Chinese Dragon Worries (allAfrica.com)

Analysts speak on impact of the Chinese Yuan devaluation on Uganda’s economy

As global markets continue to reel after the surprise decision by China to devalue its currency, the Yuan, by about 2% its largest single-day drop since 1994 questions are being asked about the impact the development would have on developing African countries like Uganda.

On Tuesday Aug 11, the Central bank of China said it made the decision to devalue – adjust the value of a currency downward relative to other currencies – the Yuan (Reminbi ) in a bid to tame the country’s slowing economic growth, which was reported at 7% – the lowest in several years. The devaluation, the Chinese government hopes, will help stimulate their declining export industry by making their exports cheaper in foreign markets hence boosting local production. From that perspective, experts say the devaluation would be good for Uganda, which is a net importer from China though the competitiveness of local products could suffer because of cheaper Chinese imports.

Also, Ugandan exports to China, which have been growing over the years, could suffer a hitch as they will become more expensive to Chinese consumers hence lowering demand for them.

Bank of Uganda statistics show that last year, Uganda imported goods worth $546.60 million from China and by mid-2015 Uganda had imported goods worth $625.50million – majorly mechanical and electrical appliances, textiles, garments, pharmaceuticals, porcelain and footwear.

On the other hand, China’s major imports from Uganda have been tea, coffee, spices and plastics worth $58.64 in 2014, and growing to $59.63 million by June 2015.

Besides commodity trade, the Chinese today are the biggest investors in Uganda with investments worth billions of dollars in the infrastructure sector, manufacturing sector, energy, water, the hospitality industry, financial and personal services among others. China has also substantially increased its aid commitments to Uganda over the years, which it has provided in the form of technical assistance, with an emphasis on training in Chinese institutions, grants, and interest-free loans, and preferential loans that have an interest subsidy, and debt relief. Any major adjustments on the Yuan would therefore elicit anxious looks from Ugandans.

Commenting on the impact the devalued Yuan would have on African countries, Standard Chartered Bank Chief African Economist Razia Khan was not positive. She told the South African Business Daily, the BDlive, that the devaluation was happening at a difficult moment for many African economies, which had been battered by volatility that had sent many regional currencies lower this year as oil prices dropped and the dollar surged. “Countries with narrow export bases will be substantially disadvantaged,” she said. However, Fred Muhumuza, a research analyst at Financial Deepening Sector Uganda, was a little positive. He argued that Uganda is just a “small pawn” in the game of international trade, which means that he did not foresee any serious impact of that. “In that battle of the Titans, Uganda is just not even a pawn on the Chess Board. We still go to China through the dollar so our local deprecation will continue to bite us more, much as a depreciated Yuan gives Ugandan traders a few more Yuan per dollar,” he said. “The additional few Yuan will not be much relief given the bigger domestic cost increase in getting the dollars in the first place.” He added that China has been growing through exports partly by keeping its currency very weak, a move that has not gone down well with its competitors. Consequently, the US and other countries have been on China’s case to let the value of its currency to be determined by market forces. Now with lower economic growth of 7%, from historical levels above 10%, they can only stimulate growth by partly depreciating their currency.

However, Stephen Kaboyo, the managing partner of Alpha Capital Partners, was equally concerned saying the development would have twofold impact – the most important of which is on the trade relationship with African countries including Uganda. Given that China is Africa’s biggest trading partner, any economic event that happens there, will certainly cause anxiety. “In this particular case, China’s buying power for African commodities will be eroded which means less demand,” he said.

“On the other hand though some countries could benefit from a weaker yuan because essentially this cuts the cost of Chinese goods and services that they import, this brings some degree of optimism for Uganda that in the long run this could reduce the large trade deficit as infrastructure spending linked to China has been growing.”

He added that countries that have been directly transacting in yuan for trade purposes could see renewed pressures on their currencies and of course the timing is bad considering that most of these countries have been hit by volatility arising from the dollar surge and drop in oil prices. But in his own assessment, he said Uganda has limited exposure because import goods are still priced in US dollars, which means we may not see an immediate impact.

Amadou Sy of the Brookings Institute, suggests that this development should be an eye-opener to African governments especially when it comes to the health of the Chinese economy. “More than the movements of the yuan, every African ministry of finance and Central bank should be carefully watching the movements in the determinants of Chinese growth. I would even argue that they should have specialized “China Watch” units monitoring the evolution of Chinese real estate and business investment, infrastructure investment and consumption, as well as urbanization and service industries trends,” he said.

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