Africa argees with China to end U.S. dollar use

[pluMmet]

http://www.zerohedge.com/news/africa-just-says-nein-us-dollar-time-go-short-usdzmk-and-usdghc

Last week we presented the aftermath of the very much unannounced "Conference of Beijing" as a result of which Africa has been slowly but surely converting to a continent controlled almost exclusively by China. However, there was one thing missing: even as China has been virtually the sole source of infrastructure funding in Africa, the continent has long been a legacy dollar preserve, which obviously means renminbi penetration and replacement would be problematic to say the least. As it turns out, this too is rapidly changing: as the WSJ reports, Africa is increasingly just saying "nein" to the USD. "African countries are trying to shoo the U.S. dollar away, even if it means threatening to throw people who use greenbacks in jail. Starting next year, Angola will require oil and gas companies to pay tax revenue and local contracts in kwanza, its currency, rather than dollars. Mozambique wants companies to exchange half of their export earnings for meticais, hoping to pull more of the wealth in vast coal and natural-gas deposits into the domestic economy. And Ghana is seeking similar ways to reinforce "the primacy of the domestic currency," after the cedi plummeted more than 17% against the dollar in the first six months of this year. The sternest steps come from Zambia, a copper-rich country in southern Africa where the central bank has banned dollar-denominated transactions. Offenders who are "quoting, paying or demanding to be paid or receiving foreign currency" can face a maximum 10 years in prison, the central bank said in a two-page directive in May." Is it time to dump the EUR in hopes of a short covering rally that continues to be elusive (just as Germany wants) and buy Zambian Kwachas instead? We will wait for Tom Stolper to advise Goldman clients to sell the Zambian currency first, but at this rate the USDZMK may well be the most profitable currency pair of the next 3-6 months.

Why is Africa angry at the one allmighty Greenback?

The moves aim to strengthen thinly traded currencies and steer more capital into isolated financial markets. But the new rules are an abrupt change for foreign and local companies used to doing business in U.S. dollars.

In other words, Africa is finally pushing for its own capital markets, rudimentary as they may be. One wonders just who may be pulling the strings behind this very quiet but very crucial development. But one thing that is certain is that the traditional operations for legacy companies in Africa is about to change for good:

"There will be an adjustment period," said Mike Keenan, an African currencies analyst at Absa Capital, a South African subsidiary of Barclays PLC. "But the story with Africa and commodities has been one where the proceeds kind of circumvent the country. These authorities are trying to clamp down on that."

Zambia's central bank sees upside to a strong and liquid kwacha.

The move to promote the currency's use gives authorities leverage over monetary policy they lacked without control of the dominant market currency. The crackdown also could bring local banks new business in hedging instruments and foreign-exchange transactions.

"The kwacha is legal tender," said Caeser Siwale, chief executive in Zambia for Renaissance Capital, an investment bank. "There tends to be a different yardstick for us," with big companies expecting small economies like Zambia to live with a reliance on foreign currency that would never happen in Europe or China, he added.

In Zambia, the measures appear to be working. Heightened demand for kwacha pushed the currency to its highest level in more than a year in July, when it reached 4,640 to the dollar. It has slipped a bit since then.

So why go long the ZMK (and short the USD)? Here's why.

Fueling the demand were foreign-owned manufacturing and mining companies racing to acquire kwacha even as they asked the government to reconsider the policy. The companies complain it make operations more expensive and cumbersome.

"It might be hard to find kwacha when you need it," said Frederick Bantubonse, general manager of Zambia's Chamber of Mines. Mining companies also are worried about the cost of hedging their copper production against kwacha volatility. The group has appealed to government to limit the types of transactions affected by the move.

In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.

And while it is unlikely that the Kwacha has to fear becoming a carry currency, the short USDZMK may be at best a short-term trade. At least until China reveals its full plans.

In the long run, strengthening the kwacha by decree will take less time than demonstrating political stability and a commitment to controlling inflation, said John K. Wakeman-Linn, mission chief for Zambia at the International Monetary Fund.

"I don't think it's necessarily an adverse policy, but I don't see it providing a lot of additional long-term confidence in the kwacha, either," he said. "Regulation like this cannot substitute for policies that generate confidence in the market."

Those who are leery of going long just one African country can diversify their holdings. Into Ghanaian Cedis, aka GHS (1 year chart of USDGHC here).

Policy makers elsewhere in Africa are watching Zambia. Ghana, another fast-growing African economy with rich mineral deposits and a nascent consumer class, also is seeking to boost its currency's value.

