African Currency Research Articles

African forex markets: Modeling their predictability and the asymmetric effects of oil and geopolitical risk

This study investigates the African forex (FX), geopolitical risk (GPR) and oil associations, resorting to the quantile-based causality, parametric quantile regression (QR), and non-parametric quantile-on-quantile regression (QQR) methodologies. We explore 16 major African currency markets. The sample contains daily data and spans from July 2000 through August 2023. Our results zoom on the differences in the FX-GPR-oil interactions at different market conditions of the dependent and independent variables, proxied for each case by 19 quantiles from 0.05 to 0.95. We find that the African FX returns are significantly asymmetrically predicted by both WTI oil and GPR. Our tail-based causality analysis uncovers the directional causal flow from GPR and Oil (WTI) to foreign exchange rates. We also report on salient asymmetries in the responsiveness of country-specific African FX returns to oil and geopolitics-driven shocks. In addition, the results of our QR analysis show a mix of positive and negative GPR and Oil effects, characterized by varying degrees of significance for different currencies. Our QQR analysis also reveals that GPR and WTI oil exert asymmetric effects on African FX returns. The returns of several African forex markets demonstrate negative relationships with GPR, especially at the lower tails of GPR and/or WTI oil, as usually the extreme-tailed conditions are driven by diverse kinds of crises, well covered by the analyzed dataset. Our outcomes cater relevant knowledge for scholars, FX investors, traders and regulatory bodies.

Tail-spillover effects between African currencies, bitcoin, gold and oil during two recent black swan events

Tail-spillover effects between African currencies, bitcoin, gold and oil during two recent black swan events

Cryptocurrency and African fiat currencies: A peaceful coexistence?

AbstractThis study examines the asymmetric behaviour of Bitcoin relative to six major African fiat currencies (Egyptian Pound, Cedi, ZAR, Naira, Rupee and Dinar) for the period 10 August 2015 to 31 December 2022. The time and frequency information in the time series of the currencies were captured applying the ensemble empirical mode decomposition. The quantile regression (QR) and quantile‐in‐quantile regression (QQR) were applied on the decomposed series to examine the connections among the currencies at different currency regimes across time. The empirical results show that both QR and QQR can adequately capture the time‐varying asymmetric behaviour of the currencies across time. The results range from weak to very strong dependencies albeit both negative and positive across different quantiles. Our findings suggest that except for ZAR, Bitcoin is a viable alternative currency to African reserve currencies from the medium‐term since it can hedge depreciation and forex risk of the fiat currencies. Based on the findings of this study, we recommend that forex traders and policymakers in Africa should adopt Bitcoin as an alternative currency to African currencies in the medium‐term to mitigate currency crises in the continent.

Bibliometric review of research on exchange rate predictability and fundamentals

This paper presents a bibliometric review of exchange rate predictability and fundamentals, using a database of 2,668 Scopus-indexed documents. This paper aims to identify gaps in the explanatory power of exchange rate models and synthesize knowledge on this topic. The analysis reveals the landscape of research, key conceptual and empirical foci, intellectual structure, key topics, and research front in the literature. The review also highlights potential focus areas such as deep learning, time-varying models, investor sentiment, and study concerning African currencies.

Foreign aid, debt interest repayments and Dutch disease effects in a real exchange rate model for African countries

The international competitiveness of developing countries is integral to their economic development; hence understanding the main determinants of the real exchange rate is important. The empirical literature supports the Dutch disease hypothesis that foreign aid inflows significantly contribute to a real appreciation of African currencies, but these studies do not account for the downward pressure on the exchange rate from foreign currency payments. Using a panel of sub-Saharan African countries from 1980 to 2017, we test the hypothesis that the real exchange rate appreciation from aid inflows is moderated by interest repayments on external debt. Our findings suggest that one-third of the Dutch disease effect of aid inflows on the real exchange rate is offset by external debt interest repayments. These findings are important in showing that countries with external debt servicing obligations can mitigate the Dutch disease effect of aid inflows on competitiveness.

