The International Monetary Fund has for the first time warned that sub-Saharan African countries are becoming "increasingly vulnerable to global financial shocks" as they intensify their reliance on foreign investors.
The warning, in its twice-yearly review of the region, comes as African frontier markets such as Nigeria, Ghana and Kenya fret about the side-effects of tighter monetary policy in the US.
African countries have benefited over the past three years from investors’ hunger for yield due to ultra-loose monetary policies in the US, Japan and Europe. Governments in the region have raised a record $8 billion (€5.85 billion) in global sovereign bonds – including from several debuts – this year, up from just $1 billion a decade ago. And foreign investors have for the first time become active players in some domestic bond and equity markets there.
Love story
Abebe Aemro Selassie, deputy head of the Africa department at the IMF, said that managing capital flows had become "a bigger issue than ever" for sub-Saharan states. He warned that African countries should not expect their love story with international investors for cheap and abundant funding to last for ever.
“The example I like to use for capital flows is that they resemble the bee: they produce honey, but they also have a sting,” he said in an interview.
In the past countries in Africa relied heavily on aid from donor countries to finance their needs. Since 2010, however, easy global financial conditions combined with sustained high growth led to a significant increase in private capital inflows.
During 2010/2012, net private flows to sub-Saharan African countries doubled compared with the period 2000/2007. Flows to several key regional heavyweights, including Ghana, Kenya, Mozambique, Nigeria, Senegal, Uganda, and Zambia, registered a fivefold increase in the same period.
The IMF said African countries should anticipate “continuing volatility and increasing funding costs” as advanced economy central banks gradually move away from their unprecedented accommodative policies.
Integration
"Given the trend toward deeper integration with global financial markets, sub-Saharan African frontier markets are likely to become increasingly vulnerable to global financial shocks," it said.
African policymakers painted a more sanguine view, however. Lamido Sanusi, governor of the central bank of Nigeria, said in an interview that the impact of tighter monetary policy in the US would be felt more acutely in larger emerging economies such as India or South Africa than in frontier markets such as Nigeria or Ghana.
“Tapering is not going to happen as quickly [as the market fears],” Mr Sanusi added, saying that the US economy still showed signs of weakness.
In spite of the warning about the potential reversal of capital flows, the IMF painted a relatively rosy picture of the outlook for the region.
“Sub-Saharan Africa is projected to grow vigorously in the medium term, as it has for much of the past decade,” the Washington-based body said.
The IMF forecast that economic growth will accelerate to 6 per cent in 2014, the highest since the onset of the global financial crisis in 2008/2009 and up from 5 per cent in 2013.
Demand
"The main factor behind the continuing underlying growth in most of the region is, as in previous years, strong domestic demand, especially associated with investment in infrastructure and export capacity in many countries."
However, such investment could be a double-edged sword for some African economies that are experiencing deteriorating deficits as they spend on machinery to build the infrastructure.
The IMF warned that fiscal and current accounts deficits were likely to deteriorate in the next year.
But it added that inflation in the region is expected to remain moderate in 2013/2014, reflecting benign prospects for food prices. – (Copyright The Financial Times Limited 2013 )
