South Sudan pound drops 85pc in two days as country scraps fixed exchange
A fruit market in Juba. South Sudan has taken key measures to reform its exchange rate policy. PHOTO | FILE
What you need to know:
South Sudan’s official currency market has been hurt by the black market whose valuation was more realistic, putting the dollar at 18 pounds.
This allowed for arbitrage, with speculators buying dollars cheaply from the government before selling them at a higher rate in the parallel market.
Investors who choose to exit South Sudan will exposed to exchange losses following the change in currency rate as the harvest in S. Sudan pounds will be converted at a much lower rate.
South Sudan currency has depreciated 85 per cent in the last two days after the government stopped fixing its exchange rate in a move likely to hurt Kenyan businesses operating in the young nation.
Central Bank of South Sudan abandoned the fixed exchange rate regime, allowing the Sudanese pound to trade freely against other currencies and setting it off on a free fall.
The rate had been set at 2.96 South Sudan pounds (SSP) per US dollar but declined to 18.5 pounds a dollar on exposure to market forces of supply and demand, in a twist that effectively leaves depositors in the country with drastically slashed wealth.
“The floating will make more people use the Sudanese currency; this will smoothen business transactions in the long run. The last time I visited Sudan, I found myself back to Kenya with pounds I could not exchange,” said economist Dr X. N Iraki of the University of Nairobi.
South Sudan’s official currency market has been hurt by the black market whose valuation was more realistic, putting the dollar at 18 pounds.
This allowed for arbitrage, with speculators buying dollars cheaply from the government before selling them at a higher rate in the parallel market.
Analysts expect the devaluation to impact earnings of Kenyan companies operating in the country from next year as this year’s income statements will be converted at the average exchange rate during the year.
“There will be no immediate impact on 2015 earnings. Conversion of income statement items to KES (which is the functional currency) is based on average exchange rate over reporting period. Next year, earnings conversion at the weakened rate will erode earnings contribution from South Sudan,” said Standard Investment Bank in a note to investors.
CFC Stanbic said it was too early to comment on how the devaluation would impact its operations while KCB and Equity Bank were yet to respond to our queries by the time of going to Press.
Investors who choose to exit South Sudan will also be exposed to exchange losses following the change in currency rate as the harvest in S. Sudan pounds will be converted at a much lower rate.
“Note that it is largely a book loss and can only have a direct profit and loss effect when realised,” said the head of banking research at Ecobank Capital, George Bodo.
Kenyan insurance companies with operations in South Sudan such as UAP Holdings, will stand to benefit if they had invested the unused premium from Sudan in Kenya.
Analyst agreed the government decision to shift to free float exchange rate was good for the young nation which has been in civil conflict for the last two years.
“Overall, if oil prices remain under pressure the floating of the currency is a positive since it provides clarity to investors (removes expectations of currency depreciation) which is positive for FDI inflows,” said Standard Investment Bank.
Fighting between the government and rebels led by vice-president Riek Machar affected economic activity in the country, leading to stoppage of oil activity, its core export product.
The country which seceded from Sudan in 2011 is almost fully dependent on imports indicating the weakening of its currency will bring inflationary pressure.
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