Evelyn Reynolds

In early November, the Fed implemented a fourth consecutive three-quarter point interest rate increase to take its short-term borrowing rate to its highest level since January 2008.
Government debt in sub-Saharan Africa has risen to its highest level in more than a decade as a result of the Covid-19 pandemic and Russia’s invasion of Ukraine.
The ability of African governments to service their external debt will continue to be weakened by scarcer financing and higher interest rates, Verisk Maplecroft said.

ACCRA, GHANA – NOVEMBER 05: Ghanaians march during the ‘Ku Me Preko’ demonstration on November 5, 2022, in Accra, Ghana. People took to the streets of Ghana’s capital to protest against the soaring cost of living, aggravated since the Russian invasion of Ukraine
Ernest Ankomah/Getty Images

The U.S. Federal Reserve’s monetary policy tightening and a strengthening dollar are having a knock-on effect on African nations’ balance sheets and public debt burdens, according to a new report.
In early November, the Fed implemented a fourth consecutive three-quarter point interest rate increase to take its short-term borrowing rate to its highest level since January 2008.

Meanwhile, a combination of rate hikes, the war in Ukraine and fears of recession have driven the traditional “safe haven” greenback higher. Despite a recent tail-off since its peak in late September, the DXY U.S. dollar index is up more than 11% year-to-date.
Government debt in sub-Saharan Africa has risen to its highest level in more than a decade as a result of the Covid-19 pandemic and Russia’s invasion of Ukraine. In a report Tuesday, risk consultancy Verisk Maplecroft highlighted that debt is now 77% of gross domestic product on average across six key African economies: Nigeria, Ghana, Ethiopia, Kenya, Zambia and Mozambique.
These nations have added a median of 10.3 GDP percentage points to this debt burden since 2019, the report noted.

As the supply chain disruptions provoked by the post-pandemic surge in demand and the Ukraine war have driven central banks to raise interest rates, the increase in sovereign debt yields has further constrained African balance sheets.
“Consecutive base rate rises by the U.S. Federal Reserve have resulted in reduced capital inflows into Africa and widened spreads on the continent’s sovereign bonds,” said Verisk Maplecroft Africa Analyst Benjamin Hunter. 

“Exposure to international interest rate changes is exacerbated by the large proportion of African public debt that is held in dollars.”
The ability of African governments to service their external debt will continue to be weakened by scarcer financing and higher interest rates, Verisk Maplecroft said, while domestic rate rises in response to soaring inflation are also intensifying the overall public debt burden of many sub-Saharan African countries.

“High public debt levels and elevated borrowing costs will constrain public spending, which will likely result in a deteriorating ESG and political risk landscape across the continent,” Hunter added. 
“Weaker sovereign fundamentals and higher ESG+P risks will in turn deter investors, further weakening Africa’s market position.”
Verisk Maplecroft expects the Fed’s hawkish stance to take its base rate from 3.75% in November to between 4.25% and 5% in 2023, prolonging the downward pressure on African sovereign debt markets.
The firm does not foresee a substantial loosening of Africa’s domestic monetary conditions over the next 12 months either, which Hunter said will keep borrowing costs high and “disincentivise inflows into African sovereign debt markets.”
Spotlight on Ghana
Hunter pointed to Ghana as among the most affected by this negative feedback loop between a deepening public debt burden, a constrained fiscal position and a deteriorating ESG and political landscape.
The West African nation’s public debt has risen from 62.6% of GDP in 2019 to an estimated 90.7% in 2022, while inflation soared to 40.4% in October and the central bank on Monday raised interest rates by 250 basis points to 27%. The Bank of Ghana has now hiked by 1,350 basis points since the tightening cycle began in 2021.
With the cedi currency — one of the worst performers in the world this year — continuing to lose value and inflation continuing to rise, however, analysts at Oxford Economics Africa projected this week that the main interest rate will likely be hiked by another 200 basis points early in 2023.
“With living standards deteriorating as a result, civil unrest and government stability risks have worsened. In November 2022, demonstrators in Accra called for the resignation of President Nana Akufo-Addo,” Hunter said. 

ACCRA, GHANA – NOVEMBER 05: Ghanaians march during the ‘Ku Me Preko’ demonstration on November 5, 2022, in Accra, Ghana. People took to the streets of Ghana’s capital to protest against the soaring cost of living, aggravated since the Russian invasion of Ukraine.
Ernest Ankomah/Getty Images

“In turn, this instability will widen spreads on Ghana’s sovereign debt, deepening the negative feedback loop by increasing external borrowing costs; our research indicates that weaker performers on the Governance pillar of our Sovereign ESG ratings have to contend with 25% higher yields on average.”
The IMF will visit Ghana again in December to continue discussions on the country’s request for a debt restructuring plan. Meanwhile, Moody’s on Tuesday downgraded the country’s credit rating even deeper into “junk” territory, citing the likelihood that private investors rack up steep losses as a result of the restructuring.
The IMF is currently providing or discussing debt relief with 34 African nations, including through the G-20 Common Framework established during the Covid-19 pandemic. Verisk Maplecroft notes that while IMF assistance will help shrink fiscal deficits and restructure debts, countries implored by the IMF to cut spending will likely experience “negative ESG+P trade-offs.”
“Although the IMF has emphasised that targeted social spending on the most vulnerable must not be cut, social spending on programmes such as food and fuel subsidies will likely be scaled back,” Hunter said. 
“The inability to mitigate the impact of external economic shocks and inflation through public spending will likely have reverberating impacts across the continent’s ESG+P risk landscape.”

