With foreign-exchange reserves equal to less than a 10th of the emerging-market average, nations from Ghana to Zambia are finding they’re powerless to stop their currencies from tumbling amid a rout in commodities, China’s devaluation and the prospect of higher interest rates in the US.
Half the 10 worst-performing currencies this year are from Africa, even though policymakers are burning through their reserves faster than any other region.
“African central banks are being pushed to the brink,” said Nema Ramkhelawan-Bhana, an economist in Johannesburg at Rand Merchant Bank, a unit of Africa’s biggest lender. “They’re going to have to accept more weakness.”
That’s presenting challenges across the continent, from spiraling inflation in Angola to dollar shortages that are crippling business in Nigeria. And as reserves dwindle and exports fall, sub-Saharan Africa will push its current-account deficit to the widest of any region, deterring foreign investment, the International Monetary Fund warned in April.
“I don’t see a reason to go diving into these places at the moment,” said Phillip Blackwood, a London-based managing partner at EM Quest Capital LLP, which advises Denmark’s Sydbank A/S on $3.5-billion of emerging-market debt investments.
He said his client recently sold Nigerian, Ghanaian and Kenyan local-currency securities and is now “very light” on African assets. While a weaker exchange rate makes exports more competitive, the benefits are being wiped out by the plunge in the value of the oil, crops and precious metals the nations rely on for foreign earnings. African nations have an average $5.8 billion in foreign- exchange reserves, data compiled by Bloomberg show. That’s just 7% of the $78-billion average across 31 global developing countries, even after stripping out China’s $3.7-trillion of holdings, the world’s largest.
Angola burned through 10% of its foreign-currency stockpile this year and raised interest rates as a 19% drop in the kwanza helped push inflation to a 2 1/2-year high. South Africa, Uganda and Kenya have also tightened policy in an attempt to prop up their currencies, while Ghana merged two of its main rates into a new 24 percent benchmark, effective later this week. Nigeria, Africa’s biggest oil producer, saw its foreign- exchange holdings plunge 20 percent and its naira drop 18 percent since September. It resorted to trading restrictions, only to cause a dollar shortage that’s stopping companies paying overseas suppliers.
“The market punished them every step of the way until they eventually just closed the foreign-exchange market,” said Gareth Brickman, an analyst at Johannesburg-based advisory ETM Analytics. “Other economies in the region don’t have the reserves firepower even to attempt that. I’m very bearish.” So is Rand Merchant Bank, which sees Kenya’s shilling sliding 2.6% by year-end. It already tumbled 10% in 2015 and reached a record low last month. The South African lender predicts Ghana’s cedi, which has fallen 9% in the past month, will shed another 3% this year, even after a bailout from the IMF.
The initial proceeds of that loan were “essentially thrown into the wind” trying to stop the currency falling, said Bryan Carter, a money manager at Acadian Asset Management Inc., who oversees almost $500-million.
Africa simply “lacks enough ammunition to reverse the trend” of sliding currencies, he said from Boston. The widening gap between exports and imports makes it harder for the continent’s central banks to refill their coffers once they’ve been drained, the IMF said in an April report. It predicted the deficit in sub-Saharan Africa’s current account would widen to 4.6% of gross domestic product this year, while growth among resource-rich nations would slump to the slowest since 2009.
Africa’s central banks are “chucking dollars down a black hole,” said Charlie Hampshire, the London-based head of trading at frontier-market specialist INTL FCStone Inc. – Bloomberg