This is a guest post by John Causey, a private equity and transaction advisor with a focus on sub-Saharan Africa.
The U.S. dollar’s dominance in sub-Saharan Africa is no longer certain. Despite the current volatility of the Chinese renminbi an auspicious moment may exist for China’s currency to challenge the dollar’s hegemony in the region.
Apart from the structural advantages granted by the Bretton Woods Conference in 1944, two factors have historically benefited the dollar in Africa: the dollar denominated nature of virtually all developmental finance and aid institutions, and oil being priced in Dollars. Psychology also played a role. Though a number of today’s ruling national parties, such as South Africa’s African National Congress, were sympathetic to the Chinese and Soviet regimes during their struggles for independence, following independence the U.S. was widely viewed as a role model: its black celebrities and athletes inspired the continent, and a history of fighting for civil liberties and liberal democratic ideals gave Americans moral authority. Adopting the dollar as the preferred reserve currency was hardly a considered choice, it was a foregone conclusion.
As Bob Dylan famously sang, the times they are a changin’…
The timing now may be opportune for the renminbi to strike at the dollar in Africa for at least three reasons. First, oil’s precipitous drop in price and America’s waning interest in crude – nod to Texas fracking entrepreneurs – has decimated U.S. Dollar foreign exchange (FOREX) reserves in oil rich African nations. Diminished reserves weaken central banks’ abilities to prop up domestic currencies and for foreign companies to repatriate profits. Second, the newly established Asian Infrastructure Investment Bank and New Development Bank (formerly BRICS Development Bank) aim to rival the traditional developmental finance institutions, and it’s conceivable that these and others will soon move to be Renminbi based. Third, arguably China operates in Africa with greater aplomb and with more nuanced and mutually beneficial relationships than America’s corporations and its federal. The USG’s most visible diplomatic effort in Africa, Power Africa, is sputtering. American businesses haven’t sufficiently picked up the slack. With diminished American interest in Nigeria’s crude, U.S.-Africa export/import figures could worsen further in the new year.
Globally, any material retreat in the dollar’s dominance likely means the U.S. can no longer safely run large deficits with key trading partners and remain economically viable. The enormous financial benefits of pervasive dollar internationalization allows America, a country which produces relatively little these days, to remain an influential economic super power. The psychological effects of losing the reserve currency status would complicate diplomatic efforts, and call into question the future role of the United States in global financial markets.
Might the U.S. benefit from these de-dollarization events?
Although the process likely would be excruciating, some argue that de-dollarization could benefit America. The argument goes this way: removing the ability to mask current account (trading) deficits with a capital account (borrowing) surplus would lead to higher American exports and less domestic reliance on foreign products. By making it more onerous to borrow fresh capital to service old debts, America would be encouraged to deleverage more quickly. Domestic manufacturing would be strengthened and the depreciating dollar would attract higher rates of foreign investment into the U.S. This argument sounds credible until factoring in other realities: approximately 20 trillion dollars in sovereign debt, much larger unfunded future liabilities, and that the United States is entering into an environment of rising interest rates.