Submitted by Tyler Durden: Last week we presented the aftermath of
the very much unannounced "Conference of Beijing" as a result of which
Africa has been slowly but surely converting to a continent controlled
almost exclusively by China. However, there was one thing missing: even
as China has been virtually the sole source of infrastructure funding in
Africa, the continent has long been a legacy dollar preserve, which
obviously means renminbi penetration and replacement would be
problematic to say the least. As it turns out, this too is rapidly
changing: as the WSJ reports, Africa is increasingly just saying "nein" to the USD. "African
countries are trying to shoo the U.S. dollar away, even if it means
threatening to throw people who use greenbacks in jail. Starting
next year, Angola will require oil and gas companies to pay tax revenue
and local contracts in kwanza, its currency, rather than dollars.
Mozambique wants companies to exchange half of their export earnings for
meticais, hoping to pull more of the wealth in vast coal and
natural-gas deposits into the domestic economy. And Ghana is seeking
similar ways to reinforce "the primacy of the domestic currency," after
the cedi plummeted more than 17% against the dollar in the first six
months of this year. The sternest steps come from Zambia, a copper-rich
country in southern Africa where the central bank has banned
dollar-denominated transactions. Offenders who are "quoting,
paying or demanding to be paid or receiving foreign currency" can face a
maximum 10 years in prison, the central bank said in a
two-page directive in May." Is it time to dump the EUR in hopes of a
short covering rally that continues to be elusive (just as Germany
wants) and buy Zambian Kwachas instead? We will wait for Tom Stolper to
advise Goldman clients to sell the Zambian currency first, but at this
rate the USDZMK may well be the most profitable currency pair of the next 3-6 months.
Why is Africa angry at the one allmighty Greenback?
The moves aim to strengthen thinly traded currencies and steer more capital into isolated financial markets. But the new rules are an abrupt change for foreign and local companies used to doing business in U.S. dollars.
In other words, Africa is finally pushing for its own capital
markets, rudimentary as they may be. One wonders just who may be pulling
the strings behind this very quiet but very crucial development. But
one thing that is certain is that the traditional operations for legacy
companies in Africa is about to change for good:
"There will be an adjustment period," said Mike Keenan, an African currencies analyst at Absa Capital, a South African subsidiary of Barclays PLC. "But the story with Africa and commodities has been one where the proceeds kind of circumvent the country. These authorities are trying to clamp down on that."
Zambia's central bank sees upside to a strong and liquid kwacha.
The move to promote the currency's use gives authorities leverage over monetary policy they lacked without control of the dominant market currency. The crackdown also could bring local banks new business in hedging instruments and foreign-exchange transactions.
"The kwacha is legal tender," said Caeser Siwale, chief executive in Zambia for Renaissance Capital, an investment bank. "There tends to be a different yardstick for us," with big companies expecting small economies like Zambia to live with a reliance on foreign currency that would never happen in Europe or China, he added.
In Zambia, the measures appear to be working. Heightened demand for kwacha pushed the currency to its highest level in more than a year in July, when it reached 4,640 to the dollar. It has slipped a bit since then.
So why go long the ZMK (and short the USD)? Here's why.
Fueling the demand were foreign-owned manufacturing and mining companies racing to acquire kwacha even as they asked the government to reconsider the policy. The companies complain it make operations more expensive and cumbersome.
"It might be hard to find kwacha when you need it," said Frederick Bantubonse, general manager of Zambia's Chamber of Mines. Mining companies also are worried about the cost of hedging their copper production against kwacha volatility. The group has appealed to government to limit the types of transactions affected by the move.
In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.
And while it is unlikely that the Kwacha has to fear becoming a carry
currency, the short USDZMK may be at best a short-term trade. At least
until China reveals its full plans.
In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.
"I don't think it's necessarily an adverse policy, but I don't see it providing a lot of additional long-term confidence in the kwacha, either," he said. "Regulation like this cannot substitute for policies that generate confidence in the market."
Those who are leery of going long just one African country can
diversify their holdings. Into Ghanaian Cedis, aka GHS (1 year chart of USDGHC here).
Policy makers elsewhere in Africa are watching Zambia. Ghana, another fast-growing African economy with rich mineral deposits and a nascent consumer class, also is seeking to boost its currency's value.
Since May, Ghana's banks have had to keep all of their deposits at the central bank in cedi, rather than a mix of cedi and U.S. dollars. The switch encourages banks to seek deposits in cedi rather than foreign currency, according to Millison Narh, a deputy governor of the Bank of Ghana.
The central bank's pro-cedi policies aim to make life easier for people like Sterre Mkatini, who recently lugged a backpack filled with $8,000 worth of local currency to a nearby bank to pay one year's rent upfront. Many landlords demand such payments to sidestep high inflation.
Of course, there are risks:
Kwaku Asente Addo, a cashier at Penta Forex Bureau, isn't sure Ghana's government can or will do much to purge the greenback. "They can't do that; they're bluffing," he said.
Maybe they are. But if, indeed, China is pushing the strings, maybe they aren't.
Finally, here is the one currency to really watch:
A central bank ceiling on over-the-counter dollar transactions at banks has sent Ghana's class of China-bound traders into street-side foreign-exchange bureaus that normally cater to fanny-pack-clad tourists. Chinese importers often show up just before flights back to China desperate to buy $100,000.
How long until China will welcome all African transactions to settle in CNY?
Either way, keep a close eye on Africa. Things are heating up there quickly.
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