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5 Countries To Watch For African Currency Troubles

5 Countries To Watch For African Currency Troubles

Sub-Saharan Africa is facing a myriad of challenges — low oil and gas prices, low commodities prices, drought, and inflation. Despite countries’ policy efforts to minimize the pain in their most exposed areas, the market is punishing some for not preparing for the downside risks in their economy while being kinder (though not exactly rewarding) to others that built in buffers against exposure.

GDPs will suffer in the second half of 2016 with most growth estimations adjusted downwards. Numerous countries are exposed to high financial risks, especially with their currencies.

Here’s what to expect in the second half of 2016.

Ghana

Economic growth has slowed in Ghana with the trials of 2015 carrying over to 2016. These include ongoing electricity shortages due to inconsistent gas supply and flooding, high inflation and subsequent fiscal and monetary tightening. A June International Monetary Fund (IMF) report predicts Ghana’s economy will grow 5.2 percent, down from its 5.9 percent prediction in 2016. Other analysts say that the number will be closer to 4.1 percent-to-4.3 percent, only slightly above 3.9 percent in 2015 and 4 percent in 2014 and well off the 7.1 percent 10-year trailing average.

Gold and oil output are expected to be lower than previously predicted. Ghana’s Chamber of Mines expects gold production of 2.7 million ounces, down from 2.8 million ounces in 2015 and 3.1 million ounces in 2014. In the oil sector, the Jubilee field will not meet original expectations for 2016, according to Tullow Oil, with the production projection lowered from 101,000 barrels per day to to 74,000.

All in all, the Ghanaian cedi remains a high risk unless the Cocobod loan and expected eurobond issuance of around US$1 billion actually find their way to the market. The low decline of 4 percent this year against the dollar could be eliminated with the issuance, or balloon if the loan is cancelled.

Mozambique

The economic darling of 2014 and 2015 is facing a perfect storm of problems — some self-created. Political tensions are at their highest since the months leading up to the October 2014 presidential election. Sporadic attacks in central Mozambique on road transport and other infrastructure have fueled growing fears of instability. The fear has influenced international decision makers and weighed heavily on foreign investment. The fear may not be fully attributed to the government, the high frustration with the country’s debt load is definitely a government problem.

Global investors in 2013 lent $850 million to a state-owned company to buy a tuna fishing fleet but learned a couple of months later that funds had been rerouted to ship buying for the Navy. Two years later, Mozambique informed investors that it intended to restructure the bonds because the fishing company’s revenue wasn’t holding up. Credit Suisse, which led the bond sale with Russian bank VTB, made other sizable loans to Mozambique, including $622 million to buy military equipment and $535 million to build a shipyard to service military and fishing fleets.

Regulators and investors argue that the loans were only recently disclosed. The IMF and other donors cut off about $320 million in aid since the news emerged. Mozambique’s debt is now approaching 100 percent of GDP (from 78.6 percent of GDP at the end of 2015).

The metical has depreciated around 27 percent against the U.S. dollar year-to-date. The fiscal risks and growing inflation raise the chance for further depreciation, which could push up the debt ratio (as the bonds are priced in dollars) and subsequently prompt rating downgrades. The downward-spiraling relationship between debt and currency could be dangerous in the short term for Mozambique.

Nigeria

Following the election of Muhammadu Buhari in 2015, the bright light for Nigeria has quickly dimmed. The IMF now estimates a mere 0.8 percent growth in 2016 compared to its original estimate of 4.6 percent. The economy contracted further in the second quarter of 2016 as result of a sharp drop in electricity output, decimating any opportunity of growth for the manufacturing sector.

The ongoing low oil prices are devastating the country’s revenue, which weighs on budget planning. Estimates today by the budgeting committee appear optimistic as the Brent oil price has dropped nearly 12 percent since June 29. Two concerns will be on investor’s minds as the price loses buoyancy to growing reality of a sustained supply glut.

First, Nigeria could potentially end the year in a full-blown recession. Second, paying bills will become ever so burdensome for the country as its currency falls further.

Policymakers face the unusual prospect of stagflation in Africa’s largest economy — persistent high inflation combined with high unemployment and stagnant demand in the country’s economy. Rising food inflation, increased electricity tariffs and the elimination of fuel subsidies are hurting local pockets.

The adoption of a flexible foreign exchange was thought to be a way to slow the process, but investors appear to be waiting for tighter monetary policy and budgeting in the short term to compliment the flexible foreign exchange. Those concessions may not even be enough for the market. A planned eurobond may help the naira. Yet the story around the bond and its pricing could grow negative if the market issues further wrath on the naira.

Angola

The Angolan economy is under pressure from ongoing low oil prices. The IMF recently dropped its 2016 growth forecast to 0.9 percent, compared to the original 3.3 percent estimate in January 2016. The government now estimates 1.3 percent economic growth, down from its 3.3 percent estimate. Low revenue caused a U.S. dollar shortage and impeded prior infrastructure growth plans. Other sectors accordingly suffer from the U.S. dollar shortage as foreign sellers reject import requests from Angolan buyers or hold products until payment can either be proved or delivered. Investor trust in Angolan companies to pay the bill sadly will weigh against any potential rebound for the economy.

President José Eduardo dos Santos announced on June 22 that the country’s oil company, Sonangol, has not been able to pay revenues to the government since January 2016, further worrying the market. He appointed his daughter, Isabel dos Santos, to head the company after firing its board of directors. What does this mean for the Angolan kwanza? Better management of oil is expected in the short term. But that may not be enough to overcome low prices through the end of 2016 combined with the drought impact on agriculture and inflation.

South Africa

The South African world has changed a lot in the past few months. The IMF predicted a rough year for South Africa in January 2016 with 1.4 percent estimated growth. Today that number is 0.6 percent with several economic analysts imagining a full contraction in GDP for the year of minus 0.1 to minus 0.3 percent.

This goes against the Treasury’s 2016 Bbudget assumption of 0.9 percent growth. The country is at risk of seeing a rise in its debt-to-GDP ratio and a growing gap in its current account deficit.

Although South Africa is likely to experience some pain from Brexit, it is unclear how much. The country will lose on exports yet it surprisingly gained on a gold price uptick in the immediate short term.

South Africa could escape the pain with stronger economic growth but the global economy is unlikely to provide that in 2016 or early 2017. Credit rating risks will be further priced into the market as investors look to see how the politics and policy play out going forward. Betting on a boost to the South African rand is likely dangerous in the short term.

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.