Currency and Vulnerable Economies
2020 has been a year of historic economic upheaval. Shocks in the market have impacted trade, inflation, employment, and national budgets—sparking an unprecedented global recession to which even stable economies are not immune.
Just as lack of an organized global virus containment strategy has prolonged the public health impacts of the COVID-19 pandemic, uncoordinated monetary policy strategy and capability has contributed to instability for currencies around the world. Economically vulnerable countries, many of which were facing currency stress prior to 2020, have been among the worst impacted.
The worst performers this year have been the Venezuelan Bolivar Soberano and the Zimbabwe dollar (also called the Zimdollar), and both countries have seen YTD depreciation over 70% against the dollar.
VES – Venezuelan Bolivar Soberano
Venezuela, whose bolivar soberano (and predecessor bolivar fuerte) has been in freefall for years, began to normalize de-facto dollarization and loosen currency restrictions for importers in 2019. Depreciation not only continued but accelerated. Purchasing power of Venezuelans paid in local currency is in a constant slide and minimum wages, although regularly increased, are rarely sufficient. The country’s foreign currency reserves are now at a 40-year low. Obtaining cash to support disease-fighting efforts and monetary stabilization has been complicated by international sanctions and the legal complications of contested leadership.
Venezuela is currently suing the Bank of England for access to $1 billion in gold bars held there. The collapse of the country’s domestic oil industry has made it more difficult for the country to generate revenue and led to severe gas shortages. Despite the largest known oil reserves in the world, the country has had to import fuel and in June increased domestic gasoline prices, abandoning long-standing fuel subsidies that made the resource practically free and cost the country billions each year.
ZWD – Zimbabwe Zimdollar
Since a devaluation in March, monetary policy in Zimbabwe has kept the official exchange rate of the Zimdollar fixed despite market forces, leading to a widening gap between the parallel market rate. That fixed rate was scrapped last week, when the Reserve Bank of Zimbabwe launched a foreign currency auction platform to meet currency needs and determine the currency’s official rate. The currency depreciated sharply as a result of its first two auctions. Year-to-date depreciation is now nearly on par with Venezuela’s. Further depreciation is expected as auctions continue and market forces determine an appropriate value for the currency.
The Zimdollar is a young currency, and was in trouble before the COVID-19 pandemic and economic shocks of 2020. In 2019, Zimbabwe enacted Statutory Instrument 142, declaring the Zimdollar as the only valid currency in the country. The currency has faced depreciation ever since, as the economy struggled to transition from widespread use of foreign currency to a national currency with low physical supply, low market confidence, and continuous depreciation. The rule restricting foreign currency use has now been rolled back and replaced with a 5-year de-dollarization plan that projects interchangeable use of foreign currencies and the Zimdollar until 2022.
Year-to-date depreciation against the dollar has been over 20% in Brazil, Zambia, and the Seychelles.
BRL – Brazilian Real
The Brazilian real saw significant recovery in May and early June amid positive market sentiment, but has resumed depreciation over the past several weeks. Earlier this year, the global economic turmoil of the COVID-19 pandemic led to massive investor selloffs, particularly of emerging market currencies, as investors sought safe havens. As a result, the real depreciated to all-time lows. The Central Bank of Brazil has been aggressive in its attempts to prop up the currency and stabilize the economy, with mixed results.
Since March, the bank has held massive foreign currency auctions in the spot market, sold billions of currency swap contracts and dollar-bonds, and has made unprecedented rate cuts. These measures have helped the currency retain value, although they’ve been costly. Injections of cash have been possible because of solid foreign currency reserves, but public debt is at an all-time high. After a series of cuts, Brazil’s current interest rate of 2.25% is an all-time low, but the bank has expressed that further rate cuts are possible.
President Bolsonaro has resisted lockdown or shutdown measures, and Brazil has emerged as one of the countries worst hit by the pandemic with over 60,000 deaths.
ZMW – Zambian Kwacha
Over the past two months, the Zambian kwacha has fluctuated above and below 18 ZMW to 1 USD, although year-to-date depreciation is high. The bulk of the currency’s fall happened fairly early in the global economic crisis. The currency has reached all-time lows this year, and options for intervention are few and far between. Demand for dollars in the country is high, but the country’s foreign reserves are historically low and its external debt obligations far outstrip its capability to pay.
Zambia is heavily dependent on imports and its weak currency, but current reserves represent less than 3 months of import cover. In order to shore up foreign reserves, in early June the Revenue Authority revised tax policy to demand that mines pay provisional income tax, annual company income tax, domestic and withholding value added tax, withholding tax, customs duty, excise duty, and import-value-added-tax in dollars (rather than kwacha) to the central bank, while any VAT refunds will continue to be paid in kwacha. They have also announced additional oversight into mineral valuation at mines to combat deliberate undervaluation and tax avoidance.
SCR – Seychelles Rupee
Before the global upheaval of 2020, the Seychelles rupee had been stable for years. Its current value is an all-time low. The tourism industry in the Seychelles is a primary source of government revenue, employment, and hard currency, and its collapse has led to severe shortages of U.S. dollars, which are in high demand due to the islands’ high reliance on imports.
The central bank has insufficient dollars to meet business needs, and some importers have had to rely on credit agreements with suppliers in lieu of payment. Interest rates have been cut twice this year, from 5% to 4% in April and from 4% to 3% in June. The central bank governor has asked citizens to avoid unnecessary spending and has warned that public sector jobs cuts may be on the horizon.
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Table above taken from AIRINC's COVID-19 landing page with weekly exchange rate updates.
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