Since May, Ghana's banks have had to keep all of their deposits at the central bank in cedi, rather than a mix of cedi and U.S. dollars. The switch encourages banks to seek deposits in cedi rather than foreign currency, according to Millison Narh, a deputy governor of the Bank of Ghana.

The central bank's pro-cedi policies aim to make life easier for people like Sterre Mkatini, who recently lugged a backpack filled with $8,000 worth of local currency to a nearby bank to pay one year's rent upfront. Many landlords demand such payments to sidestep high inflation.

Of course, there are risks:

Kwaku Asente Addo, a cashier at Penta Forex Bureau, isn't sure Ghana's government can or will do much to purge the greenback. "They can't do that; they're bluffing," he said.

Maybe they are. But if, indeed, China is pushing the strings, maybe they aren't.

Finally, here is the one currency to really watch:

A central bank ceiling on over-the-counter dollar transactions at banks has sent Ghana's class of China-bound traders into street-side foreign-exchange bureaus that normally cater to fanny-pack-clad tourists. Chinese importers often show up just before flights back to China desperate to buy $100,000.

How long until China will welcome all African transactions to settle in CNY?

Either way, keep a close eye on Africa. Things are heating up there quickly.

[40oz]

In related news,

North Africa becomes central focus in war on terrorism

[rightsonword]

In related news,

North Africa becomes central focus in war on terrorism

That's quite the coinkidink.

[jaman]

this great news....one less welfare country we have to pay for...s o b

[MoonRover]

So whats hussein obama's brother going to do with that $20 that he sent to him.....

[umbertino]

Interesting article.... Thanks for sharing.... I visited Ghana in 1997 (twice) and at the time ( don't know about now) their biggest note was the 5,000 cedis note which would make most transactions kinda difficult.... I still have some left.

[pluMmet]

Interesting article.... Thanks for sharing.... I visited Ghana in 1997 (twice) and at the time ( don't know about now) their biggest note was the 5,000 cedis note which would make most transactions kinda difficult.... I still have some left.

It does not take a genius to Wiki the question to find out that they have plenty of small notes...

The Currency Act of 1967 replaced the Zambian pound, shilling, pence currency for new kwacha and ngwee currency. Thus on 16 January 1968, the Zambian pound was replaced by the kwacha with the new official rate equal to one half the old unit, or US$1. The 5-pound note became 10 kwacha, the 1-pound note 2 kwacha, the 10-shilling note 1 kwacha, and a new 50-ngwee note was introduced to correspond to the old 5 shillings. At the same time, the currency was decimalized.[1]

5 kwacha notes were introduced in 1973, the same year that the last 50 ngwee notes were issued. 50 kwacha notes were introduced in 1986, with the 1 kwacha note being replaced by a coin in 1988. 100 and 500 kwacha notes were introduced in 1991, followed by 1000, 5000 and 10,000 kwacha in 1992, when the 5 and 10 kwacha notes were replaced by coins and the 2 kwacha discontinued. In 2003, 20,000 and 50,000 kwacha notes were introduced.

All their currency from 1973 is still in circulation except 5 and 10 kwacha notes that were replaced by coins.

[umbertino]

Ok.. I was referring to Ghana ( since I had visited there) cedis not Zambia kwacha... But that's ok.

Edited August 13, 2012 by umbertino

[rightsonword]

Interesting article.... Thanks for sharing.... I visited Ghana in 1997 (twice) and at the time ( don't know about now) their biggest note was the 5,000 cedis note which would make most transactions kinda difficult.... I still have some left.

Here in Japan, the notes come in 10,000; 5,000; 1,000; 500 coin, 100 coin. At first it was confusing for me, but now it's quite easy to do the math, though I guess it also depends on the purchasing power of the notes. Not sure how this compares to your experience, just thought I'd share mine.

Edited August 14, 2012 by rightsonword

[pluMmet]

Ok.. I was referring to Ghana ( since I had visited there) cedis not Zambia kwacha... But that's ok.

Okay --- following same logic wiki Ghana Cedi

Value Dimensions Main Colour Description Date of issue

Obverse & Reverse Obverse Reverse

1 cedi 137 × 65 mm Red The Big Six, Independence Arch Akosombo Dam July 3, 2007

2 cedis 140 × 67 mm Beige Kwame Nkrumah Parliament House May 14, 2010

5 cedis 141 × 68 mm Blue The Big Six, Independence Arch Balme Library: University of Ghana July 3, 2007

10 cedis 145 × 71 mm Yellow-green Bank of Ghana

20 cedis 149 × 74 mm Purple Supreme Court

50 cedis 153 × 77 mm Brown Christiansborg Castle