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August currency review

Mass street protests continue in Belarus, having erupted following long-time president Alexander Lukashenko's latest 'landslide' election victory on 9 August, which was widely seen as having been rigged. Since then, the Belarusian rouble has lost substantial value. However, there are also longer-term factors in play that are causing the currency to weaken.

Indeed, the rouble, which fell 10% against the euro in August (see first table), had already weakened by 7% the month before. It also saw big declines in February and March this year. In the last 12 months it has fallen 27% overall against the euro, despite the central bank trying to shore up the currency's value as part of its 'managed-float' regime.

With the exception of Minsk's thriving IT sector, much of it in private hands, the state-planned structure of the Belarus economy has changed little since Soviet times. Free markets, privatisations and a more genuine democracy have all been eschewed by Lukashenko (in power since 1994) in favour of stability, full employment, low inequality and low poverty rates. The costs are high and include poor productivity growth, state oppression and heavy reliance on Russian markets, aid and cut-price gas and oil, which Belarus refines.

Pressure on the antiquated system has been building, forcing Lukashenko to improve relations with the EU in the hope of attracting investment. But Russia's president, Vladimir Putin, has responded by pressing for deeper economic and political "integration" with Moscow. Lukashenko has skilfully played off East and West in the past, but the game has now become virtually impossible. To side more firmly with Russia would mean Putin dominating and prolong Belarus's crumbling but unreformed economic system. To move towards the EU would probably lead to Russia imposing punitively high energy prices, which Belarus cannot afford - it has no alternative source of energy, at least for now.

Lukashenko is clinging to power as yet, but something must give eventually one way or another. Until that happens, the foreign exchange markets will continue to take it out on the rouble.

Countries experiencing largest currency losses in August
Currency code Movement v EUR
3 - 31 Aug 2020 (%)
Angola AOA -6 22.2
Belarus BYN -10 5.3
Brazil BRL -7 2.3
Turkey TRY -6 11.8
Zambia ZMW -9 15.8
Zimbabwe ZWL -10 837.5

In currency news elsewhere, Vietnam has been accused by the United States of deliberately undervaluing its currency. The dong's value is controlled by the central bank with strong reference to the US dollar and moves very little against it. Vietnam's exceptionally good economic performance in recent years would have caused the currency to appreciate if it floated freely. The US could follow up by designating Vietnam a 'currency manipulator', which may lead to sanctions, but in the meantime there is the possibility that Vietnamese authorities might be pressured into allowing the dong to gain value more reflective of the country's economic rise.

South Sudan, whose central bank also tries to hold the value of its currency against the dollar, announced on 19 August that the foreign exchange reserves it uses to do that had run out. The huge gap between official  (USD 1 / SSP 165) and black-market (SSP 400) rates could rapidly diminish if the pound goes into freefall, bringing further increases in inflation, which is already very high.

The Covid-19 pandemic has harmed virtually every economy in the world, but the great reduction in tourism has hit holiday destinations particularly hard. Cuba relies heavily on visitors' dollars but reports suggest it is running very short of them. This has caused exchange rates on the black market to diverge rapidly from official rates, and authorities have responded by ditching the 10% conversion charge for exchanging US dollars through authorised means in the hope of attracting more of them. This effectively devalues official exchange rates, but nominally they remain the same. However, if hard-currency shortages worsen further, the pressure could force the government to do what it has said it wants to do for years, and that is unify its complex dual-currency regime. If so, expect a major devaluation to come.

Finally, in what was yet another strong month for the euro, no currency gained more than 2% against it in August. Here is our selected currency movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 31 August 2020 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS -3 -14 -23 -27 42.4
Australia AUD +2 +3 +4 +1 -0.3
Brazil BRL -7 -9 -23 -30 2.3
Canada CAD +2 -2 -5 -6 0.1
Chile CLP -3 -4 -3 -14 2.5
China CNY +1 -3 -6 -4 2.7
Egypt EGP 0 -7 -9 -3 4.2
India INR +2 -4 -9 -9 6.9
Indonesia IDR 0 -6 -9 -10 1.5
Japan JPY -1 -5 -5 -7 0.3
Kenya KES -1 -7 -13 -11 4.4
Korea Republic KRW 0 -2 -6 -5 0.3
Mexico MXN +1 -6 -17 -15 3.6
Nigeria NGN -1 -7 -12 -13 13.4
Norway NOK +2 +3 -1 -4 1.3
Philippines PHP +1 -3 -2 0 2.7
Poland PLN 0 +1 -2 0 3.0
Russia RUB -1 -11 -16 -17 3.4
Singapore SGD 0 -3 -5 -6 -0.4
South Africa ZAR +1 -2 -14 -16 2.2
Sweden SEK 0 +2 +3 +5 0.5
Switzerland CHF 0 -1 -1 +1 -0.9
Turkey TRY -6 -13 -21 -27 11.8
United Kingdom GBP +1 +1 -4 +1 1.0
United States of America USD 0 -7 -8 -8 1.0
Venezuela VES 0 -40 -75 -94 2296.6
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