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FOREX Africa: A Strong US Dollar Potents Mixed Fortunes For Africa

FOREX Africa: A Strong US Dollar Potents Mixed Fortunes For Africa

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, AFK Insider 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.

A rough year for African currencies

As those living in Africa might have noticed, 2014 was not a particularly auspicious year when it came to the strength of local currencies.

Vis-à-vis the US dollar Africa’s domestic currencies lost on average around 10.4 percent, reflecting the overall strength of the greenback this year after the US Fed announced an end to quantitative easing on top of improving US employment numbers.

Compared to the Euro the dollar is up around 18 percent compared to January of 2014 and, unsurprisingly, African currencies fell accordingly.

Among the countries that fared the worst in terms of maintaining strength against the dollar was, like last year, Ghana, which has lost nearly half of its value since January of 2014.

Although depreciation is familiar territory for Ghanaians, whom have not seen the cedi actually retain its value ever since it was taken off a fixed exchange rate scheme in 1983, the recent speed up in the loss of value has been difficult. Except, of course, for those deciding to ditch the cedi altogether and participate in the growing dollarization of the Ghanaian economy.

As for 2015 the likelihood is that the IMF will come through with some package or another that will be the usual slapdash arrangement of painful reforms that are only halfway implemented and which anyway won’t solve the underlying problem:  the fact that Ghana imports a lot and is exceedingly reliant on commodity exports, just like the rest of Africa, only worse.

It’s important to note here that other major commodity exporters, especially of oil which took a huge hit in the last three months of 2014, also did poorly.

South Africa’s currency fell by around 12.5 percent over the course of the year while Nigeria lost 14.6 percent, not far from what Ebola ravaged Liberia did for the year:  a 16 percent loss against the greenback.

Stemming the tide

However, some countries did manage to stem the tide in terms of currency loss, and some in the most unexpected places.

Liberia’s equally Ebola-hit neighbor Sierra Leone, for instance, actually gained 2.3 percent against the US dollar between October and late-January, a rather unexpected and somewhat puzzling affair that might be explained by declining oil prices and perhaps overly optimistic assessments of how well the country has been battling the killer disease.

Sierra Leone’s currency has since given up its recent gain in the first few weeks of this year, suggesting any late-2014 optimism that might have led to it has since been erased.

Another surprise was the Djiboutian franc, which increased its performance against the dollar by about 1.68 percent compared to January 2014.

Like the Sierra Leone leone, the gain amidst the general African decline is curious until one takes into account the growing US military presence in the country, which though small will nonetheless have a large impact on this equally small country.

Another impact might be the the slowly improving situation in Somalia.

The New York Times reported recently that the return of peace, or at least something resembling peace, has allowed lucrative banana farming to start up again.  Djibouti is a natural port for north Somali exports, so an increase in trade, in addition to US military spending, may have been at work in boosting the franc.

Then there are those countries that, even if the lost value over the course of 2014, nonetheless didn’t do too badly against the dollar.

The Democratic Republic of the Congo managed to keep its loss under 1.0 percent, while Guinea and Burundi lost just a little than 1.0 percent of their currencies value vis-à-vis the dollar.

Rwanda lost 2.4 percent while Kenya kept is depreciation against the US dollar at around 5.75 percent.  Ethiopia, which recently issued sovereign hard-currency debt, saw its currency fall by just 6.6 percent.

If there is one theme here tying these countries together it is their relative lack of reliance on oil, although oil rich-Angola, did almost as well as Ethiopia by only losing 6.7 percent of its value against the dollar.

Trends for 2015

Looking ahead to 2015, what can we expect on the currency front? For many, it’s the same risks and opportunities that were seen in 2014 and all, unfortunately for Africa’s economies, come from outside the continent.

China’s continued economic slowing is dampening demand for commodities, though the fact that India is now growing more quickly than its Chinese peer may mean Delhi could eventually replace Beijing in soaking up that demand.

This is not really likely to manifest itself very quickly, however, so growing India should not be seen as a savior to replace a possibly now-sated China.

This leaves Europe and the United States as possible sources of commodity demand, which probably again won’t really manifest itself much this year.

America’s labor-market recovery is still building steam, which is normally good for Africa except this time the collapse in oil prices that will help American employment will necessarily hurt African producers.

Europe, as usual, is relatively stagnant, meaning that the West, even with better performance this year isn’t likely to soak up a lot of African products any time soon.

However, not all is necessarily so bad.  Africa’s domestic consumption continues to grow and its nascent manufacturing sector will continue to grow as infrastructure and the policy environment continues to improve.

Insofar that cheaper currencies will make Africa a more competitive place to set up a factory, especially as wages get higher in China, that is a good thing.  Tourism may also be a good growth source this year as lower oil prices will make travel costs to Africa less expensive while the stronger dollar will make the continent a less expensive place to visit.

 

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 and Mint Press News.