Is Africa headed for a financial crisis?

Covid-19 has exerted immense pressure on the world’s emerging markets, yet some of the pandemic’s most painful economic episodes may be yet to come. A rerun of the 2013 “taper tantrum,” a post-recovery collapse in oil prices, and poorly executed multilateral programs are creating economic concerns that match the enormity of many countries’ epidemiological concerns.

In sub-Saharan Africa—where a third wave is gripping many countries, and a fourth wave is gripping others—it has become increasingly difficult for governments to get ahead of these challenges. The World Health Organization has reported that Africa’s Covid-19 infections are doubling every 18 days, and just 1.3 percent of the continent has been vaccinated. With the health toll mounting, the economic toll rises, too.

The first challenge comes from beyond Africa’s borders, as central bankers in advanced economies deliberate an end to the monetary relief that has kept the global economy tenuously afloat for the past year. When the pandemic struck, investors fled from “riskier” emerging markets to the safe assets of advanced economies. Within the first four months of 2020, capital outflows from emerging markets reached $243 billion, producing a sharp depreciation in many currencies and a sudden spike in borrowing costs.

Over time, this pain was soothed as the major central banks took unprecedented actions to ease monetary conditions. Interest rates in advanced economies were slashed to near-zero levels last summer, with the yield on the 10-year U.S. Treasury bond falling to 0.5 percent and the 10-year U.K. Gilt falling to 0.15 percent.

These cuts, combined with other asset purchases and lending facilities, were critical for calming global markets and supporting the flow of credit amid the uncertainty of the early pandemic. As their success in soothing advanced economies entailed pushing those countries’ yields to levels where no investor could turn an acceptable profit, the measures also succeeded in pushing investors back to the juicier yields of emerging markets, where (in sub-Saharan Africa) investors could collect around 8 percent on a Nigerian 10-year bond, 9 percent on a South African 10-year bond, and 12 percent on a Kenyan 10-year bond.

The widening gap between emerging markets and advanced economies also revived a familiar old carry trade, in which investors would borrow cheaper, lower-yielding dollars to buy higher-yielding assets elsewhere. Through the end of 2020, emerging markets’ capital inflows ended up topping $360 billion, despite the health and other challenges that these countries were facing.

Yet this convenient arrangement of near-zero rates in the rich world, along with large inflows to the developing world, has been coming to an end. As advanced economies have recovered, the yield on the 10-year U.S. Treasury climbed back from 0.5 percent last August to 1.75 percent in March, before leveling off around 1.3 percent today. Higher interest rates in advanced economies have put last year’s process in reverse: As investors can now earn more acceptable returns at home, they no longer need to rush to the “riskier” assets of emerging markets. In fact, they will rush away. In March, $290 million fled the world’s emerging markets per day, a jarring turnaround from the inflows of the prior year.

Then there are the inflation concerns, which central banks conventionally respond to with monetary tightening. This would exacerbate the situation for emerging markets by driving advanced economies’ interest rates up further, encouraging further emerging market capital outflows, and strengthening advanced economies’ currencies against those of emerging markets—which makes emerging markets’ imports and foreign-currency interest payments ever more expensive. The International Monetary Fund (IMF) has warned the major central banks not to overreact to rising price levels, but it appears they have done so to little avail. Last week the Bank of England indicated that it will raise rates in the near future, contributing to worries about a second “taper tantrum.”

The haunting “taper tantrum” occurred in 2013 when then-Federal Reserve Chairman Ben Bernanke commented that he may begin “tapering” asset purchases, which increased U.S. interest rates and sent investors fleeing from emerging markets. In the fire sale of their assets, emerging markets’ currencies fell by an average of 13.5 percent. With investors dumping their sovereign bonds, the yields on those bonds spiked by 2.5 percent as well, given that bond prices and yields move inversely. Weaker currencies and higher rates proved to be a painful combination for these countries’ borrowing costs.

New difficulties servicing debt would also exacerbate one of the continent’s greatest pre-existing problems, Lopes says, which is the “punitive interest rates” on African sovereign bonds. For those African countries which do have access to global capital markets, raising the funds from foreign creditors that are needed to finance basic government operations can be exceptionally expensive by global standards. A key reason for this is how global credit rating agencies perceive African countries.

The debt of just one country on the continent, Botswana, is above “speculative” or “junk” status, in the rating agencies’ estimation. Such a uniformly negative outlook on African governments is difficult to justify, Lopes argues, but the consequences are not difficult to see—particularly during the pandemic. Angola, Ghana, Gabon, and Zambia spend more servicing their debt than they do providing health care. In Angola’s case, interest payments are more than double its health care expenditures.

Historically reliable revenue sources such as oil are of declining help to African governments like Angola, says Bohlund. Oil prices have halved since 2008, dropping to levels at which no African country could turn a profit in the beginning of the pandemic, and the “reopening” rebound in oil prices these past few months is slowing down. Rabah Arezki, the chief economist of the African Development Bank, worries that serious political and economic crises will accompany oil’s decline.

“The last oil price super-cycle might already be underway, the end of which could herald an increase in the number of failed states,” Arezki warns, citing lower costs of alternative energy sources and new environmental regulations abroad.

This is particularly problematic for oil-dependent Angola, whose production has fallen by one-third since 2015; Mozambique, whose oil investments have been fatally disrupted by an insurgency in the country’s north; and Nigeria, whose output has declined as well. With OPEC’s agreement last month to ramp up oil production, African producers will have to reckon not only with declining sales but also with the declining prices that accompany OPEC’s supply increase.

International organizations have gone to considerable lengths to address these monetary and fiscal challenges, through a variety of emergency grants, loans, and technical assistance initiatives. In addition to the $160 billion the World Bank has made available and the $110 billion that the IMF has deployed, the two have notably overseen programs to temporarily relieve countries of their debt burdens and to replenish government reserves. Yet both important efforts have suffered a lack of participation from the private sector, advanced economies, and from many low- and middle-income countries themselves.

This problem was partially brought on by the Paris Club itself, which bowed to private-sector requests not to mandate relief for commercial debts. It was also partially requested by African governments, which justifiably (if unfortunately) feared the long-term consequences of credit downgrades and losing access to global capital markets if their creditors were inconvenienced by a temporary deferral of interest payments.

* Stephen Paduano, the executive director of the LSE Economic Diplomacy Commission