Tightening global financial conditions as a result of policy rate increases in advanced economies, coupled with the war in Ukraine, are pushing up sovereign spreads in African countries, reflecting fears about their debt sustainability, said World Bank chief economist Albert Zeufack.
The risks could mount if global inflationary pressures continue amid the multiple shocks facing the world economy, and if the Federal Reserve Bank hikes policy rates more aggressively than anticipated, he added.
Zeufack was speaking at the launch of the World Bank Africa’s Pulse publication on Wednesday before next week’s World Bank/IMF Spring meetings. The Africa Pulse publication is the region’s biannual macroeconomic analysis published around the World Bank/IMF Spring and Annual meetings each April and October. Each issue includes a special focus on a particular development challenge that is shaping the continent’s economic future.
“In 2021, countries in the region were at moderate or high risk of debt distress, and the share of countries in high risk of debt distress grew from 52.6% in 2020 to 60.5% in 2021,” Zeufack said.
While some countries in the region had implemented austerity measures to address the issue, these actions have been insufficient to reduce debt levels, he added.
SA, the continent’s most industrialised economy was poised to act as a drag on the regional recovery as a result of weak offshore investment on concerns about the country’s political and macroeconomic outlook and the business environment, Zeufack said. That was being fuelled by structural hurdles such as power outages, persistently weak state-owned enterprises, transport and logistic inefficiencies, as well as labour and product market rigidities, he added.
Zeufack warned that while SA deals with current short-term shocks such as elevated inflation, contractionary fiscal and monetary policy, supply disruptions, and growing uncertainty, it should not lose sight of overcoming its structural challenges.
“Some steps are needed to attract investment in human and physical capital, particularly in the fields of digitalisation and green technology,” he said.
Zeufack also spoke about the dilemma facing central banks across Sub-Saharan Africa which had to choose between supporting a sluggish economy at the cost of higher inflation or combating inflation at the cost of withdrawing support to economic activity.
“Monetary authorities in the region have opted for the second option,” he said, adding that in response to the monetary policy normalisation in advanced countries, especially the US, the number of central banks that were hiking policy rates is on the rise.
“However, monetary tightening in Africa might not be effective in curbing inflation as it is primarily driven by supply shocks, primarily as a result of commodity prices and climatic shocks, and the weak monetary transmission in countries with underdeveloped financial markets and large informal sectors,” Zeufack said.
zwanet@businesslive.co.za
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