Ghana, other African economies at risk of future US rate hikes
Economies of several sub-Saharan African countries including Ghana are vulnerable to risks posed by future US rate hikes, rating agency Moody’s has said.
In a report summary copied to ghanabusinessnews.com, Moody’s warns that several economies in sub-Saharan Africa (SSA) are vulnerable to capital flight and potential financial market volatility associated with anticipated US monetary policy normalization.
The US Federal Reserve was expected to raise interest rates last week, but the Fed held back, pushing the decision to 2016. The Fed hasn’t raised its rates for more than nine years. It cited ‘uncertainties abroad’ for holding back.
However, the Moody’s report titled “Twin Deficits, External Debt and Narrow Policy Space Increase Exposure to Fed Rate Hike”, says these economies are less exposed to changing investor sentiment than traditional emerging market countries because they have lower levels of short-term foreign investor liquidity.
“The region is not immune to the volatility that a disorderly reaction to changing US policy could bring,” it said.
Rita Babihuga, a Moody’s Assistant Vice President – Analyst and author of the report was cited as saying, “with an interest rate increase in the US still on the near horizon, especially vulnerable are those SSA countries running large current account deficits that are not fully financed by a combination of foreign direct investment and official flows, as well as large fiscal deficits that are partly reliant on external financing,”
The report which excludes South Africa, given the country resides within, and exhibits characteristics consistent with, the traditional definition of emerging markets, includes the following countries, Ghana, Mozambique and Kenya, which it says are among the most vulnerable African economies to tighter external financing conditions stemming from a US rate rise.
Zambia and Uganda also have moderate levels of exposure, the report said.
“For these countries, higher US interest rates could trigger an increase in capital outflows, thereby putting pressure on foreign exchange reserves and further weakening their currencies,” Babihuga said.
According to the report, it is Moody’s expectation that commodity prices will remain lower for a longer period of time — reflecting slowing demand from China and other emerging markets, overcapacity in the oil and steel markets, the strong dollar and other factors — will further widen twin deficits and dampen growth prospects in countries such as Republic of Congo, Cameroon, Democratic Republic of the Congo, Gabon and Ethiopia.
It also notes that with the exception of three net commodity exporters – Nigeria, Gabon and Botswana – most SSA countries were running fiscal and current account deficits at the end of 2014.
The report indicates that several SSA countries, including Ghana, Uganda, Nigeria, Angola, Tanzania and Zambia are entering the period of anticipated tighter US policy in an already weakened position, either from exogenous shocks or domestic policy challenges. The policy room for adjusting to any potential financial market volatility arising from US interest rate changes and a stronger US dollar is limited.
“These countries have already witnessed currency depreciation in excess of 25 per cent over the past year, with increasing risk of pass through to domestic inflation and the requirement for higher real interest rates reducing near-term growth,” it said.
The report suggests that further appreciation of the US dollar as the US Federal Reserve raises interest rates could result in a cycle of higher inflation and interest rate hikes and with real interest rates already elevated, this would choke off domestic demand and reduce growth. Uganda, Ghana, Kenya, Zambia and Mozambique appear particularly vulnerable in this respect.
By Emmanuel K. Dogbevi