Uganda still shielded from currency war effects

The latest spate of worldwide currency turbulence has its root in U.S. monetary policies, and is threatening to hamper global trade. A number of economies, including Japan, Brazil and South Korea, have scrambled to launch direct or indirect intervention measures to stop their currencies from rapidly appreciating against the U.S. dollar. Apparently, Uganda has not yet felt the impact although traders based in China have a different story to tell, Dorothy Nakaweesi writes.

With the world’s reserve currency issuer (the US) and its long-term rival to that status (China) competing to nearly ruining their own currencies, major analysts have warned of grim implications, with some businesses already feeling the impact.

The United States, China, Japan and other developed countries are tinkering with their economies to adopt a more accommodative monetary policy, leading to currency depreciation.

And because there are low returns on investment in these countries, a lot of hot money (funds that are controlled by investors who actively seek short term returns) flocking to emerging markets has increased the pressure on their currencies.

Because of this; the affected countries are faced with the choice to take measures to intervene in currency markets. China hiked its key interest rate by a quarter percentage point last week for the first time in almost three years, prompting analysts to speculate that Beijing is launching a preemptive strike in a currency war with Washington ahead of the G20 Summit in Seoul next month.

Some experts say China may have expected fierce pressure from the U.S. and EU to strengthen the yuan during the just conclude G20 finance ministers and central bank governors in Gyeongju and ahead of the G20 Summit to be held in Seoul on November 11-12. Higher interest rates are expected to drive foreign capital to the country in search of profit and cause the yuan to strengthen.

But others disagree: “The rate hike could be seen as a protest by China against pressure to strengthen its currency by demonstrating that a shrinking Chinese economy would make a global economic recovery impossible,” said Prof. Kim Jung-sik of Yonsei University.

In other words, China’s decision should not be seen as a conciliatory gesture but rather as a warning against the U.S. that a cooling Chinese economy would cause the global economy to enter a slump.

International Monetary Fund Managing Director Dominique Strauss-Kahn recently warned that such a conflict can undermine the world economy.

“The IMF needs to launch a “systemic stability initiative” to build international consensus on global currency policies,” Mr Kahn said.
Ahead of the IMF and World Bank meetings in Washington nearly a week ago, WB President Robert Zoellick said multilateral bodies have a role to play in resolving currency tensions but that ultimately, countries must tackle the issue by re-balancing their economies.
As the world anxiously waited for the just concluded IMF meeting to sort issues out; members failed to reach an accord to relieve the tension.

Genesis
In an interview with Business Power, Mr Patrick Bitature, the chairman Uganda Investment Authority and Simba Group of Companies explains that the ‘carry trade’, where liquid emerging economies like Brazil, Thailand and SA (not China or India which are considered illiquid) attract large inflows of funds investing in money and fixed income securities that deliver higher yields than in developed markets, where yields are at zero as in Japan or near zero as in Europe and the USA.

“This is causing emerging market currencies to strengthen (many have strengthened over 25 per cent Vs the US dollar over the last 18 months), causing their exports to be uncompetitive,” Mr Bitature explained.

He added that a stronger currency does dampen inflation, which is allowing these countries to reduce interest rates, but not enough to stem the inflow of foreign funds. Some countries such as Brazil and Malaysia have started taxing these foreign short term fund flows.
Subsequently, Mr Bitature says that the main issue is about the US - China play; where the US government through its ‘Quantitative easing’ programme is effectively printing currency to weaken the green back. The reasons for this are to stimulate the economy and stimulate inflation as the US is at risk of entering deflation.
This would be a worst case scenario - prices need to continue to increase for the economy to grow. The by-product of this is that the US dollar is weakening, making US exports more competitive.
In longer term, Asian governments who are net holders of US dollar denominated reserves are seeing their holding reduce in value as the US dollar declines.

“China wishes to keep its currency weak to fuel its export driven market. Further a weakening of hard currencies such as the Euro, US dollar and Yen, coupled with high inflation will have the effect of reducing the developed world market huge debt levels due to inflation,” Mr Bitature adds. It is these conflicting and varying interests at play that have led to a currency war.

