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. 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. [ILLUSTRATION OMITTED] 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. [ILLUSTRATION OMITTED] 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. Nigeria's naira has lost a quarter of its value against the dollar in recent months, hitting a low of N158.8: $1 in January. Plunging oil prices, the drying-up of portfolio funds, declines in external reserves (from highs of $64,8bn in August 2008) and limitations on foreign-trade finance facilities for banks have impacted the naira's stability in currency markets. The Central Bank of Nigeria (CBN) issued a statement that "devaluation was deliberate",
thus reflecting the demand pressures relative to supply. Nonetheless, the CBN unveiled measures to prevent speculative currency attacks and help Nigeria withstand external contagion. The CBN's reintroduction of the 'Retail Dutch Auction System' in mid-January 2009, effectively limits the provision of forex to only 'legitimate' end users who need hard currency for external trade, and halts interbank transactions. Any amounts not sold to eligible customers in five working days must be resold to the CBN. The latter is committed to managing the exchange rate within a 3% band until further notice. Moreover, it has sharply reduced commercial banks' allowable forex net open position (from 5% and previously 10%) to 1% of shareholders' funds. That will ease pressure on the naira by limiting demand. The fundamentals of Nigeria's economy are, in fact, quite sound, with 2008 foreign debt reported at $37bn (1.7% of GDP) and foreign exchange reserves exceeding $50bn, though oil receipts will fall below last year's $70bn level. The CBN expects the naira to stabilise soon and strengthen again, relative to its current range. It's difficult to envisage the naira regaining past the N118:$1 mark amid depleting capital inflows. Lower remittances and tourist earnings, weighing on balance of payments, are affecting East African currencies. The Kenyan, Tanzanian and Ugandan shillings have fallen to all-time lows of Ksh80, Tshi,380 and Ush2,004 respectively vis-a-vis the dollar, with potential further downside risks. In each country, external official reserves are too low to support the currency. The Mauritius rupee is vulnerable to global recession
impacting clothing exports and international banking services as well as tourist arrivals. The Mauritian SEMDEX index is down 50% from its February 2008 peak (2,100) dragged by two key sectors (tourism and banking), representing 66% of the index. [ILLUSTRATION OMITTED] Africa's Francophone states need a competitive currency to keep pace with regional neighbours (notably Nigeria and Ghana). The strongest African currency is, in fact, the Angolan kwanza, supported by oil-export receipts of $68bn--on OPEC's 2008 figures--and very limited exposure to foreign portfolio investment. Lately, demand for forex has surged, fuelling speculation that the authorities may devalue the kwanza (exchange rate 75-5-$1) which has been broadly intact since end 2007. The commodity boom and higher capital flows to emerging and frontier markets (until mid-2008) led to an overvalued exchange rate in most African countries. The IMF estimates that real exchange rates of SSA oil exporters, adjusted for the differential between African inflation and rates in main trading partner economies, rose 37% since 2000, with the bulk of the increase (25%) fuelled by soaring oil prices since 2003. Recently, however, regional currencies have recouped some of their competitiveness, albeit from an overvalued position. Finding an equilibrium A new World Bank report, Export Surges: The Power of a Competitive Currency, states that [managed] depreciation supports the real economy and exports over the longer term. It outlines four key elements of such surges (defined as 'a significant and sustained increase in
manufacturing export growth from one seven-year period to another'). Export surges are more likely in liberalised and open economies; surges usually follow a hefty depreciation of the real exchange rate; the latter should decline significantly to leave it some 20% undervalued; and the discovery of new products and new markets is equally important. The report argues that the key to Africa's export success is "restructuring trade away from traditional export sectors"--namely oil, metals and agriculture. The report's conclusion is that currency devaluation is more effective than trade liberalisation in boosting exports. Thus, 20% real exchange rate devaluation gives a "large and immediate boost to all exports", while trade liberalisation as envisaged in Doha trade rounds has differential effects, with some products and industries benefiting more than others. No economic strategy is risk free. An overvalued exchange rate means foreign imports are cheaper than procuring them domestically. This hinders the development of local industries. A stronger currency also hurts the services sector (primarily tourism). Conversely, a faltering currency sustained over time causes inflationary pressures through higher import prices. That, in turn, increases pressures for curtailing public spending and hiking interest rates. It can fuel tensions among trading partners--who may object to a policy of deliberately undercutting prices to gain competitive edge.