Ebola’s Potential Influence on Exchange Rates
We all know that global political events and everyday domestic data can influence exchange rates dramatically. For instance, the Pound Sterling exchange rate took a dive right before the Scottish Referendum as Scotland’s independence would have direct consequences for Sterling. At the moment, the Pound is experiencing volatility as the tide of UK politics is turning, and the currency is likely to experience fluctuations until the general election next May.
But how much of an impact do less currency-related events have on exchange rates? The question we’ll be focussing on particularly in this article is what impact will the latest Ebola health scare have on foreign exchange rates?
Ebola Crisis
The latest Ebola crisis is the largest in history and has so far affected 8,000 people in multiple countries in West Africa, with the death toll reaching over 4,000. The most prominently affected countries are Guinea, Liberia and Sierra Leone. But the outbreak has begun to cross continents and two cases of suspected Ebola have been seen in the UK over the weekend. The government has now enforced screening at airports, but there’s wide debate on the efficiency of such a measure.
So what has this meant for Africa? Food prices have risen during the epidemic to exceed five-year highs, a factor that causes social unrest and malnutrition as families struggle to feed themselves. In previous years citizens in many African countries rioted in response to rising food prices, and now the increase in the cost of items such as corn, rice and beans threatens the same outcome. African currencies have also fallen as risk appetite wanes and safe-haven assets such as the US Dollar (USD), Swiss Franc (CHF) and Japanese Yen (JPY) have become increasingly in demand. Moreover, after the Ebola epidemic dies down, there’s likely to be a continuing effect on the West African economies as they recover. Forex expert Jack Allen commented: ‘Even if currencies do not continue to fall, import-price inflation is likely to remain high for some time.’
In addition, Ebola has caused the closure of markets in many affected areas, meaning people cannot buy food. World Food Program spokeswoman Frances Kennedy commented: ‘The population is in distress.’
So, let’s bring the concept of Ebola in Western countries to the forefront now. Investor sentiment, as we’ve discussed, has already moved away from countries that recorded multiple cases of Ebola, but what will happen when the disease inevitably spreads? The World Bank has warned that Ebola is likely to devastate many African economies, and now fears of infection are surfacing in Europe as well as the US, which has already seen one fatality.
Interest Rate Hikes, Global Growth Impact on Exchange Rates
There are many other factors dictating exchange rate movement at the present time. In recent weeks the US Dollar took a hit in response to weak global growth and the International Monetary Fund (IMF) suggested that five years of stagnation could be upon us. One of the main focal points for investors at the moment is interest rate hikes, more specifically whether the Bank of England (BoE) or the Federal Reserve will be the first to increase borrowing costs out of the Group of Seven (G7) developed nations.
Global growth concerns have been driven specifically by downturns in regions like China and the Eurozone, but this week has highlighted that African economies could be seriously damaged by Ebola.
The World Bank currently speculates that: ‘If the epidemic was to significantly infect people in neighbouring countries, some of which have much larger economies, the two-year regional financial impact could reach $32.6 billion US Dollars by the end of 2015.’ The cost of trying to contain and treat Ebola is already adding pressure to the slowdown the IMF was already concerned about. These figures, of course, are a rough estimate. They fail to consider what would happen in the face of a global pandemic. Furthermore, it doesn’t take into account any costs extended beyond next year.
At recent IMF conferences Managing Director Christine Lagarde attended recent IMF conferences where she wore a badge that stated: ‘Isolate Ebola, Not Countries’. Lagarde went on to say: ‘We should be very careful not to terrify the planet in respect of the whole of Africa.’
Which brings us on to the next point – fear.
Could Ebola Fears cause Pound Sterling, US Dollar and Euro Declines?
Unfortunately, any fears in the market cause currency movement. As industry expert David R. Kotok explains: ‘Economic consequences also result when fear and concern change behaviours. If consumers and businesses retrench by reducing flights on airplanes, changing vacation plans or altering business connections in a globally interdependent world, GDP [Gross Domestic Product] growth rates will fall farther. We do not know how much, at what speed, or for how long.’
As travel bans to affected countries increase, shares have dipped in airlines that travel between Africa, Europe and the US. Unfortunately the result of Ebola will be economic losses which could even cripple some of the worst hit African economies. If the Ebola situation worsens, investors could sell off shares in airline companies, an action that could see a decline in traffic as well as a severe hit in revenue. German based analyst Andrew Zarnett commented: ‘History has shown us that should the Ebola epidemic spread domestically, it will have a significant impact on the airline and the entire hospitality sector.’ Furthermore, nobody has been able to accurately estimate the cost of healthcare to control and treat the current epidemic.
So, if the situation worsens, investors may begin pushing aside economic market concerns such as rate hikes, and place their trust in safe-haven currencies until it blows over. The affect on Africa is already expected to be catastrophic, with the long-term impact forecast to linger for some time. But the likelihood of it seriously affecting currencies such as the Pound Euro and US Dollar is minimal at the moment.
In areas of Africa near to where the three worst affected countries are, other risks are still very prominent. For instance, faltering commodity prices for items such as oil is a very real threat to Nigeria. Kenya’s concerns regard a fall in tourism, whilst help from the IMF is at the forefront of Ghana’s concerns.
Forecast for Ebola Containment
If countries remain educated to the threat of Ebola and how to prevent its spread, containment could be reasonably successful. The virus passes through infected bodily fluid and isn’t airborne. Therefore, hand washing and cleanliness are of vital importance. Headlines have been drastic and cases of deaths have been reported heavily in the media, triggering ripples of fear through the market. However, at the moment the main concern for currencies is the damage to the African economy. African investment strategist Ayo Salami suggests: We have not seen outflows from our fund. There is no evidence in the African market of investors heading for the exit – there is no sell-off.’
Hopefully, the epidemic can be quashed through containment, and Canada has already begun launching human clinical trials for an Ebola vaccine. In wealthier countries with more ability to formulate vaccines, and better healthcare facilities, the virus has more chance of being contained. And while the cost of quelling such a deadly virus may cause a drag on global growth, the UK is likely to see little effect. In the US, the White House has already stated that the world’s largest economy is pledging large amounts of money to fighting the virus in Africa, as well as preparing to contain the virus in the US. The White House stated: ‘Domestically, we have prepared for the diagnosis of an Ebola case on US soil and have measures in place to stop this and any potential future cases in their tracks.’
As the world prioritises halting the spread of the virus, major currencies should remain relatively stable. If Ebola can be reasonably contained the market may only see small and likely temporary effects. However, if the Ebola situation becomes out of hand, or a pandemic occurs, the currency market could experience a shake-up in exchange rates.