The Generalised Extreme Value Distribution Approach to Comparing the Riskiness of BitCoin/US Dollar and South African Rand/US Dollar Returns

In this paper, the generalised extreme value distribution (GEVD) model is employed to estimate financial risk in the form of return levels and the value at risk (VaR) for the two exchange rates, BitCoin/US dollar (BTC/USD) and the South African rand/US dollar (ZAR/USD). The Basel Committee on Banking Supervision (BCBS) responsible for developing supervisory guidelines for banks and financial trading desks recommended that VaR be computed and reported. The maximum likelihood estimation (MLE) method is used to estimate the parameters of the GEVD. The estimated risk values are used to compare the riskiness of the two exchange rates and help both traders and investors to define their position in forex trading. This is to helping understanding the risk they are taking when they convert their savings/investments to BitCoin instead of the South African currency, the rand. The high extreme value index associated with the BTC/USD compared to the ZAR/USD implies that BitCoin is riskier than the rand. The BTC/USD has higher values of expected extreme/tail losses of 13.44%, 18.02%, and 23.41% at short (6 months), medium (12 months), and long (24 months) terms, compared to the ZAR/USD expected extreme/tail losses of 2.40%, 2.84%, and 3.28%, respectively. The computed VaR estimates for losses of USD 0.17, USD 0.22, and USD 0.38 per dollar invested in BTC/USD at 90%, 95%, and 99%, compared to ZAR/USD’s USD 0.03, USD 0.03, and USD 0.04 at the respective confidence levels, confirm the high risk associated with BitCoin. The conclusion drawn from this study is that BTC/USD is riskier than ZAR/USD, despite the rand being a developing country’s currency, hence perceived as being risky. The perception is that the rand is riskier than BitCoin and perceptions do influence exchange rates. Kupiec’s backtest results confirmed the model’s adequacy. These findings are helpful to investors, traders, and risk managers when deciding on trading positions for the two currencies.

RiskMetrics method for estimating Value at Risk to compare the riskiness of BitCoin and Rand

In this study, the RiskMetrics method is used to estimate Value at Risk for two exchange rates: BitCoin/dollar and the South African Rand/dollar. Value at Risk is used to compare the riskiness of the two currencies. This is to help South Africans and investors understand the risk they are taking by converting their savings/investments to BitCoin instead of the South African currency, the Rand. The Maximum Likelihood Estimation method is used to estimate the parameters of the models. Seven statistical error distributions, namely Normal Distribution, skewed Normal Distribution, Student’s T-Distribution, skewed Student’s T-Distribution, Generalized Error Distribution, skewed Generalized Error Distribution, and the Generalized Hyperbolic Distributions, were considered when modelling and estimating model parameters. Value at Risk estimates suggest that the BitCoin/dollar return averaging 0.035 and 0.055 per dollar invested at 95% and 99%, respectively, is riskier than the Rand/dollar return averaging 0.012 and 0.019 per dollar invested at 95% and 99%, respectively. Using the Kupiec test, RiskMetrics with Generalized Error Distribution (p > 0.07) and skewed Generalized Error Distribution (p > 0.62) gave the best fitting model in the estimation of Value at Risk for BitCoin/dollar and Rand/dollar, respectively. The RiskMetrics approach seems to perform better at higher than lower confidence levels, as evidenced by higher p-values from backtesting using the Kupiec test at 99% than at 95% levels of significance. These findings are also helpful for risk managers in estimating adequate risk-based capital requirements for the two currencies.

Foreign exchange market return spillovers and connectedness among African countries

This paper examines the foreign exchange return shock spillovers and network connectedness among African countries during crisis periods using (Diebold & Yilmaz, 2012; 2014; 2016) which is based on generalized VAR and network theory between June 2004 and June 2021. Overall, the study found a low system-wide spillover connectedness among African foreign exchange markets. However, the total systemic spillover index increased during the eurozone sovereign debt crisis followed by global financial crisis, indicating evidence of contagion effects. This offers good diversification opportunities in the African currency market during crisis periods. The study also found no significant evidence of spillover effects among African currencies. Nonetheless, the network connectedness analysis found a positive significant pairwise return spillovers from the South African rand, Moroccan dirham and the CFA francs to Botswana pula, and from Moroccan dirham to CFA francs and South African rand. Furthermore, the study found South African rand, Moroccan dirham and CFA francs as the most significant net-transmitter of return shocks to other currencies whiles the Kenyan shilling and Botswana pula are the net-receivers of return shocks from other currencies. These results have implications for African central banks interventions in stabilizing their exchange rates to facilitate intra and inter-African trade and for international portfolio investors in managing their foreign exchange risk exposures.

Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis.

