As a frontier market, the countries of Africa represent both 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 a developing, emergent continental market 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 all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
The big news in African business and economic circles this week was word out of Lagos that the rebasing of Nigeria’s GDP, last done in 1990, was finally complete. When all was said and done and the numbers added up, Nigeria’s bean counters calculated that the economy of Africa’s most populous country was in fact worth $510 billion, or 89% bigger than earlier estimates.
Nigeria, of course, was quite pleased and officials responsible for the recount, from the finance minister on down, were keen to argue Nigeria’s “new,” larger economy was proof that the country was on the way up. When foreign investors look at Africa, Nigerians are now arguing, they should look further afield than just South Africa – the traditional parking spot for foreign capital seeking out returns on the continent.
As AFKInsider reported earlier this week, South Africans were quick to respond that though Nigeria had a bigger economy, it was not necessarily a richer country. Per capital GDP in South Africa is still 2.8 times higher and on a whole host of important measures, from the UN’s Human Development Report to measures of economic governance, South Africa is clearly still the continent’s leading economy.
What’s more, South Africa is an economy that is much more diverse and sophisticated than its Nigerian competitor. South Africa, for instance, has a well-developed manufacturing sector that is the most advanced on the continent, and South African firms are prominent across Africa. Its services sector is likewise better developed.
Nigeria, on the other hand, is still overwhelmingly a one-trick pony when as it is first and foremost a petro state totally dependent on its oil exports for survival.
As point of comparison, consider the difference between, say, Israel and Saudi Arabia. Saudi Arabia, by dint of its larger population and huge oil resources, has an economy about three times as large as tiny Israel. One would not, however, go to Saudi Arabia to find cutting-edge technologies, advanced services such as insurance or banking, or, for that matter, nearly any other business activity found in a modern, highly-competitive and entrepreneurial economy.
That’s because Israel’s economy revolves around creating goods and services that other countries WANT to buy as opposed to, as in the case of Saudi Arabia, having a resources other countries HAVE to buy. While South Africa is no Israel, it is far more like that entrepreneurial business state while Nigeria, despite its recent success, is much more like Saudi Arabia.
Another way to take the measure of different economies is to examine the relative strength of their respective currencies. Here, if we compare the currencies of the continent’s two leading economies over the past ten years we quickly see that the rand has always been more highly valued than the naira, with the rand dipping to lows against the naira in 2008 and, so far, in 2014.
This, however, is likely a function of first the global financial crisis and, more recently, tapering activity by the U.S. Federal Reserve and a slowdown in Chinese economic activity hitting South Africa and its widely-traded currency much more harder than Nigeria. During ‘normal’ periods of global growth the rand tends to run in a tight trading range of just under 20 naira to the rand.
How do these currencies do against a global benchmark, such as the U.S. dollar? Here, the story gets more interesting as the best way to compare each is to examine their respective percent decrease or increase vis-à-vis the dollar. What we see here is a reversal of the usual story about the strength of the South African economy vis-à-vis Nigeria.
Annual percent loss / gain v US dollar
From the chart above we see that when it comes to retaining value against the dollar, the rand and not the naira has had a far worse time of it over the past ten years. In fact, altogether the naira has been a much more stable currency to invest in if you were a U.S. investor seeking to purchase African assets.
Except for the deep plunge against the dollar in 2008 the naira has remained relatively steady – a relative anchor compared to the wildly swinging rand and a testament to the sound stewardship of Lamido Sanusi, Nigeria’s central bank chief for much of this time period.
What’s worse for South Africa, however, is that once these gains and losses have been averaged over this ten year period it turns out that the rand has lost much more of its value against the dollar on an annual percentage basis than has the naira. Indeed, a $100 purchase of rand in April of 2004 would be worth only $53 today while a similar purchase of naira would be valued at $74 – a massive difference.
This is certainly bad news for South Africa. When a country that seems to fill the news pages everyday with stories of corruption, political instability, and armed conflict has a currency that retains more value than yours – you know you’ve got problems.
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.
