Daily Management Review

Rate Hikes By The US Fed, Combined With A Strong Dollar, Threatening Political Stability In Africa


Rate Hikes By The US Fed, Combined With A Strong Dollar, Threatening Political Stability In Africa
According to a new report, the US Federal Reserve's tightening of its monetary policy and a strengthening of the US dollar are posting a negative impact on African countries' balance sheets and public debt burdens.
The Fed implemented its fourth consecutive three-quarter point interest rate increase in early November, as it pushed the short-term borrowing rate to its highest level since January 2008.
Meanwhile, a combination of rate hikes, the Ukraine war, and recession fears has pushed the traditional "safe haven" greenback higher. Despite a recent drop from its peak in late September, the DXY U.S. dollar index is still up more than 11% year to date.
As a consequence of the Covid-19 pandemic and Russia's invasion of Ukraine, government debt in Sub-Saharan Africa has reached its highest level in over a decade. In a report released on recently, risk consultancy Verisk Maplecroft stated that debt is now 77% of GDP on average in six key African economies: Nigeria, Ghana, Ethiopia, Kenya, Zambia, and Mozambique.
According to the report, these countries have added a median of 10.3 GDP percentage points to their debt burden since 2019.
As a result of supply chain disruptions caused by the post-pandemic surge in demand and the Ukraine war, central banks have raised interest rates, further constraining African balance sheets.
“Consecutive base rate rises by the U.S. Federal Reserve have resulted in reduced capital inflows into Africa and widened spreads on the continent’s sovereign bonds,” said Verisk Maplecroft Africa Analyst Benjamin Hunter.
“Exposure to international interest rate changes is exacerbated by the large proportion of African public debt that is held in dollars.”
According to Verisk Maplecroft, the capacity of African governments to honour their external debt will persist to be hampered by relatively scarce financing and higher interest rates, while domestic rate hikes in reaction to surging inflation are also increasing the total burden of public debt of many Sub-Saharan African economies.
“High public debt levels and elevated borrowing costs will constrain public spending, which will likely result in a deteriorating ESG and political risk landscape across the continent,” Hunter added.
“Weaker sovereign fundamentals and higher ESG+P risks will in turn deter investors, further weakening Africa’s market position.”
According to Verisk Maplecroft, the Fed's hawkish stance will cause its base rate to rise from 3.75% in November to between 4.25% and 5% in 2023, putting further downward pressure on African sovereign debt markets.
The firm also does not expect a significant loosening of Africa's domestic monetary conditions over the next year, which Hunter believes will keep borrowing costs high and "disincentivize inflows into African sovereign debt markets."
Hunter identified Ghana as one of the countries most impacted by the negative feedback loop created by a growing public debt burden, a constrained fiscal position, and a deteriorating ESG and political landscape.
The West African country's public debt has risen from 62.6% of GDP in 2019 to an estimated 90.7% in 2022, while inflation hit 40.4% in October and the central bank raised interest rates by 250 basis points to 27% on Monday. Since the tightening cycle began in 2021, the Bank of Ghana has raised interest rates by 1,350 basis points.
With the cedi currency, one of the worst performers in the world this year, continuing to lose value and inflation rising, analysts at Oxford Economics Africa forecasted this week that the main interest rate will likely be raised by 200 basis points early in 2023.
“With living standards deteriorating as a result, civil unrest and government stability risks have worsened. In November 2022, demonstrators in Accra called for the resignation of President Nana Akufo-Addo,” Hunter said.
“In turn, this instability will widen spreads on Ghana’s sovereign debt, deepening the negative feedback loop by increasing external borrowing costs; our research indicates that weaker performers on the Governance pillar of our Sovereign ESG ratings have to contend with 25% higher yields on average.”