African nations in pains over oil price crash and US dollar spike

The credit boom in sub-Saharan Africa in recent years has been cause for almost as much consternation as celebration. While the emergence of Africa in capital markets is hailed as a significant development, the continent’s growing exposure to the global market has left it increasingly vulnerable to precisely the sort of shocks that are upsetting investors’ balance this year.

Across emerging markets, prices for assets are falling as investors consider not just the impact of a possible US interest rate rise but the particular attributes of the countries themselves, against a backdrop of low growth in developed markets and falling commodity prices. The prevailing mood, according to Kamakshya Trivedi, analyst at Goldman Sachs, is caution.

 Yet the size of Africa and the variety of countries it holds mean that quick judgments should be avoided, says Yvonne Ike, head of sub-Saharan Africa coverage at Bank of America Merrill Lynch.

While the effect of globalisation has left Africa more exposed to external conditions, it has also made it more accessible.

As Jan Dehn, head of research at Ashmore, points out, the effects of global economic shifts on Africa are made opaque by the diversity of the economies encompassed. “The actual impact on any given country depends entirely on the precise mix of exposures to particular commodities,” he says.

The slide in the price of oil that began in June 2014 has triggered suffering among oil exporters, while importers such as Ivory Coast are big beneficiaries.

Nevertheless, falling commodity prices and a strengthening US dollar have had a significant impact on Africa’s economic development. Growth rates in sub-Saharan African have declined from an average of 5-7 per cent to 3-4 per cent in 2015, according to the International Monetary Fund, which notes that large fiscal deficits and domestic security-related risk have exacerbated the global financial adversity for some countries.

China, above all, is cause for some of the greatest concern. In 2014, it was Africa’s largest bilateral trading partner, with more than $200bn worth of trade. Many economies in sub-Saharan Africa are commodity exporters reliant on China to buy their goods.

When taken together, the relative downturn in China, an oversupply of key commodities including oil, the strengthening of the US dollar and the uncertainty of the direction of US interest rates, are flashing warning signs.

“The combined impact of the current global market conditions, power, security and corruption is that the short-term outlook for Africa is challenging,” says Ms Ike.

Rita Babihuga, analyst in the Africa sovereign ratings group at Moody’s, says that these problems are putting more pressure on currencies across the region, which is likely to lead to tighter fiscal and monetary policies to preserve macroeconomic stability.

“Countries that didn’t build up sufficient fiscal reserves, such as Angola and Nigeria, face the double threat of deteriorating external and domestic conditions, and are likely to face greater aversion from foreign investors,” she says.

For a number of countries, including Ghana, Uganda and Zambia, the cycle of higher US interest rates — which is expected to encourage investors in developed countries to take money out of emerging markets — has come at a time when their economies are weakened and policymakers have limited capacity to adjust rates to counter this.

Falling prices for bonds issued by countries in sub-Saharan Africa illustrate this shift, with the yield on a 10-year bond issued by Ghana last year up from 7.71 per cent to 10.13 per cent.

Nigeria, which has struggled to adapt to falling oil prices, was removed from JPMorgan’s index of emerging market government bonds this year, a decision that cannot be reversed for 12 months and has closed the door to billions of dollars of passive-investment money tracking the index.

“Macroeconomic trends have been driving emerging markets this year,” says Emily Fletcher, co-manager of BlackRock’s Frontiers Investment Trust, which has cut its position in Nigeria to just 5 per cent. “Nigeria is under pressure from external and internal problems. We’re underweight. Nigeria has done very badly in the context of oil prices, which have been low and stayed low beyond expectations.”

But not every country is experiencing heavy outflows of global capital. “The typical African country is less dependent on global capital markets and less beholden to the often irrational behaviour of investors towards emerging markets,” says Mr Dehn.

Many obtain the bulk of their financing from bilateral and multilateral institutions, which can act as an alternative source of financing at times of market stress. Foreign investment, meanwhile, also tends to be the preserve of specialists who are less likely to pull out money during bouts of global volatility.

However, in spite of the breadth of funding and the recent development of a local pension and insurance sector in sub-Saharan Africa, the confluence of mounting external pressures is expected to be uppermost in investors’ minds for the rest of this year.