Research on the exchange rate volatility and dynamic conditional correlation of African currencies/financial markets interdependence appears to be limited. In this paper, we employ GARCH models to characterize the exchange rate volatility of eight major African currencies. The variation of interdependence with respect to time is described using the DCC-GARCH model. From the results of the DCC, remarkable variations in correlations through time across these countries are observed with the correlations varying from low to moderate, suggesting that African economies are generally governed by certain economic factors and are vastly regulated. These regulations, including exchange rate misalignment led to sluggish and negative growth in most of the African countries. For instance, persistent misalignment can cause high levels of inflation, for example, undervaluation. Overvaluation can lead to trade imbalances and they can in turn create macroeconomic instability and balance of payment problems. Given these results, we suggest that policy makers should revamp and adopt state resilience so as to reduce the negative effect of exchange rate misalignment on economic growth.

How French Currency Imperialism in Africa Led to the Assassination of Muammar Gaddafi

AbstractWho was responsible for the assassination of Muammar Gaddafi, the president of Libya? The official story says it was Libyan rebels who were seeking justice against a political dictator. But there is more than meets the eye regarding this assassination, which was an orchestrated event. Yet, the mainstream media have ignored the evidence that counters the official narrative. Emails between former U.S. Secretary of State Hillary Clinton and her aide Sidney Blumenthal describe how French currency imperialism in Africa led to the death of Gaddafi. John Perkins, a former economic “hitman,” draws the same conclusion. In this article, we reveal why the French government had strong motives to silence Gaddafi and to put an end to his efforts to replace the CFA franc with a truly African currency not controlled by an imperial power.

How do variations in dollar exchange rate impact food commodity prices in Africa?

Aim: Commodity exporting nations have significant terms of trade swings, making their actual exchange rate unstable. This study looked at how variations in dollar exchange rate affected food commodity prices in Africa between 1990 and 2021.
 Design/Research methods: The study conducted GARCH analysis for ascertaining prevalence of volatilities of exchange rates and interest rates respectively in selected African countries. Also, we estimated both static and dynamic analysis driven by panel least squares and generalized method of moments (GMM) estimators on panel data from some commodity-exporting African, namely, Ghana, Gabon, Tunisia, Nigeria, and South Africa.
 Findings: The dynamic GMM results reveal exchange rate and interest rate variations taken together had positive effects on commodity prices. GARCH estimates demonstrate significant volatility growth using both normal and t multivariate distributions. However, based on empirical findings, t-distribution had largest maximized log-likelihood of -8920.1 and also had a satisfactory df of 26.82 (<30). The results demonstrate that the Nigerian Naira had highest coefficient of volatility of approximately 71.2%. This was followed by the Ghanaian Cedi with a negative volatility rate of 71% and the South African rand with a coefficient of 65%. However, while all countries had negative volatility with respect to interest rate, all countries except Ghana had positive volatility in exchange rate of their currency. Ghana, Gabon, Tunisia, and Nigeria showed negative exchange rate volatility. A possible explanation for this high volatilities in the aforementioned countries is persistent domestic inflation.
 Originality: The originality is rooted on establishment of food prices having some positive relation with pervasive exchange rate shocks. This is an indication of adverse effects of downward adjustment of exchange rate of local African currencies vis-à-vis the US dollar on food prices in the African countries covered in the study.
 Contributions: The contribution of the study lies on its explanation of the increase of food commodity prices due to variability calculated in terms of depreciation in dollar exchange rate. Empirically, it is a confirmation of a significant structural problem, exchange rate variation as a cause of domestic inflation in selected African countries.
 Limitations: Results have to be interpreted with care due to the small sample size. The results are rather a working hypothesis for future research.
 JEL: A20, F46, G20

Managing energy-water-carbon-food nexus for cleaner agricultural greenhouse production: A control system approach

