Africa, China, & Emerging Markets: It’ll be a Risky 2016

Stock Exchange By Katrina.Tuliao, via Wikimedia Commons

Photo Credit: Katrina.Tuliao, via Wikimedia Commons

On the first day of trading this New Year, Chinese markets suffered their worst opening decline in nearly a decade, tumbling 7% before trading was suspended for the day. China has been gradually slowing over the past several years, moderating its multi-decade record growth as it shifts to a more endogenously-driven economic model. One of the world’s most vulnerable emerging markets (EMs), Africa, will show the signs of strain in the world economy this year, borne from the slowing of the Chinese economy and the wider global environment.

The impact of rising interest rates after an unprecedented period of cheap money allowed easy borrowing for EMs, declining stocks and currencies, rock-bottom commodity prices, and the lack of demand in China are the factors driving under-performance this year.

In December of last year the Federal Reserve passed the first rise in interest rates since the beginning of the financial crisis at 25 base points, starting what it hopes will be a chain of increases to a suggested target rate of 2%. The tightening of monetary policy from the Fed finds immediate reflection in the global economy through a liquidity withdrawal, rising borrowing costs for countries that need financing and a decline in the value of EM currencies and stock markets, dependent on the cheap lending from a decade of Fed policy. It is already suggested that African countries will experience higher debt financing this year, along with depreciating currencies. This in turn will force those governments to make hard choices over policy priorities and how to finance them.

Commodity prices are another strategic liability for EMs, especially African economies reliant on the export of primary materials and energy to China and other developed and growing markets. The slide in oil, attributed to a variety of factors such as oversupply, lacklustre demand, and political and geopolitical reasons is slated to continue into 2016. Shipping volumes of dry bulk materials are at record low levels, as prices have tumbled along with demand. Taken together, EMs built on exogenous economic models are subject to the price and demand volatility of commodities, which have never been stable, and this is the reality for much of Africa in 2016.

The previous two points tie back together to China. Collapsing Chinese exports and imports are motivated by the lacklustre economic recovery and income stagnation in North America and Europe, as well as the decline of Chinese industrial production in the past year and potentially into this year. These reports caused the worst opening week on record for the Chinese stock market, and it was trailed in fashion by stocks in the United States and Europe. A slowing Chinese economy without one of similar scale and growth to replace it means that EMs will feel the effects most acutely, being the most vulnerable to the double shock they experience from the performance of Western and Chinese markets.

This year may be the year when EMs are the canary in the coal mine for the irreconcilable problem at the heart of our economic model, which is how to sustain infinite growth in a finite and over-leveraged world. The debt-fuelled growth of China – itself suspect in the context of a stagnant, deflationary world economy that we’ve seen since 2009 – staved off the question in the aftermath of the 2008 financial crisis for another 7-8 years, but did not galvanize an attempt to solve it. The pain in Africa is an early sign that an overdue, outsized market correction is on the way, the scale of which may be in some ways unprecedented in economic history. 

In sum, 2016 may look much like 2015 did for Africa, with the main difference being in the promised rise of interest rates that will put additional pressure on the currencies, fiscal balance and stock markets of African states. In turn, economic diversification, regional integration, and finding new export niches may well offer a chance for Africa to begin to turn away from its over reliance on commodity prices and their associated market volatility, but that will not compensate the losses quickly in the conditions of a liquidity collapse. While observing events in Africa, meanwhile, it is important to start an overdue conversation here about the volatility of economic cycles and financialization of the economy, because in our interconnected world, when one domino falls, the rest follow.

Georgi Ivanov (7 Posts)

Georgi Ivanov is a political scientist specializing in the geopolitical questions of the Arctic region. He obtained his B.A. in Political Science from the University of Western Ontario and his M.A. in Political Science from Carleton University in Ottawa. Ivanov's interests include international political economy, currency politics, the Middle and East Asia. He is fluent in English and Bulgarian, and currently works with the Atlantic Council of Canada, the Atlantic Community in Berlin, and does occasional consulting for Wikistrat.


 

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