Capital Flows

Quartz is reporting that Emirates airlines is considering pulling out of Nigeria. It is already cutting its twice-daily flights to Lagos and Abuja from Dubai to once a day to Lagos only, starting at the end of October. United Airlines ended its service from the United States to Nigeria in May. Domestic airlines are also facing difficulty. Quartz reports that Aero Contractors, Nigeria’s oldest airline and long regarded as its most reliable, has suspended operations. Quartz also reports that many domestic passengers have been stranded because local airlines have not been able to refuel their planes because of a shortage of jet fuel. Civil aviation challenges reflect Nigeria’s current economic recession, a result of low international oil prices and a cut in Nigeria’s production because of an insurgency in the oil-rich delta. The Nigerian government has adopted currency controls that make it difficult to repatriate dollar profits. Shortages of jet fuel is a periodic problem, even in more prosperous times. Nigeria has faced such challenges before, notably during the military administration of Ibrahim Babangida when a two-tiered exchange rate greatly reduced the profits of foreign carriers. Nevertheless, in normal times, routes between Nigeria and the Persian Gulf and Europe are very profitable. Hence, European airlines strive to maintain a presence when times are bad. As such, British Airways, AirFrance, KLM, Lufthansa, Alitalia and Delta have not cut service, at least for now.

This piece has been co-authored by Nathan Birhanu and Bochen Han. Nathan is an intern for the Council on Foreign Relations Africa Studies program and is a graduate of Fordham University’s Graduate Program in International Political Economy & Development. Bochen is an intern for the Council on Foreign Relations Asia Studies program and is an undergraduate majoring in political science at Duke University. As China’s involvement with Africa intensifies, media coverage has also proliferated, bringing to the forefront the everyday interactions between Chinese and Africans within Africa. What is less discussed is the story in reverse: how Africans are interacting with the Chinese in China. The most emblematic of the African experience in China is that of African migrants in the southern metropolis of Guangzhou, China’s third largest city after Beijing and Shanghai. In the late 1990s, Africans began moving to the city to take advantage of the boom in export trading. Estimates of the number of Africans living in Guangzhou range from 20,000 to 200,000. A better estimate is difficult because of the itinerant nature of Africans in China. Some African nationals stay as little as three months, while others settle permanently. Unlike the majority of Chinese migrants who go to Africa with the backing of a Chinese corporation, Africans usually come individually with little financial capital and few employment guarantees. An African relocating to China is often taking a gamble that reflects both push and pull factors, including poor conditions at home and the lavish opportunities apparently awaiting in the world’s second largest economy. Lately, however, Africans seem to be relinquishing their Chinese Dream. While no official data exist, anecdotal evidence suggests that hundreds, if not thousands, of Africans are returning home. This trend, commonly referred to as “U-turning,” is driven by a combination of social and economic factors. First, China’s economy is maturing. When Africans first arrived, the rapidly growing Chinese economy allowed African businessmen to purchase goods in bulk for resale in their home countries at a substantial markup. However, in recent years, partly due to international pressure, China has cracked down on violations of intellectual property rights, hindering the production of cheap, often-counterfeit goods. Rising Chinese workers’ wages and Africans’ own living costs have cut profit margins for these African middlemen. Furthermore, in response to the growing number of foreigners in the country, China recently made its first major reform to its immigration policy since 1986. The 2013 “Exit and Entry Administration Law,” seen by authorities as a natural next step to China’s development, leads to harsher overstay penalties and visa restrictions and has generated discontent within the African diaspora. Second, Chinese racism and xenophobia of the African diaspora remains, even if perhaps less so than in earlier decades. This is due to a dearth of cross-cultural understanding and negative stereotypes from Africa’s colonial past. Compounding the issue are China’s centuries-old beauty standards, which view those with darker skin as less civilized and less worthy of being deemed beautiful. Given China’s ethnic homogeneity and lack of history of immigration, changing social attitudes is a monumental task. In a climate of greater economic uncertainty, Africans who have found it difficult to integrate socially are gradually realizing that the personal costs of staying may be too high. Third, the Chinese government is sending mixed signals to the African diaspora as to whether or not it welcomes their presence. On the one hand, leaders at the highest levels continually espouse the friendship between the African and Chinese peoples, and the importance of South-South cooperation. People-to-people relations featured prominently at the 2015 Forum on China-Africa Cooperation, with the Chinese government pledging to host a variety of nationwide initiatives such as the “Year of an African country.” On the other hand, the Chinese government’s “beautification” campaign in Guangzhou’s ‘Little Africa,’ while part of a broader policy initiative and not dissimilar to demolition campaigns in other cities, has disrupted African lives and resulted in an unwelcome, heavier police presence. As with the demolition of churches as “illegal structures,” the supposedly innocent dismantling of street markets and signage promoting foreign trade may carry political undertones: a Wikileaks document reveals that government officials were once concerned that the concentrated display of Africans in Guangzhou would “[prompt] many Chinese to move out,” suggesting that beautification efforts may be aimed at dispersing migrants to other parts of China, or out altogether. Fourth, changing economic conditions within African