How Exchange Rate Volatility is affecting African Prosperity
By Emmanuel Allottey
High Net Worth Individuals (HNWI) is a term used by the financial services industry to designate persons whose investible wealth (assets such as stocks and bonds) exceeding $1millon.
This classification is measured using the United States Dollar. For wealthy Africans their wealth in local currency must be converted into the American dollar equivalent for measurement.
The volatility of the local currency of a potential HNW individual may either lead to a gain or reduction in their wealth rating. Questions have been asked about the limited number of Africans on notable lists of wealthy individuals and one of the attributes to this is exchange rate volatility.
African economies are highly reliant on revenue generated from commodity exports to external markets, due to their rich mineral wealth. In addition, African economies remain dependent on the import of finished goods from developed countries.
The interconnectedness of global trade exposes African nations to currency risk. Global demand and supply chains, and the complex nature of financial markets have seen African currencies being affected during global events.
The novel COVID-19 outbreak has destabilised global trade with demand subsiding dramatically, sharply lowering commodity prices as well as the fleeing of foreign capital, has consequently seen African currencies inevitably weakened.
From the inception of world currencies abandoning the gold standard and allowing their exchange rates to float freely against each other, there has been many currency devaluations events that have hurt not only the wealthy citizens of the country involved but has had a rippled effect across the globe.
African countries are notable for their tumultuous operating environment consisting of political unrest, central bank policies, high crime rates, poverty and lagging infrastructure. Weak economic performance in African nations compounded with volatility in exchange rates directly and indirectly affect the accumulation of wealth.
Key drivers of wealth creation are; strong safety and security, media freedom and neutrality, secure ownership rights, good economic growth, a well-developed banking system and stock market, low levels of government intervention, low taxation, ease of investment, and wealth migration into the country.
Many African nations perform poorly on most of these indicators and over time this has translated to the number and net asset value of HNWIs decreasing. Exchange rate movements can have a positive or negative impact on an individual’s wealth. HNW individuals in Africa will be exposed to currency risk if their assets remain denominated in local currency.