China currency devaluation poses risk to African currencies – Ecobank

The risk to Middle African currencies has increased following China’s recent unexpected Renminbi (China currency) devaluation, according to new research by Ecobank.

The reference rate of China’s currency, the Renminbi – that is the rate at which the central bank sets the currency on a daily basis and from which the currency is allowed to move by +/-2 per cent against the US dollar – was lowered by 1.9 per cent to RMB 6.2298 to $1, marking its biggest downward shift in 2015 so far.

This move comes amid increasing efforts to stimulate China’s economic growth through export-led activity.

Ecobank notes: “Undoubtedly, as Africa remains a key source of raw materials for China, the China-induced slump in global commodity prices will have major implications for many African economies, especially for the region’s top 10 commodity exporters to China.

“Already, commodity prices have eased, putting downward pressure on the fiscal and external positions of some economies in the region, mainly, Zambia, Ghana, Nigeria and Angola.”

“In particular, the prices of key base metals such as aluminium and copper – usually used in China’s construction and manufacturing sectors, which are already experiencing deep levels of overcapacity – have slowed to six-year lows, falling 19 per cent and 27 per cent respectively; oil prices have also dropped to a six-year low ($42/b), reaching close to the level last seen during the 2008-09 financial crisis,” the research added.

Ecobank said that amid weaker commodity prices that will have an adverse effect on African export earnings, economic activity in key African countries such as Nigeria, Angola and Zambia would likely slow down in 2015, weakening business prospects.

It added that the fall in commodity earnings, along with growing signs of America’s strengthening recovery – which has triggered a rise in capital outflows from key Middle African economies since May 2013, as demand for US dollar-denominated assets increased – will heighten exchange rate volatility.

Key countries such as Kenya and Ghana are already witnessing this trend although domestic factors are also at play, the research shows.

According to Ecobank, weaker growth in China could also reduce prospects for tourism earnings in Africa, especially as China’s tourism to the continent has grown by around 45 per cent a year in recent years.

Ecobank pointed out other risks to African currencies such as problems with the eurozone and the looming rise in US interest rates following the end of the Federal Reserve’s Quantitative Easing programme in October 2014.

“These factors pose downside risks to the region’s capital and currency markets,” the bank warned.

“China’s exchange rate policy shock is likely to increase pressure on African economies to diversify their export markets, in particular, to promote regional trade.”

“Undoubtedly, the devaluation of the Renminbi should increase China’s export competitiveness and help to boost manufacturing and investment activity.

“However, with China accounting for around one-fifth of the global economy, its move to devalue the Renminbi sparked concern that the economy might be in worse shape than previously envisaged, resulting in a sell-off in Chinese equities.

“In turn, this spooked investors, causing them to ditch risky assets such as commodities,” Ecobank added

Source: GNA