countries have caused some Africans to reconsider China. The rapid growth of several African economies combined with heavy Chinese investment in Africa has created opportunities that did not exist two decades ago. Furthermore, the collapse in commodity prices in resource-dependent African countries have played a factor, notably in Nigeria. Abuja’s currency policy has imposed restrictions on dollars leaving Nigeria, constricting African businesses abroad as they are not able to repatriate revenues. This is particularly important for African traders in China who use dollars from their origin countries for business operations. The depressed oil market and slowing Chinese economy, which is a large oil importer, suggests that the dollar’s scarcity will not alter anytime soon. Going forward, there is little sign that the African exodus from China will abate. While some African migrants are dispersing to rural or peri-urban areas, most may not be willing to wait for Chinese government initiatives that would encourage them to stay. Official Chinese insensitivity to African residents may lose China its most valuable proponent for one of the most dynamic and potentially consequential partnerships in the twenty-first century.

Rachel Brown is a research associate in Asia Studies at the Council on Foreign Relations. In February, $81 million stolen from the central bank of Bangladesh’s account at the Federal Reserve Bank of New York was laundered through the Philippines. Most observers worried about the security of the institutions involved. But equally if not more important is the potential impact on overseas Filipino workers. Increased scrutiny of vulnerabilities in the Philippines’ anti-money laundering provisions could make it harder for the over ten million Filipinos working abroad to send remittances home, as has occurred in many other developing nations. Globally, the Philippines is the third-highest recipient of remittances, which compromised 10 percent of GDP in 2014. These funds help fuel domestic consumption, and anything that affects the cost or ease of sending money to the nation will have significant economic implications. The Bangladesh Bank scandal highlights flaws in the Philippines’ current anti-money laundering regime. While the government strengthened regulations in 2013, highly secretive banking laws remain. Additionally, the 2001 Anti-Money Laundering Act does not cover the Philippines’ thriving casino industry, the destination of the pilfered funds. The revelation of these flaws and the parties involved may taint the image of the firms Philippine workers use to send money home. Philippine Senate investigations found that PhilRem, a Filipino remittance company in the United Kingdom and United States, converted and transferred the money into the accounts of one casino tour operator at the Rizal Commercial Banking Corporation (RCBC). In theory, the Philippines’ Anti-Money Laundering Act encompasses businesses like PhilRem that send or receive funds from workers overseas.  In practice, the funds are small and hard to track, and firms may misidentify themselves. (PhilRem originally listed as a land-transport company). PhilRem partners with major foreign banks such as Barclays and Lloyds to facilitate goods and cash transfers, but its involvement in the scandal could make banks wary of remittance firms’ capacity to monitor for suspicious transactions. The scandal has also sparked concern that the Philippines will be blacklisted by the inter-governmental Financial Action Task Force on Money Laundering (FATF). The Philippines was on the FATF blacklist in the early 2000s. When the FATF previously considered sanctioning the Philippines, officials worried about the repercussions for remittances. Senator Serge Osmeña noted this March that if re-blacklisted, “We will be at a loss because our banks will not be able to transact with their counterparts in New York and London.” Sending money to a blacklisted nation may entail higher fees, delays, and even denial of service. Even if the Philippines is not blacklisted, remitters could still face challenges. The experiences of other countries perceived as weak on money laundering reveal potential risks. After September 11, requirements to monitor stringently the paths and recipients of money – and penalties for not doing so – increased. Some foreign banks simply ended partner relations with firms in suspect nations, as there was little incentive to risk incurring fines given the small profits. These changes hit particularly hard in Somalia as by 2015, most major American, British, and Australian banks ceased remittance services. Remittances also dropped considerably in Guyana when the Caribbean Financial Action Task Force blacklisted it. Already, Philippine firms feel the squeeze of heightened suspicion. In late March, the Cebu Daily News reported greater scrutiny of remittances sent through a Filipino company in Australia. Even prior to the scandal, nearly forty banks shut down accounts of Filipino remittance firms in sixteen nations. In early 2016, RCBC, the Bank of the Philippine Islands, and Philippine National Bank all lost relationships with correspondent banks in Italy. If more firms lose relationships with international partners, reduced competition could lead to higher fees. Further closures or increased fees would also deal a blow to already weakening Philippine remittances. In July 2015, remittances grew at 5.9 percent their slowest rate in half a decade. Falling oil prices, in particular, have hurt remittances, roughly a third of which come from the Gulf. So what are the prospects for reforms that might forestall such closures? Last Thursday, the Philippine Central Bank’s governor announced efforts to minimize the damage to remittances from foreign banks limiting risk exposure. An inter-agency assessment of terrorist financing and money laundering weaknesses is underway, and the scandal has also revived interest in a biometric national ID system to better track who ultimately receives remitted funds. There is no question that the Philippines’ genuine money laundering vulnerabilities necessitate closer supervision, but lasting changes will occur only after the next president’s inauguration. Until then, banks should avoid too hastily curtailing services, otherwise families of overseas workers may pay too high a price.