Poverty, food insecurity and climate change are global issues facing humanity, threatening social, economic and environmental sustainability. Greenhouse cultivation provides a potential solution to these challenges. However, some greenhouses operate inefficiently and need to be optimized for more economical and cleaner crop production. In this paper, an economic model predictive control (EMPC) method for a greenhouse is proposed. The goal is to manage the energy-water‑carbon-food nexus for cleaner production and sustainable development. First, an optimization model that minimizes the greenhouse's operating costs, including costs associated with greenhouse heating/cooling, ventilation, irrigation, carbon dioxide (CO2) supply and carbon emissions taking into account both the CO2 equivalent (CO2-eq) emissions caused by electrical energy consumption and the negative emissions caused by crop photosynthesis, is developed and solved. Then, a sensitivity analysis is carried out to study the impact of electricity price, supplied CO2 price and social cost of carbon (SCC) on the optimization results. Finally, a model predictive control (MPC) controller is designed to track the optimal temperature, relative humidity, CO2 concentration and incoming radiation power in presence of system disturbances. Simulation results show that the proposed approach increases the operating costs by R186 (R denotes the South African currency, Rand) but reduces the total cost by R827 and the carbon emissions by 1.16 tons when compared with a baseline method that minimizes operating costs only. The total cost is more sensitive to changes in SCC than that in electricity price and supplied CO2 price. The MPC controller has good tracking performance under different levels of system disturbances. Greenhouse environmental factors are kept within specified ranges suitable for crop growth, which increases crop yields. This study can provide effective guidance for growers' decision-making to achieve sustainable development goals.

Single Currency and Regional Integration in The ECOWAS Region: A New Estimation Technique Using the Pseudo Maximum Likelihood Poisson with High Dimensional Fixed Effects (PPMLHDFE)

The progress of regional integration in ECOWAS is leading to the desire to create an optimal monetary zone. This desire to create an optimal monetary zone is leading to a wave of divergent views on the effect and exchange rate regime of the single currency on trade. On the one hand, WAMZ countries want to adopt it with a flexible exchange rate, while on the other hand, WAEMU countries want to adopt it with a fixed exchange rate pegged to the euro. This divergence of views is at the heart of our problem. We need to analyze the effect of this currency and its flexible exchange rate regime on regional integration, more particularly the market integration of the Economic Community of West African States. Our evaluation is based on an augmented gravity model as the basic theoretical model, with the Pseudo Maximum Poisson Likelihood with High Dimension Fixed Effects (PPMHDFE) as the estimation method. This panel study is based on data from the World Bank (WDI), IMF (DOTS) and CEPII from 2009 to 2018. The question addressed by the analysis of the potential effect of sharing a single currency on integration by the ECOWAS market, allows us to arrive at two main results. (i) The potential effect of the single currency on trade is significant, robustness tests confirm the positive effect of currency sharing on trade. (ii) The flexible exchange rate has positive effects on trade. Thus, we therefore call on the political leaders of ECOWAS countries to make efforts to meet the convergence criteria and the establishment of this single currency in order to be the foundation of the single African currency, on the one hand. On the other hand, we recommend the adoption of a single currency with a variable exchange rate with a gradual approach.

The co-movement of Bitcoin and some African currencies – A wavelet analysis

This paper investigated the co-movement between the bitcoin (BTC) and the exchange rates of some African currencies to the USD (United States Dollars) using the continuous wavelet transform (CWT) and wavelet coherence (WTC). This was done for the noisy as well as the denoised series. The CWT for the noisy series suggests high volatility for those who hold the currencies for the short term and low volatility for those who hold the currencies for a long-term period. The CWT of the denoised series suggests that volatility at low frequency is driven by noise, while volatility at a higher frequency is driven by market forces. The wavelet coherence suggests that in the presence of noise, bitcoin will be a hedge for the currencies. However, in the absence of noise, bitcoin is a haven for the Egyptian EGP, followed by the Algerian DZD, then the Nigerian NGN, and may not be a haven for the South African ZAR.

Return and volatility spillovers to African currencies markets

Using daily exchange rate data from February 02, 2000 to September 25, 2019, this paper examines the world connectedness of African currencies markets by analyzing return and volatility spillovers from the currencies of developed and emerging markets to African currencies. The study also investigates spillovers among African currencies. The empirical findings reveal that African currencies are more responsive to their own-.variable market than to regional and/or global return and volatility spillovers. The only exceptions are BWP, MAD, TND, and ZAR that are found to be integrated with other currencies, with significant meteor showers for both return and volatility.

