Nigeria, Ghana exposed by global rate hikes, South Africa can weather storm, say economists

In depth
This article is part of the dossier: Africa and the economic storm

By David Whitehouse
Posted on Wednesday, 12 October 2022 06:00, updated on Friday, 14 October 2022 09:03

Economists expect US dollar stength to continue through 2023 at least. REUTERS/Amr Abdallah Dalsh

The prospect of global interest rates staying higher for longer compounds the pressures on policymakers in Nigeria and Ghana, while South Africa can take the strain, economists say.

Higher US Federal Reserve rates to combat inflation have pushed global stock markets into retreat. In comparison with the last rapid Fed rate hiking cycle in 2004-2006, many African economies are now much more integrated with the global financial cycle, primarily through eurobond issuance, says Mark Bohlund, senior credit research analyst at REDD Intelligence in London. That makes them more vulnerable to higher US rates and a stronger dollar, he says.

The economic impact will be felt across the continent, with a number of countries seeking support from the IMF and World Bank in the coming months.

Countries with high interest payments may be the most exposed. According to Moody’s, Ghana’s interest payments make up 57.7% of  government revenue, second in the world only to Sri Lanka on 72.8%. The other African countries in the global top 10 are Egypt on 45.6%, Nigeria on 30.6%, Kenya on 29.0% and Uganda on 21.6%.

The tightening is not going to stop any time soon.

Irmgard Erasmus, senior financial economist at Oxford Economics in Cape Town, predicts that the US Federal Reserve will increase rates by a further 125 basis points this year and that the dollar will stay strong through 2023. US rates will only start to come down in 2024, she says.

The result is a “de facto reverse currency war” with Africa’s central banks under pressure to keep raising interest rates for at least the next year, Erasmus says. Nigeria has undermined its own ability to combat inflation with higher rates, she argues. Inflation is in part transmitted in Nigeria through the dual official and parallel naira exchange rates. But the Nigerian central bank refuses to acknowledge the parallel market, meaning it does not have direct control over the inflationary mechanism, Erasmus says.

In addition, she says, Nigeria has the “red flag’” of suspicion of political interference in the setting of interest rates. In contrast to South Africa and Egypt, Nigeria is unable to attract portfolio inflows because of its policy choices which have created an “artificial liquidity system,” Erasmus says.  The result is that Nigeria has “a weaker currency than is warranted in terms of trade competitiveness.”

  • Sticking with the dual exchange rate in the context of a strengthening dollar will widen the gap between the official and parallel rates still further, Erasmus says. The result will be to “disengage” central bank domestic policy efforts.
  • High fiscal spending ahead of the February presidential election is making it even harder to rein in inflation, Erasmus says. Currency liberalisation, which she hopes will take place after the election, will need to take a “staggered” rather than a big-bang approach, she adds.
  • Ghana’s economy is “fragile” given its high debt levels, Eramus says. “Ghana is the one to watch.”

South Africa ahead of curve

Emerging market central banks have generally raised interest rates sooner and more aggressively than developed markets, and so are seeing lower inflation, says Kamil Dimmich, partner at North of South Capital, a global emerging markets fund in London. South Africa started its tightening cycle starting ahead of the Fed, Dimmich notes.

While South African inflation has risen to 7.6% from 5% a year ago, it remains below US levels of 8.3%. That suggests South Africa’s central bank has been getting things “broadly right,” Dimmich says. The country also benefits from its current account surplus and a plentiful supply of labour, he adds.

Erasmus agrees that South Africa is likely to gain some protection due to the greater “sophistication” of its financial sector, which allows portfolio managers to take advantage of opportunities created during the interest-rate cycle. This gives the country capacity to combat imported inflation with higher rates, while other countries need policy reforms before being able to do so, she adds. Some of South Africa’s satellite countries will also benefit, she says.

  • Egypt, says Erasmus, also has better financial infrastructure than most African countries. Flexible policy on the Egyptian pound is a “positive signal” which is “not yet a buy signal,” Erasmus says.
  • Changing that will depend on agreeing a  financial package with the IMF, she says.

Bottom line

West Africa looks like the continent’s least well-equipped region to withstand prolonged high global interest rates.

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