Why China’s volatility is bad for Uganda’s economy

Goods offloaded at Entebbe International Airport. Ugandan traders are among those feeling the pinch from the squeeze of the Chinese economy. Photo by RACHEL MABALA.

What you need to know:

China’s slackening progress translates to the fact that her more than 1.3 billion people cease to be potential consumers of goods produced by other economies, William Lubuulwa writes

The volatility in global financial markets shows how rapidly risks can spill over from one economy to the next. World stock markets and the currencies of many emerging markets, for instance, have seen large swings since China’s decision to devalue its currency. The People’s Bank of China astounded markets with three successive devaluations of the yuan, knocking over 3 per cent off its value. The first devaluation that came in August 2015 marked the largest single drop in more than 20 years.

After a decade of a steady appreciation against the US dollar, investors had become comfortable with the stability and growing strength of the yuan but global economies were shocked, and are now facing headwinds not only from China’s economic challenges but also Japan’s slow growth and falling commodity prices.

China is the second largest economy, and has been doing very well compared to many world economies until the weakening of the yuan raised world fears that the state of the economy is worse than Chinese officials reveal. China’s growth is at an annoyingly slow pace in current history.

International Monetary Fund managing director Christine Lagarde once observed: “What has been demonstrated in the last few weeks is how much Asia is at the core of the global economy, and how much disruption in one market in Asia can spill over to the rest of the world.”

Uganda imports most of her goods from Asian economies such as China, Japan, Malaysia and United Arab Emirates (UAE). Therefore, when these economies experience any economic challenges, it is possible such challenges will be easily felt by a retailer in the remotest part of the country. This is because small-scale traders buy from wholesalers who in most cases import from Asia.

Uganda Investment Authority reports indicate that there are more than 150 registered Ugandan based Chinese businesses increasing import demand. Trade (import/export) volumes between Uganda and China have been consistently growing from Sh602b in 2007; an annual growth rate of 42 per cent which would place these volumes at slightly over Shs3650b for the year ended 2012. This is equivalent to 6 per cent of Uganda’s Gross Domestic Product, making China an important business partner with this East African country.

Uganda’s import volumes from China stood at $340m (Shs1.2 trillion) in the first quarter of 2015. This was a marked improvement from $263m (Shs966b) traded in the same period in 2014. While this is so, Uganda’s business deals are being affected because the yuan is not robust, and fears are it could slide another 6 per cent over the next year as China grapples with handling a weaker economy.

According to global EDGE Ugandans also do a great deal of business with UAE. Trade statistics indicate that UAE sells to Uganda at a tune of $450m (Shs164b) while Ugandans export to them goods worth $176m (Shs642m).

Slow growth problem
With weaknesses in Europe’s economy and the US having raised interest rates, the world has looked to China’s burning desire for raw materials to keep economies vibrant.

The problem with China’s slackening progress translates to the fact that her more than 1.3 billion people cease to be potential consumers of goods produced by other economies. For example, China is a big market for manufactured goods such as vehicles with estimates putting the 2013 sales at 20 million as opposed to USA’s close to 16 million vehicles. With these sales, China reportedly became the first country to buy more than 20 million vehicles worldwide.

Therefore, any weakness in demand on the side of Chinese could be easily felt by producers around the world.

When Bank of China partnered with Uganda banks in 2012 to ease money flow, Ugandans stopped carrying sacks of money with them to China to transact business. All they need now is their ATM cards and withdraw their money from Bank of China. Nonetheless, a few banks including Standard Chartered, Stanbic and dfcu allow Ugandan traders to pay their suppliers in China in Chinese yuan.
This, therefore, means when the Chinese economy sneezes because of the pangs of deflation of the yuan, Ugandan business people catch an unfavourable trade cold.

Nambi Nambalirwa, a Kampala based business woman, who normally imports her merchandise from both China and Turkey, confirms that the volatility of the Chinese economy has been an inconvenience. “Right now, I am concentrating on buying goods from Turkey.” She added that for the first time she was thinking of importing from the United Arab Emirates.

“Next month, I will be in Dubai on a fact finding mission, otherwise China’s yuan is becoming a challenge,” she said.
Money challenges in Asian currencies continue to put pressure on African central banks to relinquish control of their exchange rates as they run down reserves faster than any other region.
The Uganda Shilling continues bending towards the dictates of not only the dollar and the pound but also of all major Asian currencies including the Japanese yen, Chinese yuan, the Malaysian ringgit and the Indian rupee. For all these currencies to trade low against the US dollar, the worries are over the global economy’s health that has prompted more investors to turn to safe havens elsewhere.

Central Asia’s principal crude oil exporter, Kazakhstan, has had persistent pressure on her tenge even after devaluations; thereby; intensifying panic on the African continent that continues to be influenced by other continents. Because of the significance of these Asian economies, the authorities in Africa have responded by either devaluing or halting the intervention in their foreign-exchange markets.

What can be done?
Individual country policies need to be tailored to specific needs. For example, Uganda’s specifics would involve strengthening the economy with a carefully thought about fiscal policy, restrict excessive credit growth, and align exchange and interest rates to act as trade shock-absorbers. Uganda should maintain adequate foreign exchange reserves (which averaged $1153.16 million from 1986 until 2015), and strengthen inter and intra business regulations.

Changes affecting traditional and online banking in a partner country, for instance Kenya, should be monitored.

Other economies feeling pinch. It is not only Uganda feeling the economic pinch from Asia’s financial woes. The Nigerian naira and the Kenyan shilling, for example, have had to wade through rough times too. The fiscal challenges in Asia have pressed African policy makers to burn through their foreign reserves in a bid to tighten their monetary policies aimed at cushioning the failing local currencies. These external shocks, among others, partly explain why Uganda’s exports, majorly agro in nature, have been insistently reducing for some time.