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Political risks piling up, rand on the rocks

Resurfacing political risks in some parts of Sub-Saharan Africa are another threat to recoveries that are already facing multiple headwinds, while at the same time raising the pressure on several governments to provide more fiscal support. Otherwise, while the South African rand held up relatively well in the first part of this year, the currency has already weakened by over 2% against the dollar since the start of July and we think that further falls lie in store.

8 July 2022

Ghana and the IMF: big hurdles to debt sustainability

The decision by Ghana’s government to turn to the IMF will help to restore some calm among investors over the country’s poor public finances. But a very large fiscal squeeze is needed to restore debt sustainability and recent protests highlight the political difficulty of pushing that through. The result is that the debt-to-GDP ratio will remain on an upwards trajectory. EM Drop-In (Thurs, 7th July): Join our economists for their regular monthly briefing on the hot stories in EMs – and those that aren’t getting the attention they deserve. In this 20-minute session, topics will include the outlook for EM FX markets after the recent sell-offs. Register now.

6 July 2022

Hawkish shift creates difficult environment for Africa

The hawkish turn by DM central banks over the past month has further soured investor risk appetite, and capital inflows into African economies are likely to have slowed. Countries with large external financing requirements, and heavy debt burdens denominated in foreign currency – Ghana and Kenya for instance – are most exposed. Currencies in these economies are set to come under further pressure if capital inflows dry up as a result. Meanwhile, the tightening of external financing conditions means that much of the region is now effectively locked out of international capital markets. Plans to issue Eurobonds were scrapped in Kenya and Nigeria recently, narrowing policymakers’ options to plug budget deficits. All in all, these point to ever-growing public debt risks.

30 June 2022
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Tighter global financing conditions, Zambia’s debt

African financial markets are not insulated from the tightening of global external financing conditions, and recent currency weakness and rising sovereign bond yields in the region will only add to already-strained balance sheets in some economies. Ghana, Kenya and Ethiopia seem most vulnerable. In Zambia, while debt restructuring negotiations finally kicked off this week, we suspect that getting a deal over the line will take some time. That and the decision to extend a subsidy scheme are likely to hold up the final agreement on the country’s IMF programme. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now

The monetary policy tide turns

African central banks have turned up their hawkish noises over the past month. Policymakers in Nigeria and Kenya delivered their first interest rate hikes following pandemic-era cuts. In South Africa, the Reserve Bank stepped up the pace of its tightening cycle and, in Ghana, MPC members voted for another chunky interest rate rise. Price pressures are mounting in these economies, with inflation rates close to, or surpassing, upper target bounds. The spillovers from the war in Ukraine are only going to push up inflation rates further over the coming months. Reining in inflation expectations probably played a key role in MPC decisions in South Africa and Kenya. And we suspect that policymakers in the latter and in Ghana and Nigeria also had an eye out for their currencies, which have been under pressure lately. The hawkish shift in Africa probably has some legs and we expect further monetary tightening in the coming months.

War in Ukraine inflames food insecurity in Africa

The outsize role of agriculture in Sub-Saharan African economies and the tendency to rely on imported food products makes the region particularly vulnerable to the agricultural shock caused by the war in Ukraine. In addition to the risk of food shortages, external – and in some cases fiscal – positions are set to weaken. The accompanying rise in inflation will add to the economic pain on the back of the conflict.

Markets and monetary policy, mounting pressure on naira

Recent investor risk-off sentiment has pushed up sovereign dollar bond yields across Sub-Saharan Africa, fuelling debt risks further, and has put currencies under pressure. Central banks appear to be taking note, with some policymakers turning tightening cycles up a notch. In Nigeria, the recent weakness of the currency on the black market was attributed to election-related spending, but the bigger issue is that downward pressure on the naira stems from the central bank’s unorthodox FX policies.

Monetary politics in Nigeria, Ghana’s efforts to curb debt

Nigerian President Buhari’s instruction that current government officials planning to run for the country’s highest office should resign will probably leave the central bank without a governor, but this is unlikely to lead to meaningful change in monetary policy before the elections early next year. Elsewhere, the latest jump in Ghana’s inflation rate will up the pressure on the central bank to raise interest rates further. Yet, officials remain steadfast not to turn to the IMF amid rising investor concerns about the country’s debt position. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

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