The U.S. Federal Reserve’s monetary policy tightening and a strengthening dollar are having a knock-on effect on African nations’ balance sheets and public debt burdens, according to a new report.
In early November, the Fed implemented a fourth consecutive three-quarter point interest rate increase to take its short-term borrowing rate to its highest level since January 2008.
Meanwhile, a combination of rate hikes, the war in Ukraine and fears of recession have driven the traditional “safe haven” greenback higher. Despite a recent tail-off since its peak in late September, the DXY U.S. dollar index
is up more than 11% year-to-date.
Government 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 Russia’s invasion of Ukraine. In a report Tuesday, risk consultancy Verisk Maplecroft highlighted that debt is now 77% of gross domestic product on average across six key African economies: Nigeria, Ghana, Ethiopia, Kenya, Zambia and Mozambique.
These nations have added a median of 10.3 GDP percentage points to this debt burden since 2019, the report noted.
As the supply chain disruptions provoked by the post-pandemic surge in demand and the Ukraine war have driven central banks to raise interest rates, the increase in sovereign debt yields has further constrained 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.”
The ability of African governments to service their external debt will continue to be weakened by scarcer financing and higher interest rates, Verisk Maplecroft said, while domestic rate rises in response to soaring inflation are also intensifying the overall public debt burden of many sub-Saharan African countries.
“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.”
Verisk Maplecroft expects the Fed’s hawkish stance to take its base rate from 3.75% in November to between 4.25% and 5% in 2023, prolonging the downward pressure on African sovereign debt markets.
The firm does not foresee a substantial loosening of Africa’s domestic monetary conditions over the next 12 months either, which Hunter said will keep borrowing costs high and “disincentivise inflows into African sovereign debt markets.”