On December 10, President Jacob Zuma fired Nhlanhla Nene, the well regarded finance minister, and replaced him with the unknown and inexperienced David van Rooven. Though Zuma is not required by the South African constitution to consult with anybody on cabinet appointments, the fact that he did not inform his cabinet or provide public explanation for his removal of Nene and appointment of van Rooven may have been the last straw. South Africa already has been buffeted by the fall in commodity prices, uncharacteristically low growth rates, and fears that the widely anticipated U.S. Federal Reserve’s increase in interest rates will attract investor funds from emerging markets. The Rand, the South African currency, plunged, the Johannesburg Stock exchange indexes swooned, and government borrowing costs jumped. Business commentary was uniformly hostile to Nene’s firing, with dire predictions that the new appointment foreshadowed an end to South Africa’s hitherto prudent macroeconomic policy. The governing African National Congress’s (ANC) two partners, the Congress of South African Trade Unions (COSATU) and the South African Communist Party (SACP) were also not informed of the move and criticized it. The general public did not like the move either. In South Africa #ZumaMustFall became the top Twitter hashtag. Four days later, Zuma reversed himself and appointed the highly regarded Pravin Gordham as finance minister, a position he held from 2009 to 2014. The Rand and the stock markets recovered (if not completely). Opposition to the Nene firing from within the ANC is likely the reason for Zuma’s reversal. If Zuma shows little understanding of how a modern economy works (he has almost no formal education), plenty of ANC leaders not only understand it, but are personally invested in it. As has been the case in the past, the South African political economy has once again self-corrected with the appointment of Gordham, who has successfully steered South Africa through its only recession since the coming of “non-racial” democracy in 1994. The South African media is now reporting that Zuma and his political allies within the ANC have been politically wounded. The ANC faces local elections in 2016 and an internal fight in 2017 over Zuma’s successor as ANC leader. The opposition parties, especially the center-right Democratic Alliance and the left-wing Economic Freedom Fighters, are visibly strengthening as public disillusionment with Zuma grows: the South African media reports that 66 percent of the public distrusts the president. At this point, the party leadership race appears to be between Nkosazana Dlamini-Zuma, Zuma’s former wife and his candidate of choice, and Cyril Ramaphosa, an architect of the 1994 “non-racial’ democratic settlement and the candidate of business. The South African media is also speculating that the ANC could remove Zuma as party leader soon. As of December 14, #ZumaMustStillFall had replaced, #ZumaMustFall. Only the ANC can remove its party leader and, in effect, the president. That has happened before; in 2008, the party removed Thabo Mbeki as party leader and forced him to resign the presidency a few months later. As a practical matter, Zuma could be removed by a majority vote of the National Assembly or by a motion of no confidence. The ANC holds 62 percent of the seats in the National Assembly. How ANC members vote would be largely determined by the party’s National Executive Committee (NEC). Zuma has appointed most NEC members to government posts. If Zuma were to fall, many or most of them would lose their jobs and salaries. Hence, at this stage, it is unlikely that the NEC will turn against Zuma. However, this episode has probably weakened the candidacy of Dlamini-Zuma to be his successor as party leader and enhanced the position of Cyril Ramaphosa. Perhaps the significance of the past five days is that once again South Africa’s political system has demonstrated an ability to self-correct within a democratic political framework and an economy largely conducted according to free-market principles.

