Frontier markets’ currencies pressured by strong US dollar

October 14, 2022: Frontier-market currencies have come under sustained pressure in recent months as the US dollar surges in response to Fed monetary policy tightening. Weak currencies and rampant inflation in frontier markets have left central banks there with little choice but to continue to increase their interest rates as well, as illustrated in Fitch Ratings’ latest ‘Frontier Vision’ chart pack.

Frontier markets’ domestic currencies depreciated further against the dollar and inflation has continued to rise in many frontier markets as global inflationary pressures have been passed through to domestic prices – the frontier markets’ average annual inflation rate reached 13.4% in August. In response, central banks in 19 of the 35 Fitch-rated frontier markets have raised policy interest rates again. Only Angola and Uzbekistan cut policy rates.

Angola has benefitted from a combination of high oil prices as an oil exporter, a strong kwanza, and declining inflation, enabling the central bank to cut its policy rate by 50pb to 19.5% in September. The Central Bank of Uzbekistan cut its policy rate by 100bp to 15% in July, continuing the reversal of the 300bp rise that followed Russia’s invasion of Ukraine.

GDP outturns for 2Q22 present a mostly positive picture as many frontier market countries – such as Armenia, Azerbaijan, Mongolia, Maldives, Mozambique, Namibia, Nigeria and Vietnam – have recorded strong annual growth. Crisis-affected Sri Lanka recorded the lowest outturn among all frontier markets, at -8.4% yoy, and Paraguay also recorded outright yoy contraction.

Fitch's quarterly ‘Frontier Vision’ chart pack tracks high-frequency macroeconomic data for the countries included in the J.P. Morgan’s Next Generation Markets (NEXGEM) Index. The charts cover five years of historical data and the choice of data series has been harmonised as far as possible across all countries to facilitate comparisons. The index comprises countries representing sub-Saharan Africa, Latin America & the Caribbean, the Middle East & North Africa, Europe, Asia and Oceania.