Effect on Uganda
Should smaller economies like Uganda, which are largely dependent on imports, worry about this currency war and the possible outcomes?
Experts say Uganda and East Africa, like other regions of the world, will be caught in the cross-fire with an interesting interplay in trade affairs that might leave commodity dependant currencies like the Uganda Shilling better off.

Mr Bitature said: “The currency war will have little or no effect on the smaller economies like Uganda.” He argues that as Uganda is not a major exporter, either burdened by excessive debt levels, nor its markets attract any international investment fund flows; the shilling will remain effected by local market supply and demand side currency factors; the extent to which the Bank of Uganda always does intervene in the currency markets.

Mr Elly Twineyo, a development policy expert on budget, development and trade in developing countries in his critique about the likely effect of the currency war on Uganda said: “When a currency such as the dollar or pound weakens, the exporters loose. They may get less for selling (exporting) more in the markets in which they use that currency as a means of exchange.”

Also, the issues of convertibility might affect the exports of some countries especially the poor ones like Uganda. “A weak currency favours importers not exporters in the case of Uganda. We can therefore assert that where the advanced countries try to devalue their currencies, the losers are the small economies; they have to export more for less foreign exchange receipts.”

He says the small economies’ competitiveness is going to be affected and the beneficiaries are the advanced economies because when they devalue and other countries import more from them – hence they become more competitive and realise more exports.

Exporters
Some exporters, however, have not been affected by the ongoing currency war. Mr Olav Boenders, the managing director of Wagagai (U) Ltd- a cuttings flower exporting firm, says: “We have not been affected because we are paid in euros and the euro is getting stronger. The payments have been good.”

Currently, on the local market, the euro’s performance has greatly strengthened against the local unit trading at Shs3,120/170 way above last year’s Shs2,500/550.

Uganda’s economy is largely leaning on the import sector where goods are sourced mostly from Asia, USA and Europe, which continents are caught up in the currency war.

Many Ugandans who trade in China are allowed to transact in the Chinese Yuan, US dollar and Euros. Recently the Bank of Japan took a decision to further reduce its close to zero interest rate. Japan managed to get the yen to fall on currency markets. This has the effect of making its exports cheaper.

Japan has remained the leading source of vehicles and capital machinery for Uganda although car importers have not yet felt the effect. Mr Fisial Kirunda, a car importer, says it’s still too early to gauge the reduction in import rates from Japan.

“Apparently, we have reduced our imports because of the stiff competition. So not until we finish the current stock; so it’s hard for us to notice a change in prices.”

The consumers in Uganda may not necessarily enjoy lower prices.
“Traders in Uganda have the tendency of wanting very high profits and are likely to continue charging the high prices, even when they are buying at reduced prices,” Mr Twineyo who is also the executive director for the African Centre for Trade and Development said.
However, the traders based in China have a totally different view as they think the war is effecting them enormously.

Mr Nelson Owaarwe Tugume, the CEO if Inspire Africa, Nela Group of Companies and Chairman Uganda Motor Vehicle Importers Association and is currently in China thinks Africa has neglected the price war.
“Because of the price war, many Africans have not come to China for trade in this period. There is an on-going big carton fare where all Chinese factories come to display their products and its normally full of Africans but this time round it is the reverse,” he said.

“This war is injuring our business seriously. You can imagine in two weeks, one dollar was 6.65 and now, its 6.5 rmb. The yuan in japan has fallen from 90 a dollar to 80 in a spell of about 10 days. For example - for Uganda the dollar is appreciating. And what I hate is that the concerned authorities are not addressing this issue.”
The Korean government, which is hosting the G20 Summit, is preparing an independent compromise.

But this task faces tough obstacles. “We are considering a proposal to let individual countries adjust their own exchange rates,” said one Korean government official. G20 member countries will apparently be presented with a proposal to allow their own currencies to strengthen or weaken to keep their current account surpluses within 4 percent of GDP.

There are also hopes that China may announce additional measures ahead of the G20 meetings. One financial industry insider in Beijing said: “Although the situation has calmed down, the U.S. could pressure China one more time ahead of the G20 Summit to strengthen its currency.

And in response, China could implement measures to expand the fluctuation band of the yuan.” Meanwhile, finance ministers from the Group of 20 nations struggled to agree on how to prevent a currency war on Friday, with the United States switching tack to focus on a way to rebalance global trade.

Additional reporting: Agencies