The Implication of Financial Derivable from Abroad on West African Monetary Zone’s ECO Currency

This study aims to determine the extent to which the West African Monetary Zone (WAMZ) can fulfill the Expost conditions for achieving convergence. This study, therefore, evaluates the pattern of shock symmetry and convergence in connection to WAMZ’s Pillar III policy strategy. Time series data sourced from the World Bank for the period covering 1970 to 2017 were utilized for this study. Two basic econometric tools such as Impulse Response Function (IRF) and the ADF convergence test were employed to determine whether WAMZ can achieve selected Macroeconomic Convergence Criteria (MCC) in the long-run. From the study, we found that WAMZ is not a full potential candidate for ECO Economic and Monetary Union (EMU) due to the inability of the available results to show overall shock asymmetry in the entire models studied. Also, the study found that WAMZ could attain convergence in its inflation targets, but could not attain convergence in its GDP targets. Thus the results imply that in the long-run, WAMZ does not practically possess the attribute to achieve its MCC. Hence, it is imperative that for the adoption of the ECO currency, WAMZ should design and implement a short-run adjustment method to manage country-wise shocks and implement structural buffers to guard the WAMZ economies against structural shocks. Hence, we recommend that ECO currency be a reserve currency managed by the West African Currency Board (WACB) while the EMU member maintains its domestic currency. WAMZ is basically a quasi EMU.

The US-China Trade War and the Economic Ripple on South Africa

This article examines the economic ripple of United States-China trade war on South Africa. Data were analysed using the paired t-test statistics for means. Results indicate that the United States suffered a significant increase in trade deficit during the first year of the US-China trade war in 2018 compared to the pre-trade war period in 2017. South Africa witnessed a significant increase in the balance of trade deficit in 2018 during the first year of the trade war. In addition, the South African currency has suffered increased volatility during this period of US-China trade war. In conclusion, the paper highlights that based on past US trade war history, the United States may suffer more losses if the current trade war continues. The paper recommends inter alia, the urgent need for the United States and China to resolve the trade impasse, and the need for South Africa to diversity its exports in order to penetrate new markets.

Dependence between bitcoin and African currencies

Africa being one of the poorest continents is an ideal platform for the use of bitcoin. Considering the specific nature of the continent, is this digital currency going to be a propelling factor for its growth? In this paper, we investigate the correlation and dependence structure between bitcoin and eight African currencies using two different concepts, including extreme correlation plots and a bivariate extreme value model due to Gumbel (Bull Inst Int de Stat 37:471475, 1960). The currencies are chosen to correspond to eight biggest economies in Africa. We identify those African currencies having a positive correlation with bitcoin and those having a negative correlation with bitcoin. The dependence quantified can have economic implications. We perform a robustness study to see if the results hold also for parts of the data. We provide economic interpretations of the results which could be of interest to researchers, policy makers and bitcoin investors within the region and beyond.

Dynamic risk sharing in the Central African Economic and monetary community

Abstract. In contrast to the first Optimum Currency Area (OCA) theory which was mostly about preventing currency areas’ exposure to asymmetric shocks, the second model introduced by Robert A. Mundell (1973) focuses on risk sharing across member states when facing adverse macroeconomic shocks. This paper explores how risk is shared across the six member states of the Central African Economic and Monetary Community (CEMAC). Using dynamic panel VAR, we measure disposable income and consumption smoothing of negative output shocks. We find that more than 72 percent of GDP idiosyncratic shocks remain unsmoothed in the case of the Central African currency area from 1986 to 2018. Keywords. Optimal currency area, International risk-sharing, Dynamic panel VAR, Fiscal consolidation, Currency devaluation, Shock smoothing. JEL. C32, E41, E21, F32, F45.

Modelling systemic risk and dependence structure between the prices of crude oil and exchange rates in BRICS economies: Evidence using quantile coherency and NGCoVaR approaches

In this study, we examine the dependence structure and systemic risk between return series of the prices of crude oil and the BRICS exchange rates to US using the quantile coherency methods of Baruník and Kley (2015) and the nonparametric conditional value-at-risk granger causality test (hereafter NGCoVaR) of Diks and Wolski (2018) over the period 2005–2017. Further, we use the Hiemstra and Jones (1994, hereafter HJ) and Diks and Panchenko (2005, hereafter DP) tests for comparison purposes. Our findings indicate that all countries reveal significant negative dependence in the long-run dynamics between Oil prices and Brazilian, Indian, and South African currencies. HJ and DP tests suggest that lagged crude oil prices have predictive power for the Brazilian and Russian exchange rates. Furthermore, a robust unidirectional lagged dependence exists from the Brazilian exchange rate to crude oil prices. Concerning the Chinese, Indian, and South African currencies, we find no contagion effects from/to those countries to the oil market. For Russia, there is limited evidence of contagion effects. These findings provide insights for regulators and international investors.