As a result of the economic impact of Covid-19, there have been significant outflows of capital from emerging markets, many in Africa, thus far this year, as risk appetite weakens significantly and capital is redirected into safe haven assets, like gold, reports insurance company Alexander Forbes chief economist Isaah Mhlanga.
He notes that economic activity has declined drastically in regions where lockdowns have been enforced and says a recovery timeframe is difficult to predict.
As of May 25, Africa had 115 892 Covid-19 cases, with the majority of cases centred in countries with the strongest economies.
Mhlanga says that, over time, there have been many countries using debt to finance their fiscal balances, being dominated by debt portfolio flows and less so by equities. “What this means is that, as we move forward, we are likely to see further debt increases across many [African] countries.”
Another factor is the proportion of foreign currency-denominated debt, which Mhlanga points out is the most prominent type in these circumstances.
The situation is exacerbated in cases where African countries have pegged exchange rates to the dollar or the euro. This, he says, results in significant and increasing risks of ballooning debt as currencies depreciate.
In addition, this impacts on the implicated country’s ability to repay or service that debt, which will consequently become more expensive.
However, the investment case for these countries will degrade further when the Covid-19 pandemic dies down, at which point countries that have ballooning debt will be vastly less likely to attract investment.
“After Covid-19, those countries that find themselves with better fundamentals in terms of debt trajectories and interests payments will receive portfolio flows from international investors.”
He suggests that as countries deal with Covid-19, they need to ensure they generate sufficient economic growth that can be carried into the future, so that it will be able to service their debt.
Covid-19 has impacted economic activity in almost every region of the world, starting in China where a significant decline in economic activity first took place as Covid-19 began to spread quickly.
However, Mhlanga points out that since China has seemingly managed to curb the rampant spread of the virus, it has also been able to partially reopen its economy and industry and thereby rebound relatively quickly.
Other countries, however, including the US and Germany, have struggled to reopen their economies, to such an extent that their manufacturing sectors have collapsed quite significantly from levels pre-Covid-19.
The fall of major international manufacturers has impacted commodity miners, with a large percentage of these being African exports.
“Commodity prices have collapsed quite significantly in 2020 so far,” he says, adding that all the major commodities, barring gold and iron-ore, have collapsed.
"This means that many African countries who depend on single commodities for export revenues, which are the backbone of how they finance their fiscus, are already experiencing a significant negative impact in terms of how they can respond to this crisis.”
For example, Mhlanga highlights that Zambia, which depends on copper as a primary export and revenue generator, has been severely impacted by a 10% drop in copper prices.
Further, Nigeria, Angola and Ghana, which depend on oil exports to generate revenue, have also been hit hard as oil prices have declined by 60% since the beginning of the year. Although oil has recovered slightly, he says the prices are still much lower than where they were at the beginning of the year.
Mhlanga notes that the collapse of commodity prices means that for African countries that depend on commodities for export revenues, there will also be a significant contraction in economic growth.