Mozambique’s currency, the metical, has appreciated 35% to 55 meticais per dollar since January, but “is likely to reverse some of these gains”, warned the office of economic studies of South Africa’s Standard Bank.
“The metical, trading at US$1 = MZN 55.5, has gained 35% since the beginning of the year, or 22.2% compared to the same period in 2020, but it should, however, probably reverse some of these gains, since exporters started to suspend some foreign currency conversions and importers returned to the market benefiting from the recent gains”, says the bank.
In a note sent to investors commenting on the appreciation of the metical, STandard Bank’s analysts in Mozambique wrote that “the liquidity of foreign currency and the dynamics of supply and demand, as well as the negative sentiment and economic fundamentals, imply that this rate is unsustainable due to the large and historic current account deficit and the weak outlook for foreign direct investment, at least this year, after a series of terrorist attacks in Palma since March 24.”
The metical is being one of the best performing currencies worldwide since the beginning of the year, reversing the downward trend that had been registered last year and forcing analysts to redo the forecasts for the evolution of the Mozambican currency.
“Numerous factors contributed to this stellar, albeit counterintuitive, performance of the metical in recent weeks”, write the analysts, listing, among others, the increase in the key interest rate by 300 basis points in January, which slowed down the demand for imports.
In addition, they point out, there was also “the expectation that the Bank of Mozambique would support the market by selling foreign currency to stabilise the metical, a clear change in the monetary outlook for 2020, when it let the metical rise against the dollar almost on a vertical line during the year, which served as a cushion for the balance of payments pressure and helped protect foreign reserves”.
Among the other factors pointed out by Standard Bank’s economic studies department are also delays in payments by importers, who benefited from the rise in the metical, and foreign direct investment to the extractive industry.
In the last week, the metical stabilized at 61 per dollar, a stagnation that the bank attributes to the reluctance of exporters to sell below 60 dollars and to the new policy of importers, “but the magnitude of the exchange rate correction remains uncertain”, conclude the analysts of the South African bank.
The metical was relatively stable during January at 75 meticais per dollar and started to appreciate in late February, reaching 61 meticais on Friday. The currency had not been valued so high since January 2020.
The appreciation of the metical follows a decrease of about 10% during the past year in value in relation to the dollar, and appears in in dissonance with the forecasts of most analysts, who foresaw an even greater fall of the metical this year. It kept appreaciating despite the wave of violence in the north of the country, which has catapulted Mozambique to the top of the international media agenda in recent weeks.