ACCRA, GHANA – NOVEMBER 05: Ghanaians march during the Ku Me Preko demonstration on November 5, 2022 in Accra, Ghana. People took to the streets of Ghana’s capital to protest the rising cost of living, which has worsened since the Russian invasion of Ukraine
Ernest Ankomah/Getty Images
Tightening US Federal Reserve policy and a strengthening dollar are having a negative impact on African nations’ balance sheets and public debt, according to a new report.
In early November, the Fed implemented a fourth straight three-quarter-point rate hike to bring the short-term interest rate to its highest level since January 2008.
Meanwhile, a combination of rate hikes, the war in Ukraine and recession fears have buoyed the traditional ‘safe haven’ greenback. Despite a recent slowdown from its late September peak, the DXY US Dollar Index is up more than 11% year-to-date.
Public debt in sub-Saharan Africa has risen to its highest level in more than a decade as a result of the Covid-19 pandemic and the Russian invasion of Ukraine. In a Tuesday report, risk consultancy Verisk Maplecroft highlighted that debt now averages 77% of gross domestic product in six major African economies: Nigeria, Ghana, Ethiopia, Kenya, Zambia and Mozambique.
These nations have increased that debt burden by an average of 10.3 percentage points of GDP since 2019, the report said.
As supply chain disruptions caused by the post-pandemic demand surge and the war in Ukraine have prompted central banks to hike interest rates, the rise in government bond yields has further weighed on African balance sheets.
“Successive Federal Reserve rate hikes have reduced capital flows into Africa and widened spreads on the continent’s government bonds,” said Benjamin Hunter, Africa analyst at Verisk Maplecroft.
“Vulnerability to international interest rate changes is exacerbated by the large proportion of African sovereign debt held in dollars.”
African governments’ ability to service their external debt continues to be weakened by tighter funding and higher interest rates, Verisk Maplecroft said, while domestic rate hikes in response to rising inflation are also exacerbating the overall public debt burden of many sub-Saharan African countries.
“High sovereign debt and elevated borrowing costs will constrain public spending, likely leading to a deterioration in the ESG and political risk landscape across the continent,” added Hunter.
“Weaker sovereign fundamentals and higher ESG+P risks, in turn, will deter investors and further weaken Africa’s market position.”
Verisk Maplecroft expects the Fed’s dovish stance to raise its interest rate to between 4.25% and 5% in 2023 from 3.75% in November, prolonging downward pressure on African sovereign debt markets.
The company also doesn’t anticipate any significant easing in Africa’s domestic currency conditions over the next 12 months, which Hunter says will keep borrowing costs high and “deter flows into African government bond markets.”
Ghana in the spotlight
Hunter noted that Ghana has been the hardest hit by this negative feedback loop between a tightening sovereign debt burden, tight fiscal positions and a deteriorating ESG and political landscape.
The West African nation’s public debt has risen from 62.6% of GDP in 2019 to an estimated 90.7% in 2022, while inflation surged to 40.4% in October and the central bank on Monday cut interest rates by 250 basis points to March 27 % raised. The Bank of Ghana has now hiked 1,350 basis points since the tightening cycle began in 2021.
However, as the cedi currency — one of the world’s worst performers this year — continues to depreciate and inflation continues to rise, analysts at Oxford Economics Africa forecast this week that the main interest rate is likely to be hiked another 200 basis points in early 2023.
“As living standards deteriorate as a result, civil unrest and risks to government stability have worsened. In November 2022, protesters in Accra called for the resignation of President Nana Akufo-Addo,” Hunter said.
ACCRA, GHANA – NOVEMBER 05: Ghanaians march during the Ku Me Preko demonstration on November 5, 2022 in Accra, Ghana. People took to the streets of Ghana’s capital to protest the rising cost of living, which has worsened since the Russian invasion of Ukraine.
Ernest Ankomah/Getty Images
“In turn, this instability will widen spreads on Ghana’s government bonds and deepen the negative feedback loop from rising external borrowing costs; our research shows that underperformers on the governance pillar of our ESG ratings for government bonds have to contend with 25% higher yields on average.”
The IMF will visit Ghana again in December to continue talks on the country’s request for a debt restructuring plan. Meanwhile, Moody’s on Tuesday downgraded the country’s credit rating even lower to “junk” territory, citing the likelihood that retail investors would suffer large losses as a result of the restructuring.
The IMF is currently granting or discussing debt relief with 34 African nations, including under the G-20 Common Framework established during the Covid-19 pandemic. Verisk Maplecroft notes that while IMF assistance will help reduce fiscal deficits and restructure debt, countries that are asked by the IMF to cut spending are likely to experience “negative ESG+P trade-offs”.
“Although the IMF has emphasized that targeted social spending for the most vulnerable must not be cut, social spending on programs like food and fuel subsidies is likely to be scaled back,” Hunter said.
“The inability to mitigate the impact of external economic shocks and inflation through public spending is likely to have repercussions across the continent’s ESG+P risk landscape.”