Economic Analysis - TZS: Weakening Competitiveness Will Exert Downward Pressure - MAR 2018


Tanzania Currency Forecast
Spot 2017 2018 2019
Source: BMI, Bloomberg. Last Updated: November 22, 2017
TZS/USD, ave 2,231 2,240 2,314 2,405
TZS/EUR, ave 2,635 2,531 2,545 2,766

BMI View: In the months ahead, the Tanzanian shilling is set to continue to trade sideways, with the Bank of Tanzania poised to continue sporadic intervention in an effort to limit depreciation. Over a multiyear time horizon though, a combination of slower growth and structurally high inflation will weigh on the economic competitiveness, prompting a moderate depreciatory trend.

Short-Term Outlook (three-to-six months)

We anticipate that the Tanzanian shilling will trade broadly sideways in the coming months, ending the year at TZS2,246/USD. Despite downward pressure on the exchange rate, as high inflation eats into the country's economic competitiveness, and a spate of less business friendly regulations weigh on investor sentiment, the Bank of Tanzania (BoT) remains committed to continued intervention to limit sharp downward moves. Indeed, the BoT wrote in its June monetary policy statement that it would undertake the sporadic sale of foreign reserves "in order to smoothen out excessive short-term volatility in the exchange rate". We expect that policymakers will sustain this managed float regime going forward.

Downward Pressures Will End Stable Streak
Tanzania - Exchange Rate, TZS/USD
Source: BMI, Bloomberg. Last Updated: November 21

Long-Term Outlook (six-to-24 months)

On a longer-term trajectory, we believe that the shilling is set for further weakness. We forecast the currency to fall by 5.6% to TZS2,380/USD by the end of 2018, down from TZS2,231/USD at the time of writing.

We forecast inflation to average 5.6% and 5.5% annually in 2018 and 2019 respectively, significantly higher than that in the US, which will eat into economic competitiveness and encourage depreciation. The structurally high inflation will be driven by high input costs as a result of weak supply chain logistics, while fluctuations in food supply will also present upside risks to price pressures in the long term.

At the same time, we forecast a somewhat weaker growth outlook for the country in the coming years. While robust compared to other countries in the region, our forecasts for real GDP growth of 5.9% in 2018 and 2019 respectively represent a significant slowdown from a previous five-year average of 6.7%. The cooling in growth will come on the back of a result of a deteriorating business environment, with increasingly hostile government regulations set to weigh on the mining sector ( see 'Weaker Business Environment Will See Growth Slow', August 25). This has included an export ban on mineral concentrates, and new regulations entrenching greater government intervention in the sector.

The BoT will continue to sporadically intervene to temper any especially sharp sell-offs. Indeed, as of August 2017, reserves were sufficient to cover around 5.1 months' worth of imports such that we believe that the bank's foreign exchange stockpiles will likely suffice to support the currency in the event of greater volatility. However, this will not prevent the currency from undergoing a broad sell-off.

Slowing Growth Will Drive Downward Pressure
Tanzania - Real GDP Growth, % y-o-y
ef = BM estimate/forecast. Source: BMI, NBS

Risks To Outlook

We believe that risks to the Tanzanian shilling are firmly weighted to the downside. A raft of hostile regulatory developments has weighed on investor sentiment in recent quarters, and if we see increasing regulatory challenges to businesses mount, this could further the concerns of those firms already present or looking to invest in Tanzania. A greater slowdown in growth or foreign investment as a result could fuel a quicker sell-off.