As frontier markets, the countries of Africa represent tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in developing, emergent continental markets consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets aren’t one of them if you know where to look. To help with that, AFKInsider has compiled a FOREX Africa report with the news you need to know now in order to slim down your currency risk. Let’s see what’s happening out there.
On average, African currencies fell by nearly 3 percent this year vis-à-vis the U.S. dollar, reflecting the macroeconomic impact a still-recovering global economy is having on Africa’s emerging economies. Diminished demand for oil and commodities, especially from China, put downward pressure on markets across the continent while announcements by the U.S. Federal Reserve in early 2013 that the powerful U.S. central bank would begin tapering off its purchase of bonds and mortgage-backed securities by the beginning of 2014 crushed emerging-market currencies from Morocco to Malaysia.
As a result, those African currencies most exposed to global markets were particularly hard hit.
The widely-traded South African rand began 2013 at 8.45 (ZAR) to the U.S. dollar but lost nearly a quarter of its value by year’s end, hitting 10.53 (ZAR) to the dollar by the end of December. Tapering wasn’t the only factor behind the rand’s fall, though. Labor unrest in South Africa’s critical mining sector hampered output, severely restricting growth and causing the economy’s growth rate to fall to a four-year low of 0.7-percent in the third quarter.
One bright spot for the South African economy for much of the year, however, was manufacturing – which took advantage of the rand’s fall to increase export output until mid-year, after which labor unrest spread to that sector as well.
Looking ahead, one would expect the rand to recover once labor unrest is contained and production goes back to normal in both mining and manufacturing, but given the degree to which labor action is being pushed by widespread public dissatisfaction with the economy and the ANC’s stewardship of it – a recovery may be some time in coming.
Ghana, of late a darling of the international investment community due to its newly discovered offshore petroleum resources, also saw its currency fall by almost as much as South Africa’s. Here, the problem was the country’s continued large budget deficit, which at last count amounted to nearly 9 percent of Ghana’s gross domestic product. Also problematic was fallout over a disputed presidential election this summer that threatened to derail the country’s expanding economy.
Nigeria, Africa’s second-largest economy after South Africa, also suffered currency depreciation in 2013, though not nearly so severe as in South Africa and Ghana. The naira, Nigeria’s currency, lost 3 percent vis-à-vis the U.S. dollar, falling to 160.45 (NGN) by late December. Here, reduced demand for crude for much of the year dampened growth in one of Africa’s most quickly expanding economies, while ongoing security problems in the country’s Muslim-majority north and oil-rich Niger Delta region in the south also restricted output.
The year 2013 was not all bad news, however, as many countries either ended with currencies mostly even vis-à-vis the U.S. dollar or even ahead. The former typified many of the countries in East Africa.
Tanzanian and Kenyan currencies ended the year barely changed from where they started. The Tanzanian shilling gained just .22 percent on the U.S. dollar while the Kenyan shilling lost 0.08-percent year-over-year — good news for foreign investors seeking to take advantage of this region’s growing economic heft.
The CFA Franc also did well, with the Paris-backed African currency used by 14 countries gaining a touch over 4 percent against the U.S. dollar since January. This gain more-or-less mirrors the Euro’s performance against the greenback, which also gained 4 percent vis-à-vis the U.S. dollar.
Another major currency winner of 2013 was Uganda, which saw its shilling gain 7.34 percent on the dollar over the course of the year. This was largely due to strong economic growth in the country and low inflation, with the International Monetary Fund reporting that Uganda grew as fast as 6.25-percent for the year. This comes on top of a road and hydroelectric power investment backed by the Ugandan government. Oil investment – coming in the form of a planned pipeline from South Sudan and development of Uganda’s own domestic resources – also boosted growth.
The big currency winner this year was, surprisingly, Eritrea, which saw a nearly 31-percent gain against the U.S. dollar after the nakfa – the Eritrean currency – was pegged to the U.S. dollar at a higher rate than previously anticipated. The IMF warns, however, that this artificial rate is hurting the economy and is likely to be unsustainable in the future.
The coming year should see a number of factors at work on the continent. First, the effects of the Fed’s tapering decision should become manifest through a stronger dollar. African economies that are major trade partners with the U.S. on the import side should benefit, but on the whole, look for African currencies to slide as global investors take advantage of the rising dollar to shift their assets into more secure, dollar-denominated assets.
Second, 2014 should see a strengthening of the global economy as U.S. recovery continues and Europe leaves the Euro crisis further in its wake. While both will continue to struggle on the jobs front, growth from these two locomotives of world economy should increase demand for globally-sourced imports, including from Africa.
In Asia, China and India will continue to see relatively robust growth, though election jitters in India and worries over property-market values in China could dampen prospects somewhat. Still, with a third of the world’s people contained in both countries and more still strung out along the vast East and Southeast Asian littoral, demand from Asian for African commodities should continue to be strong in 2014.
In Africa, growth should continue as there has been no major change in either external or internal macro-economic fundamentals. Liberalization and trade are linking the continent’s economies both with each other and the rest of the world, sparking increased demand for goods and services within Africa’s many diverse countries – especially in its core growth complexes in South, West, and East Africa.
Still, dangers lurk, especially in regards to politics, international relations, and the domestic security environment. Much of Northern Nigeria remains mired in a slow-burning insurgency that looks to be nowhere near ending. Pirates and oil thieves, long a threat in the Niger delta, have recently expanded operations into the Gulf of Guinea. To the east, Somalia’s Islamists remain a potent source of insecurity for Kenya and Ethiopia even as war and civil war threaten much of the former Sudan. Finally, to the south the death of Nelson Mandela – long expected though it was – could further hasten the growing split between the ruling ANC’s moderate and more radical factions.
Jeffrey Cavanaugh holds a Ph.D in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
