ABSA stocks index plagued by dollar shortages
In 2023, nearly one-third of the capital markets monitored in the Absa Africa Financial Markets Index experienced capital outflows, significantly affecting their performance.
Among the affected countries were Kenya, Nigeria, Uganda, Ghana, Egypt, Cote d’Ivoire, and Madagascar, all of which saw their stock market scores decline due to forex depreciation.
The increasing interest rates in developed countries have led to a withdrawal of dollars from emerging economies. Simultaneously, these emerging economies are grappling with substantial dollar loan repayments, driving up demand for the greenback. As a result, local currencies and stock market capitalization have depreciated.
Rising interest rates
In response to these challenges, authorities are beginning to contemplate the implementation of dollar controls. However, this move will have a negative long-term impact on the stock market.
“Each country experienced a lower score in at least one of the six pillars that make up the report. This is mainly due to unfavourable global conditions outside of African policy-makers’ direct control,” said Charles Russon, Chief Executive Officer, Absa Corporate and Investment Bank.
“Rising interest rates in advanced economies have prompted exchange rate depreciation, capital outflows and weaker foreign exchange reserves across Africa. The challenging global environment has also impacted liquidity and the size of domestic financial markets,” Mr Russon added.
A global shortage of dollars is leading to the implementation of stricter forex controls. In Kenya, a draft Bill sponsored by Rongo MP Paul Abuor aims to criminalize forex hoarding, defined as the accumulation of foreign currency beyond ‘reasonable’ needs for speculative purposes.
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Stockpiling dollars
Under these proposals, companies found stockpiling dollars beyond ‘reasonable’ needs could face fines of up to Kes10 million. The goal is to curb the hoarding of foreign currency as the Kenyan shilling approaches the 155 mark in depreciation.
Additionally, the Bill includes a whistleblower provision, safeguarding individuals who report forex hoarding activities in good faith from retaliation. They may get about 10 percent of the subject amount.
Meanwhile, even heavyweight China has taken steps to restrict offshore trading for mainland clients. According to an official document seen by Reuters and confirmed by four sources, domestic brokerages, and their overseas units are prohibited from taking on new mainland clients for offshore trading.
New investments by existing mainland clients will also be under close watch to prevent them from bypassing China’s foreign exchange controls, as reported by Reuters.
This effort to clamp down on private dollar holdings is expected to face challenges and, in any case, may lead to increased capital outflows as investors seek protection against possible infringement from the state and further depreciation of the shilling.
