Currency Slump in West Africa Triggers Demand for Dollar Assets

March 17, 2023
demand for Dollar assets

By Aduragbemi Omiyale

The Head of Custody Services for RMB West Africa, Mr Abiodun Adebimpe, has attributed an increase in the demand for Dollar assets in West Africa to a slump in the currencies of countries in the region.

In recent times, most West African currencies, such as the Nigerian Naira (NGN) and the Ghanaian Cedis (GHC), have significantly weakened against the United States currency.

This has been blamed on the Russian-Ukraine war and the lingering impact of the COVID-19 pandemic, as the region relies heavily on importation.

The import-dependent nature of most West African markets implies huge demand for foreign exchange to pay import bills, and due to declining external reserves, the central banks are not able to promptly and adequately meet these demands, forcing businesses and investors to look for dollar assets to mitigate the damage.

Also, most West African economies are commodity-driven, and any development within the global economy that affects the supply and/or demand of commodities imports and exports portends significant currency weakening effects on the economies.

Mr Adebimpe noted in an opinion piece that there is also massive fiscal debt overhang in most West African markets, stressing that one of the effects is the need to borrow from bilateral and multilateral global lenders who demand deliberate local currency weakening by the local authorities by adjusting their official exchange rates accordingly to fight the demand for foreign currencies.

According to him, weaker local currencies make it more expensive and less attractive to convert to hard currencies.

He stated that these factors together have conspired to weaken West African currencies, and the outlook remains negative in short to medium term.

The loss of confidence in the local currencies means that they are no longer considered a stable store of value, he added.

Mr Adebimpe noted that these issues had pushed businesses and investors to hedge themselves and protect the value of their earnings and holdings in fast-depreciating local currencies.

According to him, investments in dollar-denominated securities such as Eurobonds, dollar and other hard currency equities, debt instruments in the form of government and corporate bonds, as well as interest-bearing US treasury instruments, have become the preferred holdings for investors. And demand is expected to grow.

However, he disclosed that most West African governments have started to adjust their official exchange rates and, in some cases, borrow in United States Dollars to shore up their external reserves though it may take some time to materialise.

But he stressed that there is a risk the Naira will continue to depreciate in the next few months because of the major difficulties in turning around through economic reforms in an economy of its size, adding that the expectation of weaker crude oil and natural gas prices will likely continue to pressure the currency.

“There is also the challenge of remittances flow to Nigeria: many companies are no longer supporting these transactions. Most importantly, tech investments which represented a significant increase in foreign direct investments (FDI), have all but reduced drastically.

“As a result of turbulent economic conditions, businesses are increasingly turning to advisors with extensive global know-how for expert advice,” he said.

Aduragbemi Omiyale

Aduragbemi Omiyale is a journalist with Business Post Nigeria, who has passion for news writing. In her leisure time, she loves to read.

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