Poverty is expensive. At the scale of nations, Africa is considered among the lowest-income places in the world. And this makes it very hard for African countries to get loans at generous interest rates on the global debt market.
According to George Asante, the managing director of Citi and head of markets for Africa, who disclosed to the Kenyan Business news publication, The Business Daily, market access has been difficult for African nations and businesses, particularly for Eurobonds, primarily because of risk aversion in light of the challenging economic climate and pricing because of the higher rates offered in developed markets, per Business Insider Africa.
African borrowing costs have surged in the international market as a result of attractive US rates. The US Federal Reserve has been raising interest rates in an effort to combat inflation, and this has made US assets more attractive to investors. As a result, there has been a sell-off in emerging market assets, including African bonds.
This has made it more expensive for African countries to borrow money. The yield on 10-year Kenyan government bonds, for example, has risen from 9.8% in January to 13.7% in September. This means that Kenya is now paying more to borrow money, which will make it more difficult to finance its budget deficit and economic development projects.
The surge in borrowing costs is a major challenge for African countries. It could lead to a debt crisis, as countries struggle to repay their loans. It could also slow economic growth, as governments are forced to cut spending.
African countries are considered underwater borrowers because of the high risk they represent in potential default. For lenders to be able to make a profit on the money they lend, they charge much higher interest rates on African countries than other countries that have a higher creditworthiness. Then, this begs the question of why African countries are considered underwater borrowers in the first place.
First, many African countries already have high levels of debt, which makes them more vulnerable to interest rate shocks. Second, countries with low levels of foreign exchange reserves are less able to withstand a depreciation of their currency. Third, countries with weak economic growth are less able to generate the revenue needed to repay their debts. And fourth, political instability can make it difficult for countries to attract foreign investment and implement economic reforms.
The surge in borrowing costs is a major challenge for African countries. There are, however, a number of things that African countries can do to mitigate the impact of rising borrowing costs. They can try to increase their tax revenues, reduce their spending, attract foreign investment, and diversify their exports. They can also seek debt relief from international creditors.
It is important, however, to emphasize that the impact of rising borrowing costs will vary from country to country. Countries with high levels of debt and low levels of foreign exchange reserves will be more vulnerable. Moreover, the impact of rising borrowing costs will also depend on the overall state of the economy. Countries with strong economic growth will be better able to cope with the higher costs of borrowing.