Cape Verde and Guinea Bissau have more stable exchange markets

28 April 2008

Lisbon, Portugal, 28 April – Portuguese-speaking African countries that have their currencies fixed to other currencies have more stable exchange markets and better risk-return trade-off for investors. Mozambique, with its government-managed monetary system, has similar results.

This conclusion appears in the study, “Pressure in the Exchange Markets of Portuguese-speaking African countries”, recently presented by Portuguese university researchers Jorge Braga de Macedo, ex-Finance Minister for Portugal, Luis Brites Pereira and Afonso Mendonca Reis.

The econometric analysis identifies Mozambique as the “exception to the rule” that fixing to another currency – the Euro, in the case of Cape Verde and Guinea Bissau – represents greater stability in the exchange markets and a bigger attraction to investors.

A “plausible reason” for Mozambique’s results, they say, is the fact that it is the only country in the sample that has “a government-managed monetary system, implementing monetary and exchange policies in line with the IMF that establishes levels for international reserves and applications for domestic liquid assets of the central bank.”

However, the analysis allows for the conclusion that “the risk-return trade-off is much more favourable for investors when there are fixed exchange rates, given the increase in volatility is smaller for the same rate of return.”

According to the IMF’s most recent forecasts, the Mozambican metical has also been rising, by roughly one third compared to the base year 2000, while Cape Verde, Guinea and Sao Tome are in relatively stable situation.

Well above the average for petroleum producing countries, Angola shows the greatest exchange increases in the African continent, having more than doubled the value of the Kwanza since the base year.

Angola and Sao Tome and Principe have government-managed monetary systems without the trajectory of a predetermined exchange rate; Mozambique also, though in accordance with IMF policy.

The small archipelago has hesitated for a long time over the future of its currency, the dobra, considering the possibilities of fixing to the Euro, the dollar or the CFA franc.

Cape Verde and Guinea Bissau both have their currencies fixed to the Euro, with limitations in the case of the latter, member of the West African Economic and Monetary Union.

“Our main conclusion is that PALOP countries that have their currencies fixed clearly are less volatile in comparison to those that have government-managed monetary systems,” say the researchers.

As well as this, pressure in the exchange market tends to be “much less severe” in situations of fixed exchange.

Comparatively, Angola shows the most “severe” bouts of market pressure, with Mozambique sitting at the opposite end of the spectrum, within this group.

“Sao Tome and Principe sits between the two extremes, though its behaviour under exchange market pressure is clearly much more similar to that of Mozambique.

The volatility analysis indicates that Mozambique “has greatest credibility” within this group of three, and Angola the most volatility.

As for Sao Tome and Principe, its credibility “could also improve given that its volatility has decreased from 2002 and its level is now much nearer to that of Mozambique.”

Jorge Braga de Macedo is Economics Professor at Universidade Nova in Lisbon and President of the Tropical Research Institute (IICT), also in Lisbon.

Luis Brites Pereira is Professor at the same university and Afonso Mendonca Reis is a student and researcher. (macauhub)