Allen Grane is a research associate in Africa Policy Studies at the Council on Foreign Relations. Recently, the Chinese government closed a deal with the Djibouti government to build its first international military base. The deal grants the Chinese government land rights for ten years, and has abruptly sparked debate over Chinese military interests in Africa. Commentators’ fears have focused on the threat of China’s military expansion in the region. The new base, however, reflects China’s long-term economic goals in Africa more than its current military objectives. It is important to put Chinese investment in context. According to the Brookings Institution, Chinese investment, primarily in extractive industries, equals between 3 and 4.4 percent of foreign direct investment (FDI) in Africa. This is behind France, the United Kingdom, the United States, and even South Africa. However, Chinese investment in Africa is growing. As one foreign observer has noted, China hopes that in the Africa of the future, Africans will be sleeping on Chinese mattresses, using Chinese cell phones, and driving Chinese cars. African governments have been very receptive to working with China, increasing the incentive for Chinese investments; and Africans view Chinese investors more positively than people in Europe, Asia, or Latin America do. Not all stories about China’s investment in Africa have been positive, however. China has been accused of exploiting African countries for natural resources (including wildlife), importing its own labor, and keeping its African employees in poor working conditions. As the Chinese move away from commodities investments, they are still investing heavily in infrastructure projects. In recent years, China has invested in a number of major infrastructure projects across Africa, including a ten billion dollar port project in Tanzania, a multi-billion dollar bullet train in Nigeria, and a new parliament building in Zimbabwe. The new Tanzanian port, located in Bagamoyo, will be the largest in East Africa. Most recently, Chinese President Xi Jinping pledged sixty billion dollars in assistance and loans to Africa at the Forum on China-Africa Cooperation in South Africa. (We are yet to see if China will follow through on this promised assistance.) It is no surprise that the Chinese would place a military post in Djibouti. They have been known to protect their African assets before. For example, China deployed a battalion of peace keepers to protect its oil assets in South Sudan at the end of 2014; in addition, like the U.S. military, they have run anti-piracy operations around the Gulf of Aden for years. The Chinese will be on the ground along with a number of French and Japanese troops who operate out of the Djibouti-Ambouli International Airport and some 4,000 U.S. military personnel located at Camp Lemonnier. (The United States is currently expanding Camp Lemonnier and in 2014 signed a twenty year deal to continue operating there.) The base will serve a number of different functions: as a logistics hub for naval operations to support Chinese anti-piracy operations, as a staging point for operations similar to the deployment in South Sudan, and a means for ensuring that Chinese infrastructure investments are safe. The Chinese military serves the very real purpose of protecting and securing China’s trade and economic development, and as Chinese economic interests expand it is likely that their military presence will grow as well. The United States should remain cognizant of the potential for the base to serve a more combative role in the region. In the meantime, however, Washington should see the new base as an opportunity to begin working with the Chinese in Africa and build a platform for future U.S.-China cooperation.

Mauricio Macri, mayor of Buenos Aires and leader of the Cambiemos coalition, won yesterday’s presidential run-off, becoming the first non-Peronist president in nearly fifteen years. From his start on December 10 he will face several severe economic challenges: 1. Dwindling foreign reserves Official foreign reserves total just $26 billion. Of this, over half reflects swap agreements with China and other commitments, leaving just $11 billion in liquid assets. This limited buffer will likely decline as the summer progresses, until the soybean harvest begins in March. Though the season looks bountiful, soy prices are now just half 2012 levels, lessening the benefit for foreign exchange coffers. These low levels will calculate into the government’s negotiations with holdout creditors, led by Paul Singer’s NML Capital, who collectively hold $7.9 billion in defaulted Argentine bonds. Any quick solution will require the foreign reserve benefits of settling—including inflows of new capital—to outweigh the potential outflows. 2. Diverging exchange rates The difference between the official rate—9.5 pesos to the dollar—and the black market or “blue dollar” near 15—leads to local economic distortions and discourages foreign investment into the economy. Macri has already promised to lift currency controls, an important step towards letting markets again work. But it will spur inflation—which independent economists estimate at over 25 percent already. DolarBlue.net, "Centavo a Centavo, la Devaluación del Peso," 2015. The recent sale of $15 billion’s worth of dollar denominated futures contracts by the central bank will make a devaluation more costly for the government, adding potentially $7 billion to the public debt burden. 3. Growing fiscal deficit The added public debt burden comes at a time when the government is already running a fiscal deficit equal to 7 percent of GDP (the highest since 1982). This reflects the greatly expanded state—double its size as a percentage of GDP from when Nestor Kirchner took office in 2003. A big portion is public salaries—the public sector now employs 3.7 million of the 17 million members of the economically active population. La Nacion, "El Gobierno Incorporará Este Año Más de 25.000 Empleados," 2015. 