With widespread confusion and uncertainty around the economic, political and security aspects of the virus, policymakers, civil society and business are scrambling to adequately prepare for its consequences.
While China was ground-zero for the COVID-19 outbreak, a discussion of its impact on Africa can’t be limited to Sino-Africa relations. COVID-19’s rapid transmission around the world, China’s deeply embedded role in global demand and supply chains, and the broader implications of international fiscal and monetary stimulus on Africa are critical in ascertaining possible scenarios facing Africa.
To fully appreciate the complex nature of the fallout, it is imperative to understand the transmission mechanisms and multiple effects of the contagion. First, to financial markets – where the impact is immediate, direct and stark. Negative risk sentiment has already reached levels last seen during the 2008 global financial crisis and has battered emerging markets.
Violent sell-offs have ensued in the past fortnight and African currencies have been in the firing line. The South African rand, as a proxy for emerging market risk sentiment, has been particularly hard hit, while currencies like the Brazilian real and Mexican peso have also sold off aggressively.
With Chinese demand subsiding dramatically, sharply lower commodity prices and the fleeing of foreign capital, African currencies have inevitably weakened while bond yields have soared. The rand shed 5% against the greenback while South African 10-year bonds jumped 32.5 basis points. The Zambian kwacha lost more than 3% to the dollar in the same period.
The implications are twofold. Not only are bondholders of African debt now demanding a premium, driving up the cost of funding, but weaker currencies mean that the cost of repaying and servicing debt on bonds issued in foreign currency (euro bonds) rise dramatically.
Second-round effects are also significant. Given the unanticipated nature of the crisis, fiscal and monetary resources will need to be both mobilised and diverted in order to combat its spread. However, where this funding comes from becomes a major conundrum – especially since China’s benevolence is likely to be severely reduced in the current context.