The economic tragedy in Greece could mean massive losses for East
Africa’s farmers, fishermen and hotel owners should the infectious debt default
spread to the rest of Europe, the top market for fresh produce, tourists and
capital, according to a report in the East African newspaper.
The euro’s decline and the dollar’s gain would make imported
commodities, ranging from oil to machinery, more expensive, exposing the
economies to bigger current account deficits, weaker currencies and high
interest rates.
Capital flows to the region would also be impacted by risk mitigation
measures being taken by other European countries — perspectives that may spill
over to the East African region.
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| Kenyan flag (seen left) nest to Greece's flag |
Greece defaulted on its periodic debt payments to the International
Monetary Fund valued at €1.6 billion ($1.8 billion) on Tuesday last week,
becoming the first developed country to falter on its credit obligations in the
IMF’s history.
This followed the collapse of bailout talks between Prime Minister
Alexis Tsipras’s government, the European Central Bank and the Fund.
The country was set to hold a referendum on Sunday, July 5, to
determine whether it should accept the austerity conditions proposed by the
creditors and effectively remain a member of the EU.
A Yes vote is desired by the creditors while a No vote would embolden
the anti-austerity movement in Athens and across the Eurozone, making it more
difficult to stabilise the euro against other hard currencies.
A No vote may force European powers Germany and France to consider
debt relief for Greece, a prospect they have rejected because their banks are
the most exposed to Greece’s dud loans.
Economists say a No vote would send European stock markets tumbling,
with a spillover effect on the EAC economies.
“The immediate impact would be in terms of financial contagion. Should
Greece vote No, we would see risk-aversion grip markets, with a flight to safe
havens. Many emerging and frontier market currencies may come under short-term
selling pressure. In East Africa, the Kenya shilling and the Uganda shilling
would be the most impacted,” said Razia Khan, managing director and chief
economist in charge of Africa global research at Standard Chartered Bank Plc.
Even before Greece makes a decision on the exit, there are signs that
the contagion is hitting East Africa.
The euro has depreciated over the past one year against currencies of
East Africa Community member states and appeared to rapidly lose ground in the
past two weeks. This would be ominous for exporters to the European Union,
stifling demand for exports as well as travel from outside the EU.
“For the region, it could
potentially affect exports to the Eurozone and generally undermine global
economic performance. It would also impact capital markets, particularly if
there is contagion. Italy’s banking system is particularly exposed to Greek debt,”
said Andrew Mold, a senior economist with the United Nations Economic
Commission for Africa at the sub-regional office in Kigali.
The Kenya Flower Council said the turn of events was likely to hit
profitability. “A weakened euro vis-a-vis a strong dollar means our returns will be
affected,” said Jane Ngige, Kenya Flower Council chief executive.
Fresh produce farmers buy inputs like fertilisers and machinery in
dollars but are paid in euros. They only use local currency for wages and
operational costs. A strong dollar would therefore increase the cost of
production.
Europeans staying at home would not be good for the tourism sector,
which was hoping for a boost from the withdrawal of travel advisories by the
United Kingdom and improving security in the face of terrorism threats.
The sector is also hoping to benefit from the high-profile visits of
US President Barack Obama this month, World Trade Organisation ministerial
delegates in October and Pope Francis in November.
“Although we do not get many tourists from Greece, we do get a good
number from Italy and Spain, whose economies are also experiencing difficulty.
A weak euro means a decline in the number of visitors to East Africa. The
financial crisis in Greece is likely to have a serious impact on global trade
and tourism,” said Mohamed Hersi, chairman of the Kenya Coast Tourism
Association. The EU accounts for about 70 per cent of tourists to East Africa.
But George Mawadri, British Airways regional manager for East Africa,
said the Greece debt crisis would only affect travel into East Africa in the
short-term if there was a spill over into other European countries like France,
Italy and the United Kingdom, from which the majority of air travel to the East
African region originates. This, he said, could be aggravated if the Eurozone
went into a recession, affecting the citizens’ spending power on goods and
leisure.
“The way the crisis eventually plays out could impact on the
euro-dollar exchange rate. And this could then spill over to East African
currencies. But there is no consensus of the impact on the euro. Does the
crisis undermine the Euro, or does resolving it make the euro stronger?” asked
David Cowan, Citigroup’s chief economist in charge of the African region.
The euro’s decline and the dollar’s gain would make imported
commodities, ranging from oil to machinery, more expensive, exposing the
economies to bigger current account deficits, weaker currencies and high
interest rates.
“A depreciation of the euro would affect our exports to the EU. But
the dollar has strengthened further against other currencies following the
Greek debt crisis and this may cause fresh external shocks against the Uganda
shilling,” said a senior executive at Bank of Uganda.
