Africa is battling the global currency markets with one hand tied behind its back.
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 and the prospect of higher interest
rates in the U.S. Seven of the 20 worst-performing currencies this year
are from Africa, even though policy makers 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 percent 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 percent of its
foreign-currency stockpile this year and raised interest rates as a 19
percent 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 27 percent and its naira drop
22 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 percent by year-end. It already tumbled 10
percent in 2015 and reached a record low last month. The South African
lender predicts Ghana’s cedi, which has fallen 9 percent in the past
month, will shed another 3 percent 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 percent 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.
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