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.

Africa retrenches?

So far this year two African countries deemed to be on the growth bandwagon have had to turn to the IMF for assistance in meeting a pressing current account problem. Zambia turned to the international body in June after low prices for copper pressured the kwacha lower, while in August, Ghana, too, made overtures to the IMF on seeking a bailout.

Now, three more countries are continuing Africa’s currency woes.

First, Ethiopia this past week devalued the birr by 17 percent against the US dollar after the World Bank recommended it do so in order to shore up struggling exports.  This is the third time in four years that the country has devalued the birr and follows on the 10 percent depreciation in 2010 and a follow-on devaluation of 20 percent in 2011.

Smaller, unremarked devaluations have taken place since but each time the currency appreciated to unacceptably high levels due to breakneck economic growth and growing remittances from abroad.  Now, however, lagging demand for Ethiopian exports and high inflation have pushed up prices and made those exports less competitive on world markets.

Second in line for currency problems is Kenya, East Africa’s largest economy and along with Nigeria and South Africa the nation most touted by outsiders as an up-and-coming country to watch.

As reported by the Financial Times, Kenya’s central bank has intervened in order to prop up the shilling after it hit a three-year low against the dollar by falling to 88.90 shillings per dollar — 3.0 percent under its value in January.

Altogether Kenya may have sold up to $50 million in hard currency in recent days to stem the loss, but with little sense that this expenditure will stop the decline.  As in the other cases low prices in its primary commodity exports as well as a dip in tourism are driving the shilling’s downturn.

Finally, in Uganda the leadership there has decided to put off joining the club of African countries that have recently issued dollar-denominated sovereign debt.

Indeed, reports the venerable Financial Times, Uganda not only is waving off issuing such debt but it is actively advising other African states to avoid issuing such debt altogether given the currency risk that seems to be rearing its head in many parts of Africa today.

After all, every time the currency depreciates dollar debt gets that much more burdensome to pay off and acts like an anchor perpetually weighing down growth.

Beware of bankers bearing bonds

Uganda’s advice is sound given Africa’s experience in the 1980s and the 1990s, when low growth, low commodity prices and spiraling debt levels crushed many African states and held their economies in a vice-like grip.

Many are still working off that debt while a lucky few have been recipients of Western debt relief—which Uganda is warning other African governments is not likely to happen again anytime soon.  Given the risks of loading up on debt, then why are countries doing it?

One reason, of course, is the need for finance at relatively cheap rates.  While dollar debt is expensive, low-cut interest rates in the West have pushed investors into seeking greater returns abroad and African debt, especially dollar-denominated debt, is therefore of great interest and readily attracts buyers.

While the Fed’s policy of ending its massive purchase of housing-related US bonds has abated this appetite somewhat, continuing low rates and the general ‘Africa Rising’ narrative nonetheless creates demand for debt that is hard to pass up.

Another is the prestige associated with dollar denominated debt, which beyond being a source of finance is stamp of approval by the international community.  Not that such a stamp of approval actually denotes fiscal probity and stability, mind you, but much as how a neighbor’s purchase of a fancy new car leads others to want to do the same there is something of a ‘keeping up with the Jones’ effect at work in these debt issues.

However, such positional jockeying rarely ends up doing much good and African countries would therefore do well to avoid such a form of conspicuous consumption.

The China Card  

Still, this has not stopped some from taking the plunge anyway. Sovereign bond issuance from countries such as Gabon and Rwanda helped African countries to raise a record $11 billion in 2013, up from $6 billion a year earlier, and this year continued growth—despite the jittery currency markets—look set to push that number up even further.

How, then, can African countries get the best deal they can from the western loan sharks operating on Wall Street? Here, the answer is not to look west, but east.

The China in Africa story has of course been widely remarked upon, but the true degree to which Beijing’s willingness to compete with the West has not really been tested by African states.

The fact of the matter is that China is sitting on huge hard currency reserves—around $4 trillion at last count. Why not, then, go to the Chinese to seek out loans from the vast store of dollars they have accumulated as a result of their mercantile march to industrialization?

The benefits of such loans are legion.

First, if the loans are to be used for infrastructure development then Beijing is likely to want to invest anyway given doing so would merely continue their ongoing strategy of investing in Africa.

Second, loans with China necessarily often come associated with deals with other parts of the country’s vast, state-owned and state-associated industrial complex—some of which is interested in establishing export-orientated manufacturing in Africa.

Third, playing the China card when it comes to dollar-denominated debt will necessarily rattle the West even further.

Already the IMF and World Bank have been spooked enough by Chinese competition to effectively waive all sorts of requirements and restrictions on aid programs and projects.  Going even further into the arms of Beijing will no doubt spur further concessions on the part of the West that could rebound profitably for African states.

Finally and perhaps most importantly, seeking out China’s dollars gives Beijing a way to draw down its huge dollar stockpile in a profitable and stability-enhancing way.

For too long, China has been stuck in a dysfunctional relationship with America where it effectively pays the US to buy its products through China’s purchase of US Treasuries.  This keeps the dollar artificially high and the Yuan artificially low while simultaneously allowing US consumers to live far better than they should given America’s yawning fiscal and trade deficits.

However, ending this mutual dependency has been difficult in that if China stops those purchases, it loses its best customer.  Thus, China has been forced to spend and spend on worthless dollars merely to keep the system going.

Investing those dollars in Africa, however, is likely to garner Beijing a far better return on its money than just sitting on them by winning political friends and producing economic growth in Africa.  Dollar-denominated debt sourced from China, therefore, benefits not just Africans but the Chinese, too.

So, if African countries must issue debt in dollars, they would be well advised to look at just where those dollars are coming from.  All dollars may be equal, but the sources that provide them definitely are not.

Western bankers and investors won’t hesitate to drop debt and have proven, time and again, to be a poor judge of risk when they know Washington, London, or Brussels will bail them out—just look at the global financial crisis that was manufactured, literally, in Western housing markets.

Given that circumstances may force Africans to eventually deal with one government or another anyway, why not turn to a lender who has real strategic interests at stake in Africa’s development and is not just a fair weather, free-market friend?

 

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.