Report(Summary): Exchange Rate Forecasts: 5-Year Outlook For Key African Economies
Courtesy: Stears
African currencies have been under pressure over the last five years due to several factors, including the COVID-19 pandemic, rising debt, geopolitical tensions, and a tight global interest rate environment. The South African rand depreciated by 8.35% in 2021 and 8.14% in 2023 due to the spillover effects of the external shocks in 2020 and 2022.
In 2024, African currencies such as the Egyptian pound and Nigerian naira were also devalued as monetary authorities aimed to liberalise exchange rate markets, reduce arbitrage opportunities, anchor exchange rate expectations, and attract investment inflows.
In this light, our updated forecast numbers (2025-2029), underpinned by the cooling global interest rate environment, inflation differentials between the US and African economies, and domestic fiscal and monetary factors, reveal the following trends over the medium term:
Currency depreciation: African currencies are expected to continue depreciating, though at a slower rate, aligning with historical trends. The Ghanaian cedi, which depreciated over 20% so far in 2024, is forecasted to decline by 5.56% and 5.37% in 2026-2027, similar to 2021.
Undervaluation and risk premium: African currencies appear to be currently undervalued, and the region’s economies are subject to a high-risk premium. The South African rand, the best performing in our forecast analysis, is undervalued by ~50% against the US dollar (per the Big Mac Index, July 2024).
Country-specific risks: Factors such as social tensions, political risks, economic reforms, and rising debt will play significant roles in the currency movements of African countries in the coming years. These challenges are embedded as country risk premiums, influencing currency performance in our forecasts.
Investment strategies: While the medium-term outlook for currency risk appears manageable, investors may need to keep hedging against foreign exchange losses and remain cautious of country-specific risks when planning exit strategies.
Additional features of the exchange rate forecasts include:
Increased coverage: The updated solution now spans nine African countries—Nigeria, South Africa, Egypt, Ghana, Kenya, Uganda, Rwanda, Angola, and Ethiopia—offering a comprehensive outlook on the continent's major economies.
Extended horizon: We have expanded our forecast range to include quarterly projections through 2029, providing the insights needed for long-term investment planning.
Monthly reviews: We review our forecasts monthly to ensure they reflect shifting market dynamics. This allows us to deliver timely updates and improve forecast accuracy.