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Sunday, March 27, 2011

AFRICA MONEY-Wobbly currencies take shine off the carry trade, Posted by Meosha Eaton

* African bond yields rising as inflation takes hold

* Weakening currencies deter foreign t-bill interest

By Ed Cropley, African Investment Correspondent

JOHANNESBURG, March 25 (Reuters) - African central banks have started to train their sights on inflation bubbling up across the region, although wobbly currencies are making foreigners think twice about chasing lofty domestic debt yields.

From Ghana to South Africa to Kenya, concerns about rising prices have pushed yields higher across the curve, even though most central banks have dithered over dropping a semi-official focus on promoting growth above ensuring monetary stability.

Short-term debt yields in many frontier economies are now more attractive than they were in 2009, when they were sucking in buckets of foreign cash seeking something juicier than the dismal returns on offer in developed markets.

However, an imminent repeat of the influx by outsiders that pushed short-term borrowing costs in countries such as Nigeria and Uganda to below 4 percent a year ago looks unlikely given the jitters that have beset many African currencies.

So far this year, the Kenyan and Ugandan shillings and Ghana's cedi have all hit record lows against the dollar, and Nigeria's naira has sorely tested the weaker limits of a 145-155 trading band it has maintained since a devaluation in late 2008.

A mixture of politics and economics were behind the initial drops, but sluggish responses by authorities in meeting unforeseen dollar demand, and a basic misreading of inflation in the case of Kenya, has caused investors to question the ability or desire of policymakers to keep matters on an even keel.

Uganda's shilling hit a string of record lows in January as fears of violence -- that did not materialise -- in a February presidential election caused companies and rich Ugandans to stock up on dollars.

But the Bank of Uganda, either through choice or because of a lack of reserves, failed to inject dollar liquidity at levels it had previously intervened, resulting in a market that still can't see the bottom despite an 8-month slide.


Unusually high dollar demand from foreign exchange bureaux in Lagos suggest wealthy Nigerians are doing the same as their Ugandan counterparts before an April 9 election in Africa's most populous nation.

The central bank in Nigeria, Africa's biggest oil producer, has considerably more fire-power to defend the currency than in Uganda, but outside investors are still too worried to pile into a bond market offering a tempting 10 percent on 3-year paper.

"In Nigeria the election prospects are weighing into sentiment even though the yields are quite attractive at the moment," said Yvette Babb, an African debt strategist at Standard Bank in Johannesburg.

"People are not willing to take the risk because the currency might rise as it did in Uganda in the run-up to the election."

Crunching the numbers makes it clear how a small currency drop trashes the logic of putting dollars or euros into African debt -- typically 3-12-month paper where liquidity is easier to find.

An investor who stuck $10,000 into Uganda shillings at the beginning of the year would now have just $9,669, while the same amount deposited in naira would be worth only $9,967, according to the Reuters FX Carry Trade Calculator -- and that is before brokerage fees and commissions are taken into account.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For Graphic on African carry trade yields, click on http://r.reuters.com/dad78r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

"The yields definitely make treasury bills attractive from a foreign investor point of view, but you've got to make sure you're comfortable with the currency risk," said Africa analyst Leon Myburgh at Citi in Johannesburg. "You've got to pick you entry level."

Against this backdrop, Zambia, whose 3-month bills yielded 6.5 percent at auction this week, stands out as an exception -- its currency, the kwacha , has managed to post a gain of more than one percent against the dollar this year.

(Editing by Ron Askew)

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