Just two weeks ago we warned of the looming "hyperinflation monster" in Africa with the continent appearing to be running out of dollars as some of Africa’s largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are restricting access to the greenback to protect dwindling reserves. Specifically we warned of Angola's already-soaring inflation hampering its ability to 'adjust' its currency towards its black market 'reality'. But that did not stop the central bank devaluing Kwanza by 15% over the weekend - the most since 2001 - to record lows as crude prices crush their economy.
Here's what we said two weeks ago: 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.
And now, it seems Angola is willing to face the hyperinflation and social unrest as it devalues the Kwanza to record lows. As Bloomberg notes, the central bank, known as the BNA, started managing foreign-exchange sales by commercial lenders to businesses in November as a response to the limited supplies of U.S. currency.
Angola’s currency fell the most since September 2001 after the central bank allowed it to devalue as the drop in oil prices cut the main source of government revenue and export earnings.
The kwanza slid 15 percent to an all-time low, trading at 158.7370 against the dollar as of 12:35 p.m. in the capital, Luanda. The drop followed a 24 percent retreat in 2015, its eighth year of declines and the most since 2003.
The kwanza was sold at an average rate of 156.386 last week compared with 135.988 a week earlier, the Luanda-based National Bank of Angola said on its website on Dec. 31. That’s the biggest single devaluation since policy makers started cutting the currency’s exchange rate in several moves during the course of 2015, which Eurasia Group estimates amounted to 25 percent before the latest reduction.
But, as Bloomberg reports, the policies leave companies at the mercy of the central bank’s view on which sectors need dollars the most, driving many to the black market, Jose Severino, chairman of the Angola Industrial Association, or AIA, which has 2,100 members, said in December.
Central bank Governor Jose Pedro de Morais is trying to reduce the gap between the kwanza’s official rate and that on the black market, where the currency was last year fetching between 270 and 280 per dollar.
[That implies another 50% plus devaluation to meet the 'market' price of currency]
A drop of more than 65 percent in the price of crude since June 2014 has curtailed the flow of dollars into the economy of sub-Saharan Africa’s second-largest oil producer.
While the slow-motion train wreck continues - as it appears a slow and painful devaluation is some form of currency defense (and capital controls internally), of course, as we concluded previously, 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.