Weakening currencies would carry with them higher debt service
obligations for the EAC countries. First, more local currency would be required
to meet existing obligations in dollar terms, making the loans more expensive.
In this category would be commercial loans like the sovereign bonds issued by
Kenya and Rwanda.
Second, any new borrowing would be priced at higher interest rates to
accommodate the perceived higher risk of default. Tanzania, which is
increasingly turning to the commercial market after falling out with donors
over the Tegeta escrow scandal, falls in this category and would possibly be
forced to postpone a $700 million sovereign bond that it had wanted to float.
“The Greek debt crisis has destroyed the perception that governments
cannot default on loans and this may translate into higher interest rates for
small African economies borrowing from international markets. Further
appreciation of the dollar against other currencies during the debt crisis will
certainly weigh against the Ugandan shilling in the next few days,” said Joseph
Lutwama, a research economist with the Uganda Capital Markets Authority.
It is feared that limited access to international markets for project
finance would see East African governments rely more on domestic borrowing,
given the lead time required to arrange development finance from multilateral
agencies like the African Development Bank and the World Bank. This would push
interest rates up and possibly crowd out private investors from accessing
affordable capital for new ventures, expansion and job creation.
“The effect on East African markets is indirect, as investors’
concerns about Greece affect their overall investment decisions. If investors
react, they will move money out. The reality, though, is that they would only
react if there was turmoil in European markets. At the moment, the European
markets are calm,” said John Ngumi, head of investment banking for East Africa
at CFC Stanbic Bank.
Capital flows to the region would also be impacted by risk mitigation
measures being taken by other European countries — perspectives that may spill
over to the East African region.
“The effects may see banks limiting the amount of money customers
withdraw, leaving them with less disposable income to invest in the EAC capital
markets or even purchase goods and services from the region, impacting trade,
tourism and hotel occupancy,” said Einstein Kihanda, chief investment officer
at ICEA Asset Management.
“Taking on even more external debt would be a risky proposition for
East African countries with negligible export growth. The recent Kenyan
shilling decline has highlighted the country’s vulnerability as a result of its
now larger external debt commitments. A worsening Greece crisis would also
affect the performance of the so-called risk assets, including East African
asset markets,” said Ms Khan.
Outgoing African Development Bank president Donald Kaberuka said
Africa leaders should draw lessons from the Greece debt crisis.
“The crisis in Greece is a reminder of the need to preserve the
hard-won macroeconomic stability in Africa that was achieved after years of
pain. Borrow carefully, spend wisely. It must be preserved,” Dr Kaberuka said
on Twitter.
Dr Nzioki Kibua, an economist and former Central Bank of Kenya deputy
governor, said the actual impact of the Greece crisis will depend on how the
outcome of the referendum disrupts the power play in the euro-dollar parity.
The EAC Secretariat said Greece in itself would have a minimal impact
on trade because its exports to EAC are largely finished goods, which can be
sourced from other markets.
“With the crisis, imports of these goods are likely to drop or cease
but they are finished products that can be sourced from other European
countries,” said Peter Kiguta, EAC director general in charge of customs and
trade.
He said EAC countries import pharmaceuticals, machinery, electrical
and olive products from Greece. The country also has strong trade links with
Egypt and Turkey.
Egypt is a partner with East African Countries under the Tripartite
Free Trade Area while 390 Greek companies have invested more than $5 billion in
Turkey since signs of the crisis emerged in 2008, making it the leading
investor in Ankara, according to Turkey’s Foreign Ministry.
Turkey is known as a hub for the retail trade and is, together with
Dubai and China, a preferred source of East Africa traders for clothing,
carpets and upholstery. About 60 per cent of the cotton used in Turkey’s
textile yarns comes from Greek firms, a line of production that could be hit by
austerity measures.
Prof Haji Semboja of the University of Dar es Salaam said the Greece
debt crisis would see European economies like UK, Germany and France reduce
their commitments to African countries after seeing their credit ratings hit a
record low in order to save Athens.
“Europe cannot afford a fallen Greece, which may spell doom for the
European Union. This will make European countries abandon other priorities in
Africa,” said Prof Semboja. He gave an example from 1999, when Tanzania, a
highly indebted country, benefited from debt relief, which he said was intended
to save Western interests in the country.
Mr Mold said markets seem to have already discounted what has been on
the cards for some time now and are not fazed by the euro crisis.
“For the developing world, what is happening in the Chinese stock
market is perhaps of more direct relevance, given the strong investment and
trade links which have developed with Africa over the past 15 years,” he said.
The Chinese stock market has lost $2.3 trillion in the past three
weeks.
(This report is taken directly from The East African Newspaper)