Striking the balance between development and financial stability
By Nicolas Clavel, Scipion Capital Chief Investment Officer, and Ben Storrs, Scipion Capital Investment Analyst
Sub-Sahara Africa is becoming wealthier with GDP growing at an average of 5.1 percent per annum since 2000.
From a relatively low base, a commodities boom has increased the US Dollar value of exports more than threefold during the past decade.
Investments in infrastructure have helped sustain commodity exports, which have underpinned economic growth. FDI and consumption have also contributed significantly to rising GDP.
One consequence of increasing wealth is more imports into Africa. Imports from Europe have steadily increased, even after the value and volume of exports reduced by almost a third in 2009.
Imports from China increased almost 20 percent in 2013 following an increase of 16.7 percent in 2012 as Africa imports secondary and tertiary goods which it cannot yet produce itself.
The type of products Africa is beginning to import is illustrative of the growth of middle class in Africa but it also puts more pressure on foreign exchange reserves.
Imports into Africa are paid in foreign currency so banks require access to foreign exchange in order to honour their international payment commitments.
A central bank without liquid reserves or other access to foreign exchange will struggle to fund imports and retain investor confidence in its currency.
In recent years, keen to avoid the investment crises which afflicted Asian economies in the late 1990’s, African countries, including Ghana, Kenya, Mozambique, South Africa, Tanzania and Zambia, have gradually increased the nominal amount of foreign exchange reserves or maintained high levels.
Despite this, the increasing value of imports has strained foreign exchange reserves and since 2009 import cover has generally fallen, including in all of the countries mentioned above.
Import cover is the period of time a country can fund its imports from its current reserves if it stopped earning foreign exchange.
On average import cover fell from approximately five to three-and-a-half months between 2009 and 2012. In perspective this is more than adequate cover for the time being. Zambia prospered throughout the 2000’s despite often having reserves equivalent to only two months and many larger economies, for example the UK, have import cover of weeks rather than months.
Vulnerable to collapse
The consequence of a country becoming more integrated into the international trade system is being more vulnerable to a collapse in exports.
For instance Tunisia’s foreign exchange has fallen by $4bn (37 percent) while Egypt’s reserves have halved to $17bn since the start of 2011.
These changes are the result of the Arab Spring disrupting exports and discouraging investment. The IMF as well as Qatar has offered foreign exchange credit lines to fund imports if these countries run into liquidity issues.
Nigeria’s foreign exchange reserves have also fallen from US $62bn in mid-2008 (the highest in Africa after Libya) to US $40bn due to a fall in the value of their main export, crude oil. If it did not initially have cover of eight-and-a-half months it may have experienced more difficulties.
The vulnerability of some African economies has been compounded by a spate of new bond issues in foreign denominated currencies.
During 2013 African countries have issued US $10 billion of dollar bonds to international markets, breaking the 2010 record.
Investors in search of yield are providing medium term funding which would not have been available five years ago.
While governments may prefer raising foreign currency through borrowing rather than a trade surplus, borrowing can place a higher burden on foreign currency obligations in the future.
This raises the risk that an economic shock – such as tapering – will increase bond yields and lead to devaluations or interest rate rises.
On the other hand, building reserves can also come at the expense of infrastructure projects which support long term structural growth.
A lack of power generation capacity in South Africa, which experiences brown outs, is currently holding back private investment, which demonstrates the importance of striking a balance between development and financial stability.
 Latitudes, November 2013, White & Casehttp://data.worldbank.org/indicator/FI.RES.TOTL.MO/countries/ZM-GH-MZ-ZA-TN-EG-TZ?display=graph
G7 Summit guide: What it is and what leaders hope to achieve
Unless you’ve had your head buried in the sand, you’ll have seen the term ‘G7’ plastered all over the Internet this week. We’re going to give you the skinny on exactly what the G7 is and what its purpose on this planet is ─ and whether it’s a good or a bad collaboration.
Who are the G7?
The Group of Seven, or ‘G7’, may sound like a collective of pirate lords from a certain Disney smash-hit, but in reality, it’s a group of the world’s seven largest “advanced” economies ─ the powerhouses of the world, if you like.
The merry band comprises:
- The United Kingdom
- The United States
Historically, Russia was a member of the then-called ‘G8’ but found itself excluded after their ever-so-slightly illegal takeover of Crimea back in 2014.
Since 1977, the European Union has also been involved in some capacity with the G7 Summit. The Union is not recognised as an official member, but gradually, as with all Europe-linked affairs, the Union has integrated itself into the conversation and is now included in all political discussions on the annual summit agenda.
When was the ‘G’ formed?
Back in 1975, when the world was reeling from its very first oil shock and the subsequent financial fallout that came with it, the heads of state and government from six of the leading industrial countries had a face-to-face meeting at the Chateau de Rambouillet to discuss the global economy, its trajectory, and what they could do to address the economic turmoil that reared its ugly head throughout the 70s.
Why does the G7 exist?
At this very first summit ─ the ‘G6’ summit ─, the leaders adopted a 15-point communiqué, the Declaration of Rambouillet, and agreed to continuously meet once a year moving forward to address the problems of the day, with a rotating Presidency. One year later, Canada was welcomed into the fold, and the ‘G6’ became seven and has remained so ever since ─ Russia’s inclusion and exclusion not counted.
The group, as previously mentioned, was born in the looming shadow of a financial crisis, but its purpose is more significant than just economics. When leaders from the group meet, they discuss and exchange ideas on a broad range of issues, including injustice around the world, geopolitical matters, security, and sustainability.
It’s worth noting that, while the G7 may be made up of mighty nations, the bloc is an informal one. So, although it is considered an important annual event, declarations made during the summit are not legally binding. That said, they are still very influential and worth taking note of because it indicates the ambitions and outlines the initiatives of these particularly prominent leading nations.
Where is the 2021 G7 summit?
This year, the summit will be held in the United Kingdom deep in the southwest of England, with Prime Minister Boris Johnson hosting his contemporaries in the quaint Cornish resort of Carbis Bay near St Ives in Cornwall.
What will be discussed this year?
After almost two years of remote communication, this will be the first in-person G7 summit since the novel Coronavirus first took hold of the globe, and Britain wants “leaders to seize the opportunity to build back better from coronavirus, uniting to make the future fairer, greener, and more prosperous.”
The three-day summit, running from Friday to Sunday, will see the seven leaders discussing a whole host of shared challenges, ranging from the pandemic and vaccine development and distribution to the ongoing global fight against climate change through the implementation of sustainable norms and values.
According to the UK government, the attendees will also be taking a look at “ensuring that people everywhere can benefit from open trade, technological change, and scientific discovery.”