With foreign exchange reserves equal to less than a 10th of the emerging market average, African countries from Ghana to Zambia are finding they are powerless to stop their currencies from tumbling amid a rout in commodities, China’s devaluation and the prospect of higher interest rates in the US.
Half the 10 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,” says 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 is presenting challenges across the continent, from spiralling inflation in Angola to dollar shortages that are crippling business in Nigeria. As reserves dwindle and exports fall, sub-Saharan Africa would push its current account deficit to the widest of any region, deterring foreign investment, the International Monetary Fund (IMF) warned in April.
“I don’t see a reason to go diving into these places at the moment,” says Phillip Blackwood, a London-based managing partner at EM Quest Capital, which advises Denmark’s Sydbank on $3.5 billion of investments in emerging market debt.
Mr Blackwood says his client has 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 countries rely on for foreign earnings.
African countries have an average $5.8 billion in foreign-exchange reserves, data compiled by Bloomberg show.
That is just seven percent of the $78 billion average across 31 global developing countries, even after stripping out China’s $3.7-trillion of foreign exchange 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 two-and-half-year high.
SA, 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 saw its foreign exchange holdings plunge 20 percent and its naira drop 18 percent since last September. It resorted to trading restrictions, only to cause a dollar shortage that is stopping companies paying overseas suppliers.
“The market punished them every step of the way until they eventually just closed the foreign exchange market,” says Gareth Brickman, an analyst at Johannesburg-based advisory firm 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. The currency has already tumbled 10 percent this year 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 about another 3 percent this year, even after a bail-out from the IMF.
The initial proceeds of that loan have been “essentially thrown into the wind” trying to stop the currency falling, says Bryan Carter, a money manager at Acadian Asset Management in Boston who oversees almost $500m.
Africa simply “lacks enough ammunition to reverse the trend” of sliding currencies, Mr Carter says.
The widening gap between exports and imports made it harder for the continent’s central banks to refill their coffers once they had been drained, the IMF said in an April report.
The report predicted that 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 countries would slump to the slowest since 2009.
Africa’s central banks are “chucking dollars down a black hole”, says Charlie Hampshire, the head of trading at frontier market specialist INTL FCStone. – Bloomberg