The drastic drop in commodity prices over the past few months caused panic in the last week of August when stock markets in parts of the world reacted to the crash in commodities, as the price of oil appeared to continue to dive at its lowest in six years. Markets have since rebounded but many continue to keep a watchful eye on China’s economy and how this could potentially trigger a recession that could eclipse the 2008 recession. There is also a call being made for the re-valuation of reserves in commodities which China has been stock piling for years. As China experiences a slow down, what does this mean for extractive economies in Africa?
It is clear that the nature of the economy today is such that Africa can no longer be shielded from the fall out of China’s slow down. Back in 2008, African countries remained largely unscathed because they were not as linked to the world markets as they are today. Back then, the effects were not as drastic as they are now following China’s binge on commodities which were being stockpiled in anticipation for further infrastructure investment in China. According to Bloomberg, Hedge funds in China have since pushed the price of commodities like copper which has led to copper producing countries like Zambia suffering the consequences, with a fall in countries currency.
Other African countries fighting a potential plunge in currency are Nigeria and Angola. Africa’s biggest oil producer, Nigeria in February imposed trading curbs that kept the value of the naira from falling considerably even as crude prices fell significantly. The fall in currencies is making it more expensive to repay external bonds for countries that tapped into the Eurobond market. There is also the feeling that investor confidence is waning. According to Ndoronomics, orders worth US$11 billion flooded in for Zambia’s debut Eurobond. That Eurobond had a yield of 5.625% at issue. In 2015 the price tag was 9.375% with orders of just US$2.5 billion, just double the US$1.25 billion issued. The whole idea behind the Eurobond was improve the infrastructure in the country but this has not been the case. The country continues to experience infrastructure challenges such as power outages which has slowed down production particularly in the manufacturing industry.
The Central Bank of Nigeria have on the other hand vowed to prove to speculators that the currency will not fall according to Bloomberg. Nigeria’s external debt, according to Standard Bank was equivalent to less than 2 per cent of gross domestic product last year, while overall borrowing, in foreign and local currency, was 10 per cent. In Angola, which is currently Africa’s second largest producer of oil and depends on sales of crude for foreign earnings, the reserves in foreign exchange are down 21 per cent in the last 12 months. With Standard Chartered predicting a six months stagnation as market conditions in China deteriorate, these are indeed worrying trends.
Recent analysis carried out by CNBC indicated that the plunge in commodities is similar to that seen in 1974 and this has no doubt created pessimism that the six months recovery forecast by Standard Chartered is far from the mark. History appears to be repeating itself. In 1974 Zambia suffered a major shock when the price of copper fell by 40 per cent which had a ripple effect on the other sectors. With weak copper prices, import costs were raised as the price of imported fuel was raised, with a weak agricultural sector and manufacturing base that was almost non-existent, GDP per capita collapsed.
Fast forward to 2015, lessons have not been learnt. Despite high levels of mining activities Zambia as well as other resource rich countries potentially face a crisis which poses a serious threat to the economic gains made over the past few years. Ghana which relies on foreign export income from gold and oil, has seen it’s foreign debt ratio double to 38 per cent since 2006.
African leaders should be very concerned about the current state of affairs because their economies may not be able to ride out the storm in the current crisis as the economies of their countries are being affected by external factors impacting the lives of their people. While African countries may not be able to directly tackle these external factors that affect their economies, leaders need to seriously take a look at how the resources they have at their disposal are being managed. There is also the need to put in place policies that pre-empt any volatility in commodity prices. Currency controls being proposed by African governments such as Zambia to stem the fall of the currency in that country, have been criticised by some analysts as a step that could “take the country backwards”.
China’s insatiable appetite for commodities over the past few years created a dependency by countries with extractive economies, most of which failed to put in place policies that would benefit their countries and essentially created an imbalance, between the countries exporting commodities and China. The Sino-African relationship has been more of a benefit to China and than Africa which continues to have crumbling infrastructure.
The resources that are abundant on the continent have not been used to resolve the power deficit which is affecting the manufacturing industry, meanwhile Chinese government has stockpiled enough copper to improve the power infrastructure of their country. A study carried out by the IFC recently revealed that “every country that borrowed from the World Bank did worse the more it depended on extractive industries”.
Attempts at diversifying the economies of most countries in Africa have not yielded any positive results. Much of Africa’s agricultural potential remains underutilized. There is a clear need for diversification particularly following current trends that leave African countries vulnerable to external factors. Many world renowned economists continue to urge African countries that are overly dependent on natural resources to diversify. Unless this happens, we will continue to see economies that boom and later on implode, with very little growth that is short lived.