A street trader counts out change for a customer in Durban, September 8, 2015.
BY ED CROPLEY, REUTERS, JOHANNESBURG
A slump in commodity prices and flight by global investors from risky "frontier" markets has hammered currencies and state budgets across Africa, increasing dollar borrowing costs and raising the prospect of political instability. From Nigeria and Ghana in the west to Kenya in the east and South Africa and Zambia in the south, currencies have all fallen against the dollar, and in many cases crashed through historic lows plumbed in the 2008-09 financial crisis.
Things took a turn for the worse in mid-2014 when prices of oil and other commodities,
the export mainstay of many African economies, dived largely due to a
sharp slowdown in one of the biggest consuming countries, China.
accelerated a flow of funds out of frontier markets, a less developed
set of emerging markets, as investors anticipated a rise in U.S.
interest rates which has yet to happen.
Although the decline in prices and prospects has been less precipitous than during the global crisis, the fallout from China could be even worse for Africa since state finances have failed to recover from the last upheaval.
budgets were broadly in balance before the crisis but this year
governments are on track for an average fiscal deficit of 4.2 percent of
GDP, almost twice the shortfall in 2010, according to Barclays Africa.
such, they have no scope to boost spending to counteract slowing
growth. "The economic fundamentals of the region are much weaker than
back in 2008, which makes riding this current storm so much more
challenging," said Barclays Africa regional economist Ridle Markus.
growth era of the 2000s, fueled by high commodity prices, improved
governance and the spread of technology such as the mobile phones, is
fading fast. The IMF now predicts average sub-Saharan economic growth of
4.4 percent for 2015, down from the 5.8 percent forecast a year ago.
South Africa's rand ZAR=D3, Zambia's kwacha ZMW=, Uganda's shilling UGX=, Tanzania's shilling TZS= and Ghana's cedi GHS= have all set record lows in the last three months.
Nigeria, Africa's biggest economy and top oil producer, has limited the naira's NGN=D1
losses only by freezing its foreign exchange market, a move that cost
it inclusion this week in an influential JP Morgan bond index.
worryingly, government debt is climbing steeply, threatening another
driver of growth: the debt forgiveness a decade ago which freed up funds
for social and infrastructure investment, rather than interest
domestic capital markets have been slowly deepening, much of the growth
in borrowing has been in dollars as African governments tapped Eurobond
markets awash with cash printed by the U.S. and European central banks.
a Eurobond trailblazer in 2007, has issued two more dollar bonds since
then. It has plans for another $1.5 billion issue this year, putting its
public debt at around two thirds of annual gross domestic product -
well above levels before Nelson Mandela and anti-poverty activists Bono
and Bob Geldof persuaded the rich world to forgive Africa's crushing
recently Africa's top copper producer, has also been piling into the
Eurobond market, most recently in July when it had to pay a hefty 9.375
percent for a $1.25 billion bond earmarked to finance a yawning deficit.
the kwacha down more than 20 percent since the bond was issued, the
effective local cost of servicing that debt is now over 30 percent,
squeezing out other spending in a budget already under pressure from the
collapse in copper prices.
are due in both Zambia and Ghana next year, raising suspicions that
some African countries are slipping back into the bad old habits of
borrowing to fund vanity projects and political ambition rather than
is a concern with a lot of the African dollar debt market," said Anders
Faergemann, senior sovereign portfolio manager at PineBridge
Investments. "We have this return of original sin with potential for
sharp devaluation in local currencies and the governments still having to pay back in dollars."
African populations growing faster than their economies can create
jobs, analysts expect the squeeze on state spending to spill over into
political unrest at some point.
York-based DaMina Advisors has even developed an African "Commodity
Price Collapse Instability Index" - nicknamed Hades - based on its
estimate that 87 percent of African government revenues are directly or
indirectly linked to commodities.
DaMina lists three states - South Sudan, Libya
and Central African Republic - as being at "extremely" or "very" high
risk of collapse, and a further five - Equatorial Guinea, Chad,
Democratic Republic of Congo, Lesotho and Guinea - as high risk.