Sub-Saharan Africa is facing a funding squeeze that has driven up borrowing costs, weakened currencies and cut countries’ access to international capital markets, weighing on the region’s growth and its ability to fund development needs, the IMF has warned.
It said on Friday that while SA’s deep and liquid domestic capital markets cushion it to some extent, capital flows to the region could stop altogether if global market conditions tighten even more.
The head of the IMF’s Africa department, Abebe Selassie, said SA should “scrape through with some expansion” in 2023, all other things being equal, though the fund has cut its growth forecast for the country to just 0.1% because of electricity shortages.
In its new Sub-Saharan Africa regional outlook published on Friday, the IMF identifies the funding squeeze as the region’s most pressing problem.
Selassie said debt levels are the most elevated they have been in many years and countries do not have access to favourable sources of external financing. “Persistent global inflation and tighter monetary policy have led to higher borrowing costs for Sub-Saharan African countries, and have placed greater pressure on exchange rates,” the outlook report said.
The jump in external borrowing costs was reflected in sovereign spreads for Sub-Saharan Africa that soared to three times the emerging market average since the global interest rate cycle had tightened and the dollar had strengthened, the report said. No country in the region has been able to issue a Eurobond since spring 2022.
Many countries will register a small pickup in growth this year, especially non-resource-intensive economies, but the regional average will be weighed down by sluggish growth in some economies, such as SA.
The lack of financing has hit a region already struggling with high public debt and a cost of living crisis, and has interrupted the economic recovery, the fund said. It now forecasts Sub-Saharan Africa’s growth rate will decline to 3.6% in 2023 amid a global slowdown, making this the second year in which growth has decelerated.
It sees growth picking up to 4.3% in 2024, though in a global downside scenario the region’s growth could be 1.9 percentage points lower for 2023/24.
But it emphasised that the region is heterogeneous: “Many countries will register a small pickup in growth this year, especially non-resource-intensive economies, but the regional average will be weighed down by sluggish growth in some economies, such as SA.”
The funding squeeze will also affect the region’s longer-term outlook, forcing many countries to cut resources for development sectors such as health, education and infrastructure, which would further weaken the region’s growth potential, the report said.
It urges that countries focus on consolidating their public finances, as well as on containing inflation and allowing exchange rates to adjust freely. The report recommends that countries “ensure that important efforts to fund and address climate change do now crowd out basic needs like health and education” and calls for the international community to add climate finance to aid flows.
The funding squeeze comes after years in which many Sub-Saharan African countries have shifted from the aid and development financing they historically relied on, to more expensive market-based borrowing. Several accessed international bond markets for the first time, encouraged by the ample liquidity during the years of low inflation and near-zero interest rates in advanced economies.
At risk
Now the trend has reversed. Borrowing costs have soared, with the likes of Zambia, Ghana and Sri Lanka defaulting on their debt. The IMF sees almost 60% of low-income nations and 25% of developing market economies at risk of debt distress.
SA’s foreign debt has risen but remains a relatively small share of the government’s overall borrowings, at just under 11% of total government debt. The IMF estimates SA’s external debt at 20.7% of official debt, which is below the 31.1% median for Sub-Saharan Africa. Though the government raised $3bn on the bond market early in 2022, it has since focused on tapping concessional and climate-related finance from institutions such as the World Bank and the French and German development finance agencies. It said in February it planned to raise the equivalent of $2.26bn in the current fiscal year and about $9.1bn over the medium term.
February’s budget papers note that rising inflation, interest rates and risk aversion led to more difficult financing conditions, but SA’s deep capital markets (and improved fiscal and debt position) helped to cushion rising risks.
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