The African currencies that saw sharp corrections in recent years, such as the Nigerian naira (NGN) and Egyptian pound (EGP) will become incrementally overvalued, according to Renaissance Capital.

Yvonne Mhango, Director, Sub-Saharan Africa Economist at  Renaissance Capital said that the Kenyan shilling (KES) and Ghanaian cedi’s (GHS) large over- and under-valuations, respectively, are likely to persist, but the KES should remain stable.

“We see upside risk to inflation due to weather-related food price increases (Kenya) and currency weakness (Zambia). Despite these risks, we only expect interest rate hikes in Zambia and Rwanda,” she said.

 In its January 2019 note, Renaissance Capital predicted that African currencies will become less cheap in 2019.

As at May, seven of the 16 currencies were overvalued, versus five in November 2018.

“The currencies that saw sharp corrections when commodity prices fell in 2014-2016, including the NGN and the EGP, are no longer cheap,” said Mhango.

“The NGN has come from being fairly valued in November 2018, to a little overvalued in May, on this analyst’s real effective exchange rate (REER) model.” The Angolan kwanza (AOA) has seen the biggest correction over the past 18 months -  it is now only 6% overvalued, versus 40% in December 2017.

The EGP has also seen a big shift from being 20% undervalued at YE17, to fairly valued in May.

“The KES and Ethiopian birr’s (ETB) large over-valuations have been sustained. However, the GHS and Zambian kwacha (ZMW) became even cheaper. The two currencies that until recently traded close to their respective fair values, the Tanzanian shilling (TZS) and Rwandan franc (RWF) have diverged; the TZS has become a little overvalued, unlike the RWF which is now almost as cheap as the Ugandan shilling (UGX).”

“In the short term, we expect the NGN to become increasingly more expensive, the KES and ETB to sustain their large overvaluations, and the GHS and ZMW to remain significantly undervalued,” said Mhango.