Africa's financial crisis

The pandemic is playing out differently in different continents, as the African financial experience proves.

 Africa's financial crisis

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• The story: COVID-19 has exerted pressure on the world’s emerging markets, but some of the most painful economic episodes are 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’ disease concerns.
• Unable to get a grip: 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.
• Monetary challenge: 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. 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. 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.

1. As their success in soothing advanced economies entailed pushing those countries’ yields to levels where no investor could turn an acceptable profit, the measures 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.
2. 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.
3. 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.
4. 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.

• Inflation concerns: Central banks conventionally respond to inflation 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.”
• What was '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.
• Oil: Historically reliable revenue sources such as oil are of declining help to African governments like Angola. 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 is slowing down. The last oil price super-cycle might already be underway, the end of which could herald an increase in the number of failed states. 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.
• IMF SDR: A glimmer of multilateral hope emerged as the IMF approved a $650 billion issuance of SDRs, unique assets that can replenish countries’ foreign reserves and be exchanged for foreign currencies. The Paris Club’s actions additionally opened the door to China’s lack of participation, as Beijing has dubiously claimed that its state-owned China Development Bank is a commercial creditor, not an official creditor, and that it therefore has no obligation to provide debt relief. At present, the United States alone will take in $113 billion, yet Africa’s 54 countries will be granted less than $34 billion. The IMF says it is “identifying viable options” for reallocating SDRs to the countries that need them most, but no plan has emerged. 

 

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