What Will Happen If The Currency Collapses On The African Continent To The Foreign Exchange Market?

Two months ago, when we turned our attention to the recent basis spreads paction, ZeroHedge pointed out that the worrisome situation in March is getting worse and worse: that is, "the global dollar shortage has intensified to the worst level since 2012."

This shortage of dollars is expected to be displayed in a virtual and gradual manner.

And as the market participants who found themselves in a shortage of dollars have to liquidate assets denominated in US dollars, the shortage of the US dollar will also be displayed in a form of asset price pressure.

This is actually happening throughout the year, including many emerging markets such as China and sovereign wealth funds, which are clearing the dollar reserve assets.

However, in a series of unexpected events, one area was hit by the disappearance of the virtual and physical dollar, and the severity and speed of its attack far exceeded our expectations. This area is Africa.

Although we have predicted the shortage of dollars on many occasions, the situation is quite different when we see that the dollar shortage really works.

What caused the shortage of dollars? With the decline in commodity prices, the US dollar inflow of resources exports and oil exports to the cotton (but mostly oil) brought about a decline, which resulted in a shortage of US dollars.

The collapse of commodities also brought pressure on the local currency. In order to support its own currency, the central bank will use its declining dollar supply.

The shortage of US dollar has brought frustration to investors, which will increase the cost and delay the project.

For those countries that are negatively affected by falling commodity prices, the shortage of US dollars may also hinder investment in the future.

"It's a tough journey for many Nigeria companies," said Ozigbo, chief executive of Transcorp hotel.

However, no country has ever felt so clear about the shortage of dollars like Nigeria, because more than 90% of Nigeria's foreign exchange reserves come from oil exports.

At the beginning of this year, the fall in oil prices led to a significant devaluation of Nigeria's currency.

In March, the Central Bank of Nigeria fixed its exchange rate at 1 to 199.

By December, Nigeria's foreign exchange reserves fell to $29 billion 500 million, down 18% compared with December last year.

As reported earlier this summer, the Central Bank of Nigeria introduced a list of 41 commodities, from meat to concrete, to prohibit the purchase of 41 commodities for household purposes.

No matter what goods buyers want to buy with us dollars, their requirements must be verified by the central bank's list.

This provision slows down any attempt to buy dollars.

US dollar versus Nigeria

Although capital controls may slow down the collapse of Nigeria's currency, the Central Bank of Nigeria has only shifted the impact of the US dollar shortage from the central bank's reserve balance sheet to the domestic economy.

Nigeria's domestic economy has encountered obstacles because there are almost no US dollars for daily operations.

It is reported that some of Africa's largest economies, including Nigeria, Angola, Ethiopia and Mozambique, are limiting their convertibility to the US dollar in order to protect their shrinking foreign exchange reserves.

The impact of the dollar shortage is big, because the shortage of dollars in daily operations means that companies from Transcorp hotels (Nigeria Hotel) to international business giants such as GE and Coca-Cola are trying hard to get the dollars needed for imports, or return the profits to the United States.

Other African energy exporters also followed Nigeria's decision to restrict us dollar exchange: Angola listed industries that could give priority to dollar reserves, including the oil and food industry.

In Mozambique, the government has asked the company to convert half of US dollar revenue into its own currency to support foreign exchange reserves.

Jay Ireland, chief executive of General Electric Africa, said: "the situation is different from before. You used to go to the bank to exchange dollars.

Now, the exchange of US dollars has become a process of making applications in banks, and it takes longer. "

Jay Ireland said so when it comes to Nigeria and Angola.

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Ireland said Ge is still committed to long-term projects in Africa, but the shortage of US dollars means that local customers need to spend more time buying the products of the US dollar denominated in ge.

This is also known as the Venezuela approach. The government has adopted increasingly stringent foreign exchange capital control measures. However, it is found that none of these measures is useful.

At the same time, the dollar shortage in Africa has been so intense that some of the safest and most respected businesses in Africa have begun to feel it.

The impact of shortages.

For example, Coca-Cola, Coca-Cola has entered Africa for nearly a century.

The world-famous company can get us dollars from its businesses all over Africa.

However, Coca-Cola's beverage giant also expressed concern about the situation, and as their suppliers tried their best to provide funds for their imports (US dollars), these suppliers began to feel the shortage of the US dollar.

Adeola Adetunji, managing director of Coca-Cola Nigeria, said: "if monetary policy has not changed, it will become a bigger challenge. We will also pay close attention to this.

The business here is not the same as before. "

For smaller companies whose reputation is not so large, the shortage of US dollars means that the company's business is actually frozen.

Ozigbo's Transcorp hotel needs us dollars to pay the Contractor's money. It needs us dollars to import building materials to upgrade a hotel and to build another hotel.

Ozigbo said that last year, it would take 48 hours to a week to get a "considerable amount" of US dollars.

But now, if Transcorp can be exchanged for us dollars in three weeks, this is lucky.

Since the delay has occurred, the cost of upgrading the Hilton Hotel in Abuja has risen from about 16 billion (79 million US dollars) to 26 billion Na La since last year.

Ozigbo now strongly doubts whether his project is still economically feasible.

To be sure, central banks in African countries have a simple way out of the current dilemma: stop defending their currencies and let the market decide the fair value of their currencies.

The problem with this approach is that it will quickly lead to the depreciation of its currency.

Without failure, this approach will lead to hyperinflation and social upheaval.

In many African countries, the inflation rate of the two figure has been very high, so the latter (super high inflation) is certainly not their choice for these countries.

Second only to Africa

The second largest oil producing country, Angola, has been using the US dollar to support its own currency, Kwanza.

The Central Bank of Angola said it would continue to use US dollars to defend its currency.

Gualberto Lima Campos, deputy governor of Angola's central bank, said if we

This will have a huge impact on inflation, because most of our food is imported.

Angola's annual inflation rate has reached 14%.

Of course, defending a country's currency is a recipe for failure, just like the recent situation in Argentina and the recognition by the Swiss central bank.

"The Central Bank of Africa has set limits on the exchange of US dollars," said Charles Robertson, chief economist of Renaissance Capital.

Although consumption of foreign exchange reserves has supported its own currency, it has also brought about a longer-term problem.

Few investors are willing to invest their money in such a country. This country adopts the official exchange rate, rather than the exchange rate set by the market, and the exchange rate in the long run is also unsustainable.

So far, Africa has successfully avoided the "super inflation devil", which is the super inflation caused by the shortage of the US dollar.

But the countdown is going on. As long as the price of oil does not rebound in the past day, the possibility of a comprehensive currency collapse across the continent and the consequent hyperinflation and social upheaval will inevitably increase.

To make matters worse, Africa is just the beginning: here, the global commodity crash and the negative impact of the Fed's monetary policy will be hard to ignore.