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Federal Reserve Rate Hikes and Stronger Dollar Increase Risk of Political Instability in Africa

ACCRA, GHANA – NOVEMBER 5: Ghanaians march during the ‘Ku Me Preko’ demonstration on November 5, 2022 in Accra, Ghana.People take to the streets of Ghana’s capital to protest the rising cost of living that has worsened since Russia’s invasion of Ukraine.

Ernest Ankoma/Getty Images

Tightening US Federal Reserve monetary policy and a stronger dollar are having knock-on effects on African countries’ balance sheets and public debt burdens, according to a new report.

In early November, the Fed raised rates by 3/4 percentage points for the fourth time in a row, taking short-term borrowing rates to their highest level since January 2008.

Meanwhile, interest rate hikes, the war in Ukraine and fears of a recession have combined to push the traditional “safe haven” US dollar higher. Despite the recent downward trend since peaking in late September, DXY USD Index is up more than 11% year-to-date.

Sub-Saharan Africa’s government debt has risen to its highest level in more than a decade as a result of the Covid-19 pandemic and Russia’s invasion of Ukraine. In a report on Tuesday, risk consultancy Verisk Maplecroft found that debt averaged 77% of gross domestic product across Africa’s six major economies (Nigeria, Ghana, Ethiopia, Kenya, Zambia and Mozambique). emphasized.

These countries have added a median 10.3 GDP percentage points to this debt burden since 2019, the report notes.

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A post-pandemic surge in demand and supply chain disruptions caused by the Ukraine war have forced central banks to raise interest rates, while rising sovereign bond yields are further weighing on African balance sheets.

“Successive hikes in base interest rates by the US Federal Reserve have reduced capital inflows to Africa and widened spreads on the African continent’s sovereign bonds,” said Benjamin Hunter, Africa analyst at Verisk Maplecroft. said.

“Exposure to international interest rate fluctuations is exacerbated by a large portion of African public debt held in dollars.”

Verisk Maplecroft said the ability of African governments to repay their external debts will continue to be undermined by funding shortages and rising interest rates, adding that higher domestic interest rates in response to the surge in inflation would also help many sub-Saharan governments pay their debts. increased the overall public debt burden of Africans. Country.

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“High levels of public debt and rising borrowing costs are likely to constrain public spending and exacerbate the ESG and political risk landscape across the continent,” Hunter added.

“Weaker sovereign fundamentals and rising ESG+P risks will alienate investors and further weaken Africa’s market position.”

Verisk Maplecroft expects the Federal Reserve’s hawkish stance to rise from 3.75% in November to between 4.25% and 5% in 2023, bringing continued downward pressure on African sovereign debt markets doing.

The firm does not expect domestic financial conditions in Africa to ease significantly over the next 12 months, with Hunter saying that borrowing costs will remain high and “hinder inflows into the African sovereign bond market.” ” he said.

spotlight on ghana

Mr Hunter noted that Ghana is most affected by the negative feedback loop between its deepening public debt burden, constrained fiscal situation, deteriorating ESG and political climate.

The West African nation’s public debt rose from 62.6% of GDP in 2019 to an estimated 90.7% in 2022, but inflation surged to 40.4% in October and the central bank cut interest rates to 250 basis points on Monday. We raised the points to 27%. The Bank of Ghana is now up 1,350 basis points since the tightening cycle started in 2021.

As the value of the Cedi currency, one of the world’s worst performers this year, continues to fall and inflation continues to rise, analysts at Oxford Economics Africa expect another 200 basis point hike in key interest rates this week. I expected it to be high. Early 2023.

“The resulting deterioration in living standards exacerbated civil unrest and the risk of government stability. In November 2022, protesters in Accra called for the resignation of President Nana Akufo Addo,” Hunter said. Stated.

ACCRA, GHANA – NOVEMBER 5: Ghanaians march during the ‘Ku Me Preko’ demonstration on November 5, 2022 in Accra, Ghana. People have taken to the streets of Ghana’s capital to protest the rising cost of living that has worsened since Russia’s invasion of Ukraine.

Ernest Ankoma/Getty Images

“This volatility deepens a negative feedback loop by widening Ghana’s sovereign debt spreads and increasing external borrowing costs. Companies have to contend with yields that are 25% higher on average.”

The IMF will visit Ghana again in December to continue discussions on the country’s request for a debt restructuring plan. Meanwhile, Moody’s on Tuesday further downgraded the country’s credit rating to “junk” territory, saying retail investors could suffer heavy losses as a result of the restructuring.

The IMF is currently providing or discussing debt relief with 34 African countries, including through the G20 Common Framework established during the Covid-19 pandemic. Verisk Maplecroft notes that while IMF support will help reduce budget deficits and restructure debt, countries where the IMF seeks spending cuts are likely to experience a ‘negative her ESG+P tradeoff’ doing.

“While the IMF has stressed that social spending targeting the most vulnerable should not be cut, it is likely that social spending on programs such as food and fuel subsidies will be curtailed,” said Hunter. said Mr.

“The inability to mitigate the impact of external economic shocks and inflation through public spending could have implications for the overall ESG+P risk environment on the African continent.”

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