Only on the streets of cities like Cairo, Abuja or Tashkent can you gauge just how much pressure developing countries are under to ease controls on their currencies.
Individuals and businesses in five nations across Central Asia, the Middle East and Africa are paying anywhere from 4% to 136% more than official exchange rates to get their hands on dollars, according to a Bloomberg survey. So-called black markets flourish at times when there’s a shortage of greenbacks and are one indicator of how much a currency should be allowed to depreciate to reach its fair value.
Central banks that uphold pegs have been under strain after tumbling commodity prices and slowing global growth weakened currencies from Brazil to Russia by at least 19% in the past year. In the four months that followed China’s shock devaluation of the yuan in August, Kazakhstan, Argentina and Azerbaijan abandoned control of their exchange rates to boost competitiveness and avoid draining reserves.
“There is enormous pressure on some of the pegs in emerging markets, with the unofficial rate diverging significantly from the official one,” said Bernd Berg, an emerging-markets strategist at Societe Generale SA in London. “Countries like Nigeria are maintaining fixed exchange rates that are unsustainable. Once the pegs break, investors in the local currency face significant losses.”
Street Rates
In Argentina’s case, the move to a free float in December eliminated the 4.2-peso gap between the official and black market rates. In the months prior to the move, it cost as much as 50% more to buy the currency on the street than at the central bank rate.
That premium is similar to what currency vendors in Nigeria’s capital Abuja are charging for dollars now, while hawkers in Tashkent are demanding more than double to convert the Uzbeki soum. The cost to buy the US currency in unregulated trading in Egypt keeps rising even after the central bank devalued the pound three times last year.
The street rate “is a better reflection of where a market-based rate should be,” said Simon Quijano-Evans, the chief emerging-markets strategist at Commerzbank AG in London. It shows “how domestic participants and individuals really feel about their currencies,” he said.
The existence of a black market isn’t the only indicator that a country may be on the verge of changing currency policy. There wasn’t a parallel rate in Kazakhstan when the country relinquished control of the tenge to boost competitiveness for its goods in neighboring China and Russia.
Nigeria—naira
Since Africa’s biggest crude producer started managing the naira at 197-199 per dollar in March 2015, oil prices tumbled more than 40%. Under these pressures, central bank reserves fell to $28 billion this month. Non-deliverable forwards predict the naira will drop another 30% from the official rate to 288 in 12 months, approaching the black market level that exceeds 300 per dollar.
Angola—kwanza
Angola has been reducing the amount of foreign exchange it makes available to banks and businesses over the past two years to stem the drain on reserves that fell to the lowest levels since 2011 last year. The central bank let the kwanza depreciate 24% in 2015 and another 15% last month. But that may not be enough, with hawkers selling the currency at a premium of 136% to the official rate at 161 on Friday.
Egypt—pound
Egypt’s ability to defend the currency with reserves has been crippled since the so-called Arab Spring uprising five years ago triggered political instability, drove out foreign investors and curbed tourism, one of the country’s biggest sources of hard currency. The pound, which has fallen 26% since the end of 2010, is still under pressure as street vendors in Cairo charge 8.75 to buy dollars, compared with an official rate of 7.83.
Uzbekistan—soum
A slowdown in China and a plunge in the currencies of Russia and Kazakhstan, Uzbekistan’s biggest export markets, are weighing on the Central Asian economy. While low external debt and “large” international reserves provide a cushion, Uzbekistan is likely to allow the soum to weaken at least 15% this year to restore competitiveness.
The black market rate of 5,950 in soum is more than double the official level at a record-low 2,837. The central bank let the exchange rate slide 13% in 2015, compared with drops of 20% for the ruble and 46% for the tenge.
Tajikistan—somoni
This country of 8 million people borders Uzbekistan, Kyrgyzstan, China and Afghanistan in the heart of Central Asia. It relies on remittances from workers abroad. The Tajik currency dropped 25% last year and trades at 7.84 per dollar, compared with an unofficial rate of 8.15.
