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What Was Behind the Metical’s Rapid Appreciation?

What Was Behind the Metical’s Rapid Appreciation?

  • Claúdio Pondja - Director of Wealth Management at Banco BIG

Since the beginning of 2020, the metical has been on a depreciating trend against the main currencies traded in the national territory, a fact that is not surprising for an economy with a deficit balance of payments and with few sources of foreign exchange that could be used to correct this imbalance.

Until the end of January 2021, the depreciation trend of the metical continued. However, in mid-February, the metical surprised everyone with a reversal of this trend and the speed with which it appreciated until mid-April.

There are several aspects, among recurring and non-recurring, that should be analyzed:

  • At the end of January, after the meeting of the Monetary Policy Committee (CPMO) of the Central Bank, and after a festive season in which importers put pressure on commercial banks for the settlement of invoices, the Central Bank decided to raise the reference interest rates and resumed its willingness to make interventions by way of making foreign exchange available to cover imports, in addition to what it had been making available to the market for the purpose of covering fuel invoices. As a result of this intervention, the commercial banks now have more foreign currency.
  • Importers, realizing that the scarcity scenario, which they had been feeling over the last few months, had changed, decided to take advantage of this exchange rate appreciation by temporarily halting imports or negotiating with their suppliers for late payment of outstanding invoices.
  • In turn, exporters and other entities receiving foreign currency, faced with a scenario of appreciation of the metical and loss of international competitiveness, rushed their exports, thus also increasing the supply of foreign currency in the market.

The apparent absence of importers, coupled with the excess of foreign currency in the market, forced commercial banks to progressively adjust their exchange rates downward

Also contributing to this scenario was the growth in coal export volumes since the beginning of the year, as well as the increase in the price of some commodities, such as aluminum.

  • Offshore investors, who typically invest in the national public debt market and intended to benefit from the rise in interest rates, also contributed to the increase in foreign currency available in the market. This is because these entities import foreign currency into the country, and later convert it into meticais to make their investments in our securities market, and the amounts are significant enough to create a shock in the market.
  • As a result of the law of supply and demand, the apparent absence of importers, coupled with the excess of foreign currency in the market, has forced commercial banks to progressively adjust their exchange rates downward, as a way to reduce the risk associated with the currency position and comply with the prudential limits issued by the regulator.

What has become clear from this appreciation?

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  • The Central Bank, besides giving clear indications to the market of its capacity to intervene in the market, was bolder in leaving the market long in foreign currency.

Despite the existing imbalance and the galloping trend of appreciation of the metical, the Central Bank took a more expansive attitude, showing comfort with the direction the metical was taking, and in a way letting market forces, by themselves, correct the trend of our currency.

  • Given that more than half of the country’s exports, and therefore the inflow of foreign exchange, are related to large projects, particularly the export of coal and aluminum, the national economy remains fragile and very susceptible to liquidity shocks associated with the exchange rate variation and the price of these commodities.

Until there is greater economic diversification, the metical will certainly continue to experience further episodes of volatility.

  • With the Central Bank increasing the volume of foreign exchange sales to commercial banks, we may see further erosion of Net International Reserves.

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