Magazine article African Business

African Currency Slide May Not Be a Bad Thing; the Fallout from the Global Economic Crisis Takes All Sorts of Forms and Shapes. Although Africa Has Been Spared the Worst of the Financial Meltdown Trauma, Its Currencies Have Been Sliding against the Dollar. in Some Ways, This Enforced Depreciation May Benefit Africa by Boosting Exports and Reducing Imports

Magazine article African Business

African Currency Slide May Not Be a Bad Thing; the Fallout from the Global Economic Crisis Takes All Sorts of Forms and Shapes. Although Africa Has Been Spared the Worst of the Financial Meltdown Trauma, Its Currencies Have Been Sliding against the Dollar. in Some Ways, This Enforced Depreciation May Benefit Africa by Boosting Exports and Reducing Imports

Article excerpt

The severe storms battering the developed world have spread into Africa, putting at risk the progress made across this region since early 2000s. Financial contagion (i.e. the cross-border spread of the market crisis) poses the greatest risk to African currencies and growth after a period of stability.

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The channels through which the spillage of Western banking problems are felt include weaker commodity prices (especially crude oil and metals); plunging volumes of world trade; sluggish output growth amid higher inflation in most countries; and diminished capital flows--foreign direct investment, portfolio inflows and trade financing. Reduction in official development aid, remittances and demand for services (primarily tourism) will also impact the wider economy.

In the wake of an OECD-wide recession and lower regional exports, the IMF projects 2009 sub-Saharan Africa (SSA) growth at 3.5% (down from 5.4% in 2008). This still, however, compares favourably with forecast output contractions in Eastern Europe and Russia during this year. The IMF sees marked deteriorations in both the fiscal and external balances of SSA. The overall budget and current account (i.e. net trade balance of goods and services, plus unilateral transfers) are estimated at about 4% and 6.7% respectively of SSA economic output.

Bearish regional trends

The Business Africa exchange rate index, compiled by the London-based Economist Intelligence Unit, represents countries that account for over 90% of Africa's GDP. The major component is South Africa, including its partners in the Rand Monetary Zone (Lesotho, Namibia and Swaziland), which together comprise 22.5% of the African total, followed by Nigeria (15%), the Franc Zone economies (10.7%) and the Maghreb region (Algeria, Morocco and Tunisia), accounting for 22%. Ten countries--Angola, Botswana, Ethiopia, Ghana, Kenya, Mauritius, Sudan, Tanzania, Uganda and Zambia--make up the balance. All, with the exception of Angola, underwent heavy currency depreciations over the past year.

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The South African rand, the Zambian kwacha, the Ghanaian cedi and the Congolese franc depreciated by 50%, 43%, 41% and 36% respectively versus the US dollar. The kwacha's weakness is tied to copper prices but the cedi's losses occurred despite stronger gold and (to a lesser extent) cocoa prices, which together provide 70% of Ghana's total exports. Recent outflows of portfolio investment and heightened risk aversion explain the cedi's decline. The DR Congo's currency is affected by higher inflation and worsening civil strife in this mineral-rich country.

The rand, Africa's most liquid and tradable currency, has been exposed to the vicissitudes of credit crunches, reflecting South Africa's integration within the global economy. It therefore remains vulnerable to outflows of 'hot money' from the Johannesburg capital markets and the country's yawning trade deficit--with rapidly falling metal prices.

Given a bleak growth outlook, the South African Reserve Bank (SARB) is likely to cut interest rates, thus reducing South Africa's attractive yield advantages. At one point in February, the rand plummeted to R10.21: $1. That, in turn, hit the currencies of Lesotho, Namibia and Swaziland, which are 100% pegged to the rand. Even Botswana's healthy trade surplus failed to protect the country's currency, the pula, from a risk aversion-led flight to quality assets (chiefly US Treasuries and gold). Like other currencies, the pula suffered steep falls to historic lows of 8.1: $1 in late February.

The 'defunct' Zimbabwe dollar will soon be redenominated, after inflation is estimated to have reached 6.5 quindecillion novemdecil-lion per cent (i.e. 65 followed by 107 zeros), according to Professor Steve Hanke of John Hopkins University. Supply shortfalls and 'quantitative easing' (continued money printing) have caused hyperinflation. …

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