Two months ago, when looking at the latest basis spreads, we showed that a disturbing development, first flagged here in March, was getting worse: namely the "Global Dollar Shortage Intensifies To Worst Level Since 2012."
We had expected this shortage to manifest itself synthetically - and gradually - primarily in the form of pressure on asset prices as market participants who found themselves in a dollar-deficit position were forced to liquidate USD-denominated assets. This indeed happened over the year as many emerging markets, and sovereign wealth funds, not to mention China, proceeded to offload USD-denominated reserves.
However, in an unexpected turn of events, the disappearance of not just synthetic but very physical dollars has hit one region much harder and much faster than we expected. Africa.
According to the WSJ, some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves.
The implications are dramatic as the lack of dollars for everyday business operations means businesses from Transcorp Hotels to international giants like General Electric Co. and Coca-Cola Co., are all struggling to get the dollars they need for imports or to send profits back home.
While the shortage was predicted here on many occasions, however it is quite different to see it in action. The shortage comes as the inflow of dollars from resource exports, from oil to cotton (but mostly oil) has plummeted with the prices of these commodities. The commodity rout also is putting pressure on local currencies, which some central banks are trying to support with their dwindling supply of dollars.
This dollar squeeze is frustrating investors, increasing costs and delaying projects. It may hamper future investment in countries reeling from the fall in commodity prices. “It’s been a rough ride for a lot of companies in Nigeria, if not all the companies,” said Mr. Ozigbo, chief executive of Transcorp Hotels.
Nowhere has the dollar shortage been more acute, however, than Nigeria which gets more than 90% of its foreign-currency reserves from oil exports. Oil’s decline sent the value of the naira, Nigeria’s currency, sharply lower at the start of the year. In March, the Central Bank of Nigeria fixed its exchange rate at around 199 naira to the dollar. By this month, its currency reserves were down 18% to $29.5 billion from the same month last year; the are declining fast.
As also reported previously, this past summer Nigeria's central bank introduced a list of 41 items, from meat to concrete, that it won’t release dollars for. But no matter what a buyer wants their dollars for, their request has to be vetted against this list, slowing down any attempt to buy the currency.
A trader exchanges dollars for Nigerian naira in Lagos, Nigeria.
Photo: Joe Penney/Reuters
While the capital controls may have slowed the collapse of the Nigerian currency, all the central bank has managed to do is shift the impact of dollar shortage away from its own reserve balance sheet and into the domestic economy, which has hit a brick wall now that there are hardly any dollars with which to run day-to-day affairs.
Other African former energy exporting titans have followed in Nigeria's footsteps: Angola now lists industries, including the oil and food sectors, that have priority for the country’s dollar reserves, In Mozambique, the government requires companies to convert half of any dollar revenues into the local currency, as it looks to shore up its reserves.
“It’s obviously not like it used to be, where you would go to the bank and get your dollars,” said Jay Ireland, the Africa chief executive officer for GE. “Now it’s a process that they require and it takes longer,” he said, talking about Nigeria and Angola.
Mr. Ireland said GE remains committed to long-term projects in Africa, but the dollar shortage means that it now takes local clients longer to buy GE products priced in dollars.
This is also known as the "Venezuela approach", where incremental FX capital control regimes were attempted only to discover that none of them actually work.
Meanwhile in Africa, the dollar shortage is so acute, even some of the world's safest and most respected companies with African operations are starting to fell the impact. Case in point Coca-Cola, which has been in Africa for almost a century and can obtain dollars from across its businesses. However, "the beverage giant is concerned that its suppliers will start to feel the pinch as they struggle to fund imports that they need. “If there are no changes in monetary policy it might become a bigger challenge and that is a space we are watching very closely,” said Adeola Adetunji, Coca-Cola’s managing director in Nigeria. “Business is not as usual.”
As for smaller, less reputable companies, the dollar shortage means business is effectively frozen:
Mr. Ozigbo’s Transcorp needs dollars to pay contractors and to import building materials to upgrade one hotel and build another, among other construction projects.
Last year, getting a “sizable amount” of dollars would have taken 48 hours to a week, Mr. Ozigbo said. Now, Transcorp is lucky if it can obtain the money within three weeks, he said.
Amid delays, the cost of upgrading the Hilton in Abuja has ballooned from an estimated 16 billion naira ($79 million) to about 26 billion naira since last year. Mr. Ozigbo now has serious doubts about whether his project will remain economically feasible.
To be sure, African central banks have a simple way out: stop defending their currencies, and let the market determine the fair value. The problem with this approach is that it promptly leads to an immedate devaluation of the currency, and without fail, hyperinflation and social unrest. The latter is not an option for many African countries where inflation is already running red-hot in the double digits.
Angola, which is Africa’s second-biggest oil producer after Nigeria, has also been using its dollars to prop up its currency, the kwanza. Its central bank says it plans to stay on that course.
“If we devalue, it will have a huge impact on inflation because most of our food is imported,” said Gualberto Lima Campos, deputy governor for the Central Bank of Angola. The country has a 14% annual rate of inflation.
Of course, defending one's currency is a losing game as not only Argentina most recently, but the Swiss National Bank most infamously, will admit.
"As African central banks place restrictions on access to their dollars, while burning through these reserves to support their currencies, they are also storing up longer-term troubles. “Few investors will want to put money into a country at an official exchange rate that is not set by the market and which is not seen as sustainable in the long run,“ said Charles Robertson, global chief economist at investment bank Renaissance Capital."
For now Africa has avoided the "hyperinflation monster", the result of an all too predictable scarcity of dollars, however the countdown is on and with every passing day that oil prices do not rebound, the inevitability of a full-on continental currency collapse, with hyperinflation and social unrest to follow, becomes increasingly more likely.
Worse, Africa is just the start: while the manifestations will differ, the mechanics of the dollar shortage, which we recently quantified in the trillions of dollars, are universal, and should the Fed's rate divergence path with the rest of the world continue pushing the USD ever higher, soon this USD-shortage will escape the confines of the world's poorest continent and make landfall somewhere where it will be far more difficult to ignore the adverse consequences of the global commodity collapse and the Fed's monetary policy.