest payments are examples that come to mind.