4. Slower economic growth and rising unemployment The economic outlook for Argentina is grim. The International Monetary Fund projects less than 1 percent growth for the next several years due to falling commodity prices, stagnant industrial production, and domestic economic distortions. Argentina’s largest trading partner, Brazil, faces its deepest recession since the global financial crisis, and China’s slowdown, though less extreme, has weakened demand for Argentine commodities. Private sector employment is now falling, down 1.3 percent year on year. 5. Tough politics In addition to the difficult external climate, Macri faces tough domestic politics. His coalition claims some 90 of the 257 seats in the lower house (his own party 18), meaning any legislative reforms will require Peronist support. --- Argentina holds strong advantages—including a plethora of untapped mineral deposits and the world’s second-largest shale gas reserves. Its agricultural bounty remains, and an overhaul of punitive export taxes on corn and soy should bring in more investment, boosting productivity and output, as Argentina’s crops are profitable even at lower global prices. Macri will benefit from his promises of change, and a few quick market friendly moves. His technocratic team—many trained abroad—understands this, as does the president-elect. Investors are already betting on his turnaround success—pushing government bonds up 30 percent, and the Merval (Argentina’s benchmark stock index) up over 60 percent since the year’s start. The new government looks to entice back the estimated $225 billion Argentines have sent abroad through tax amnesties and other policies. Even if a part comes back, combined with new foreign direct investment and loans (assuming Argentina comes back to world markets), this money could help revive Argentina’s over $500 billion economy.

This is a guest post by Ashlyn Anderson, research associate for India, Pakistan, and South Asia at the Council on Foreign Relations. India recently hosted a milestone summit attended by delegations from all fifty-four African countries. Confronting similar development challenges, India and the nations of Africa charted plans to deepen ties and unite to address shared global concerns. India is one of many countries keen to participate in Africa’s rise, and the third India-Africa Forum Summit signaled an alignment of interests and the potential for a closer relationship. Following the summit, the group released the Delhi Declaration 2015 along with the India-Africa Framework for Strategic Cooperation that outline their shared vision. The countries cited a common priority of inclusive economic growth, and strategies to address such development challenges as climate change, gender inequality, poverty alleviation, and terrorism. India and Africa share a long history most recently derived from their colonial experiences. India’s Jawaharlal Nehru, Egypt’s Gamal Abdel Nasser, Ghana’s Kwame Nkrumah, and the leaders of Indonesia and Yugoslavia founded the Non-Aligned Movement in 1960 based on the principles laid out at the Bandung Asian-African Conference in 1955. Since the end of the Cold War, in an era of increased globalization, the group has turned toward the issue of inequality in the international economic order. But the heyday of the movement has largely passed, and the convening of the first India-Africa Forum Summit in 2008 demonstrated the desire to take India’s relationship with the African continent forward using a different venue. Along with political ties, India and the African continent share many social links. A 2010 report from the Indian Ministry of Overseas Indian Affairs reported the Indian diaspora in Africa surpassing two million in 2001 with the largest concentrations in South Africa (1,000,000), Mauritius (715,756), and Kenya (102,500). Africans increasingly migrate to India for employment and education. India offered 50,000 additional scholarships at the 2015 summit to encourage Africans to study in India. India-Africa trade currently stands at nearly $72 billion, twice as much as five years ago but still small in comparison to the value of the China-Africa trade, over $200 billion. However, the resurgence of India’s economy and Prime Minister Modi’s diplomatic activism has positioned India as a rising economic power capable of rivaling China’s economic heft in Africa. Source: Bilateral Investment Statistics, United Nations Conference on Trade and Investment, 2012 India’s total foreign direct investment (FDI) in Africa places it among the continent’s top investors. However, Indian investment in Africa has not been without obstacles and a disproportionate amount of India’s Africa FDI stock is in Mauritius, an island strategically located in the Indian Ocean. A sample of Africa’s top investors below shows how emerging investors such as China, India, and Japan, stack up against some of Africa’s traditional investors. As Western countries adjust to slower economic growth and China reacts to its recent downturn and steps up its engagement with other areas such as Latin America, India has an opportunity to play a much larger role than in the past. India does not yet eclipse the presence of countries such as China or the United States in Africa, but the 2015 summit effectively elevates India-Africa ties. Invoking shared history and ideals, India and the nations of Africa will increasingly have the economic capacity and influence to advance a common agenda. At this year’s summit, India announced $10 billion in lines of credit would be extended to African nations over the next five years in addition to another $7.4 billion pledged in 2008. The announcements of $600 million in grant assistance along with a $100 million India-Africa development fund and a $10 million India-Africa health fund demonstrates India’s transition to a more active development donor and partner.