Thursday's interest rate hike by the European Central Bank will make it even more difficult for African countries and other emerging market countries to finance themselves, several analysts said, suggesting alternative sources of funding.
Miranda Abraham points out that "although the quality of African sovereign debt has not fallen, the appetite for risk among traditional bond investors has clearly declined and this has pushed up the price to prohibitive levels."
At issue is, in addition to the European Central Bank's hike in key interest rates on Thursday, a general rise in key interest rates by central banks globally to counteract inflation, which has risen significantly following the increase in energy, food and commodity prices since Russia's invasion of Ukraine.
"African governments have offered fair prices on long-term debt, with attractive profits for investors, but the environment has changed, and investors are now preferring to buy better-rated debt, and rising inflation means that for investors there are now more opportunities perceived as having less risk and offering higher interest rates," Miranda Abraham added.
In another commentary, the Oxford Economics Africa consultancy pointed to an "extraordinary rise" in sovereign debt spreads in recent months, "which means that many African countries will not be able to gain affordable access to the debt market needed to finance their economic development.
The analysts write that this difficulty in accessing financial markets "may imply fiscal consolidation at a time when economic difficulties are already fomenting discontent among the people."
Sovereign debt `spreads' show the difference between the interest on debt securities issued in the market and the interest offered by governments, i.e. it is the difference between the bid at which the state wants to sell the debt and the interest that the buyer wants to get in the transaction.
This difference "gives an indication about changes in global risk aversion as well as country-specific risk," which is why African countries, perceived as riskier, pay more to investors in debt issues.
"The need to accelerate fiscal consolidation efforts may imply that governments have to restrain public investment, thus slowing economic growth," the analysts say, concluding that "a less favorable outcome may be for governments to ignore rising debt costs and continue on a path of fiscal unsustainability, which would lead to much deeper and more painful consolidation a few years from now," they conclude. (Lusa, via RTP).
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