Archive for October 26, 2015

Will Rising Debt Derail African Markets

For many years now investors have started to heavily back both global and African emerging markets.  Slower growth rates in the ‘established economies’ have meant that there is little to attract their money. Places like Africa and South America often looked hugely attractive compared to say investing in Europe or North America.  However market pressures are starting to affect these locations too and investment is slowing.

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The problem is that economic indicators in some of these locations is looking ominous.  Growth rates are falling here too and combined with rising inflation and currency depreciating are meaning that debt it rising too. Take for example places like Zambia and Ghana, two investment favorites on the African continent.    Now there is a worry of rising debt highlighted by the IMF.

Zambia no longer looks like a safe and profitable haven for investment funds, the country has many issues which are dragging the economy back.  Commodity prices are plummeting mostly caused by the slowdown in China which are very important for Zambia.   They also have a host of internal issues – like a huge problem with power the electrical infrastructure simply not able to cope with the requirements of a growing country.  There is also a sense of political instability with  an election due in the following twelve months.

The currency of Zambia has now become the worst performing currency in the world, losing over 80 percent of it’s value over the year.  There are numerous examples in the Africana economy of countries following a similar pattern to this and none of them are good.  The lack of confidence in the economy and it’s currency is bound to affect investment and such growth will become something unachievable.

The story is similar in Ghana,which was the fastest growing economy in 2011.  However that strong growth has now stalled and the country has actually needed external assistance in the last few months.  There are a host of reports and studies available on line although to access on an iPad, you may have to spoof your IP address.

Although falling commodity prices have caused a lot of the problems there is still a common problem shared by these advanced African economies – the lack of strong and adaptable policies needed to react to external changes.  It’s easy to be successful in the overall context of world growth but when that stalls it’s important to adapt your own fiscal policy.  Very few of these economies have done this continuing to drift on in the same way, however without growth debt will rise quickly if you don’t check expenditure.

The success of these economies have obviously caused wage pressures, which have filtered into the economy.  This has also added to debt pressures especially and meant huge financing gaps in all sorts of sectors.

Further Reading