This year’s collapse in oil and metals prices has already had a
significant impact on Africa’s largest economies, including Nigeria and Angola
– the continent’s top two crude exports respectively – and South Africa, the
continent’s top mining destination. Now dollar strength and concerns over the
health of China’s economy have
triggered a broader weakening of African currencies as they get swept up in the
emerging market volatility.
Indeed, the
state of China’s economy is likely to be a major factor in the fortunes of many
African nations. China, which overtook the United States as Africa’s largest single trade partner in
2009, has been a key destination for Africa’s mineral exports, a major investor
and constructor of infrastructure projects as well as a vital source of cheap
government financing.
Martin Kingston, head of Rothschild for sub-Saharan Africa,
said: “In the context of China, there is more than one
dynamic at play. It’s the depression of commodity prices, but also in terms of
trade and foreign direct investment, including infrastructure support. There’s
also an additional question — to what extent is Africa going to be able to rely
upon other flows of capital and other forms of support for infrastructure and
other programmes?”
Evidence is
already mounting of a slowdown. A recent note by Fathom Consulting highlighted a 40 per cent year-on-year dip in
Chinese imports from Africa for July. Martyn
Davies, chief executive of Frontier
Advisory, a group that specialises in Africa-China investment, says there
is anecdotal evidence of an easing in Chinese activity on the continent. “The hurdle rates of Chinese sovereign wealth investment, or
part sovereign wealth fund invested projects in Africa have been raised so the
capital is more discerning and seeks greater profitability,” he says.
The latest
uncertainty is likely to put such investments under an even greater microscope,
he adds. “Chinese flights to Africa have already been
curtailed. You are not seeing anywhere near the number of state business
delegations one used to see coming into this part of the world,” Mr
Davies says. Still, Mr. Davies believes the level of Chinese private sector
interest in Africa is likely to grow.
Indeed, Abebe Aemro Selassie, deputy director
of the African Department at the IMF, says what is often overlooked is the
impact China has had on the African growth story beyond commodities and
state-sponsored projects.
“The benefit to the region has been as much from China’s
emergence on the global scene and the extent it has depressed prices for
capital goods, consumer goods, and services throughout Africa,” Mr.
Selassie says. “And that is about half, if not more, of
the story. That should remain in place and is something that is underestimated.”
And while
the latest global turbulence is likely to reduce African nations’ headline
growth — the IMF forecasts growth for sub Saharan Africa to be 4.4 per cent
this year, down 5 per cent in 2014 — “it masks a very
diverse picture”, Mr Selassie says. China has been roiling global
markets all summer as its leaders try to stop a huge stock bubble from bursting
and its slowing economy from stalling
Among the
most severely affected are the continent’s oil producers, with both Nigeria and
Angola seeing their currencies plummet and their growth prospects sharply
decline. The pair, Africa’s first and third largest economies respectively, are
already suffering foreign currency shortages and both have put in measures to
control the flow of forex.
Their
fortunes have a significant impact on the continent’s growth story —
sub-Saharan Africa’s eight oil exporters account for about 50 per cent of the
region’s gross domestic product.
For Africa’s
non-oil exporters, the collapse in crude prices has provided a cushion. But,
with many African countries import-dependent, the depreciation of currencies
affects inflation and the cost of imports. It will also put a strain on those
nations that have taken advantage of investors’ search for yields to tap into
international capital markets.
The likes of
Zambia, Ethiopia, Rwanda, Kenya, Ghana, Senegal, and Ivory Coast have all
issued foreign currency dominated sovereign bonds in recent years. “In the past, foreign exchange weakness in Africa was largely
shrugged off. Economies adapted and found a way to cope with it, but the recent
surge in eurobond issuance has been a game-changer,” says Razia Khan,
chief economist for Africa at Standard Chartered. “Now, when currencies
depreciate, external risks are magnified, public debt ratios rise, and
perceptions of sovereign creditworthiness alter quite dramatically.”
Ms. Khan
says the question is whether governments have given enough consideration to the
repayment risk and how they would raise the foreign exchange to service the
debt. And the current market volatility will likely make it harder or more
expensive for African nations to tap capital markets.
“Even if China were to grow at a slightly slower rate, it
would remain a hugely significant economy. China’s interest in Africa has
always been long-term and strategic,” she says. “However, the financial market effects are real. The financial market
volatility has highlighted some of the shortcomings in the defences put in
place by regional policymakers.” (FT)
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