China, the fastest growing trading partners to sub-Saharan Africa, devalued its currency for three days in a row last week spurring financial markets turmoil across the world.
Currencies in African countries, such as South Africa, which have strong direct ties with the Asian giant reacted quickly by falling against other major currencies and analysts are expecting the fall will persist for a while.
Johannesburg-based economist, Ceec Bruggemans, predicts that the South African rand ill follow the downwards path of the Chinese yuan over the next year or so. He sees the rand, which has lost 5 percent in the last one month according to Reuters data, depreciating gradually to 14 per US dollar by the end of next year, from the 12.8 it trading now.
“Companies worldwide deriving sales and earnings from their China trade may find themselves marked down,” The Globe and Mail quoted Bruggemans saying in a recent analysis.
“The same treatment is likely to continue for commodities, especially those heavily dependent on Chinese demand and already experiencing supply gluts. Thus the slide in most commodity prices, including copper, iron ore, coal and oil, may not be over. This in turn has implications for commodity producers and emerging market currencies.”
Over the last decade many African countries that had fallen out of favor with the west have been betting heavily on China as their economic savior.
On its part, China has increased its presence on the continent funding major infrastructure projects in a number of Sub-Saharan Africa countries as it sort to gain a upper hand in deals that involve raw material for its fast growing industries back home.
Its increased demand for Africa’s natural resources has seen many countries on the continent experience a commodities boom that has driven many economies higher, making the region one of the fastest growing in the world over.
But the sudden devaluation of the yuan is now a painful reminder to many of its African partners of the risks of overdependence on the Asian giant.
Analysts predict that the yuan’s devaluation, coupled with a slowing Chinese economy, could lead to slower demand for commodities that have spearheaded Africa’s booming trade with Beijing. This will also shift the balance of trade in favor of Chinese manufacturers, who will be able to export their products at much lower prices.
According to official government statistics, China’s trade with Africa was more than $200 billion in 2014, three-times larger than US trade with Africa. This is likely to tip in favor of China in coming years, with cheap products from the Asian country choking local manufacturers in sectors like textile.
“The immediate impact of the devaluation of the yuan cannot be seen or measured, but countries that have taken steps to transact in Chinese money could see pressure on their own local currencies,” BBC’s Africa Business Report correspondent said in an analysis on the impact of China’s yuan devaluation.