The recent happenings in China – the yuan devaluation, weak manufacturing Purchasing Managers’ Index figures, stock market turmoil, and interest rate cuts – will have a notable impact on Sub-Saharan African countries, according to NKC African Economics.

Irmgard Erasmus, Analyst at NKC African Economics, said that for SSA countries with close trade ties with China, the immediate effect is more amplified, especially with regard to their local currency units.

“On a real effective exchange rate (REER) basis, the South African rand and Zambian kwacha were among the currencies most pressured by the yuan devaluation due to high explicit trade exposure,” he said.

Erasmus further said that slowing demand from China is a “red flag for African commodity exporters”.

This adds to the pressure already seen due to broad US dollar strength, which has pressured greenback-sensitive commodity prices in recent months.

“While we think that commodity prices have reached about 80% - 90% of the bear run, volatility will increase and commodity prices will likely stay lower for longer,” he said.

“In West Africa, commodity exporters will struggle to maintain currency pegs if this view for timid medium-term commodity prices plays out, and more alarmingly, spot prices could remain below incentive prices (i.e. the market prices needed to initialise new projects) for a longer period,” he said.

“This will act as a drag on both foreign direct investment (FDI) and economic growth as projects are at risk of delay, while market expectations for currency devaluations will hurt the financial account of the balance of payments,” he added.

While competitive devaluations will ease pressure off fiscal accounts, short-term implications include higher inflation and interest rate increases at the cost of growth potential.

Erasmus added that few African countries captured the opportunity offered by high commodity prices to reduce structural pressure off fiscal accounts, establish market-friendly reforms and transition toward services-based economies.

“The absence of doing so means that, on aggregate, African countries’ exposure to commodity price cycles remains uncomfortably high,” he said.

Erasmus said that NKC remains on the pessimistic side of the spectrum with regard to the outlook for Chinese growth, which will have negative spill-over consequences for Africa.

“Foreign risk factors furthermore include increased commodity price volatility brought about by external macro events, shifts in portfolio flows amid rising risk aversion and resultant knock-on effects to domestic economies’ balance of payments,” he said.

“High fiscal shortfalls and limited domestic borrowing capacity exacerbate the external fragility of energy & industrial commodity exporters in particular. Another factor to consider is the rampant power deficit in the region, which contribute to a loss with regard to terms of trade, and impediment to domestic supply,” he said.