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The Job Openings and Labor Turnover Survey showed there were 10.33 million vacancies for the month, decline of 353,000 from September and down 760,000 compared with a year ago.
That left 1.7 job openings per available worker for the month, down from a 2 to 1 ratio just a few months ago.

Workers sort packages at a FedEx Express facility on Cyber Monday in Garden City, New York, on Monday, Nov. 28, 2022.
Michael Nagle | Bloomberg | Getty Images

Job openings dipped in October amid the Federal Reserve’s efforts to cool off a red-hot employment market, the Labor Department reported Wednesday.
The Job Openings and Labor Turnover Survey, a closely watched gauge of slack in the labor force, showed there were 10.3 million vacancies for the month. That’s a decline of 353,000 from September and down 760,000 compared with a year ago.

That left 1.7 job openings per available worker for the month, down from a 2 to 1 ratio just a few months ago.
The Fed has instituted a series of rate hikes aimed at bringing down runaway inflation. One area of particular focus has been the ultra-tight jobs market, with a 3.7% unemployment rate and wage gains that are helping to fuel price pressures.
While the monthly numbers can be volatile, the JOLTS report provided at least some measure that the Fed’s inflation-fighting efforts could be having an impact. The report came the same day that payroll processing firm ADP reported job gains of just 127,000 in November, the lowest total since January 2021.
The quits level, a measure of worker confidence that they can easily move from one job to another, also declined, edging lower to 4.026 million, down 34,000 from a month ago and well below the record 4.5 million in November 2021 during what had been dubbed the “Great Resignation.”
Total separations nudged higher to 5.68 million, while layoffs and discharges also rose, up 58,000 to 1.39 million.

The Labor Department on Friday will release payroll growth numbers for November. Economists expect job growth of 200,000 for the month, according to Dow Jones estimates.
Correction: ADP reported job gains of 127,000 in November, the lowest total since January 2021. An earlier version misstated the timing. Economists expect job growth of 200,000 for November, according to Dow Jones estimates. Earlier versions misstated the month and the figure.

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Private Companies added just 127,000 positions for the month, a steep reduction from the 239,000 in October and well below the 190,000 estimate.
Leisure and hospitality saw an increase of 224,000, but that was offset by losses in manufacturing, professional and business services, financial activities and information services.

Private hiring slowed sharply during November in a sign that the historically tight labor market could be losing some steam, according to a report Wednesday from payroll processing firm ADP.
Companies added just 127,000 positions for the month, a steep reduction from the 239,000 the firm reported for October and well below the Dow Jones estimate for 190,000. It also was the lowest total since January.

The relatively weak total comes amid Federal Reserve efforts to loosen up a jobs picture in which there are still nearly two open positions for every available worker. The central bank has raised its benchmark borrowing rate six times this year, but the unemployment rate is still 3.7%, near the lowest since 1969.
“Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains,” said ADP chief economist Nela Richardson. “In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”
The ADP report comes two days before the Labor Department releases its more closely watched nonfarm payrolls count. Economists polled by Dow Jones expect that report to show a gain of 200,000 after an increase of 261,000 in October.
In the ADP report, the biggest sector gainer by far was leisure and hospitality, which saw an increase of 224,000.
However, that was offset by losses in manufacturing (-100,000), professional and business services (-77,000), financial activities (-34,000) and information services (-25,000). Goods-producing industries overall saw a decline of 86,000 jobs, while services firms added 213,000 on net.

Even with the shaky jobs numbers, salaries continued to climb.
Pay increased 7.6% from a year ago, ADP said, though that was a slightly slower pace than the 7.7% reported for October.
From a size standpoint, all of the job creation came from companies that employ 50-499 workers, a sector that added 246,000 jobs. Small companies lost 51,000 while big firms were off 68,000.

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Elon Musk called on the Fed “to cut interest rates immediately” or risk “amplifying the probability of a severe recession.”
In a similar exchange on Oct. 24, the world’s richest man estimated a global recession could last “until the spring ’24.”

Tesla Motors CEO Elon Musk unveils a new all-wheel-drive version of the Model S car in Hawthorne, California October 9, 2014.
Lucy Nicholson | Reuters

Elon Musk thinks a recession is coming and worries the Federal Reserve’s attempts to bring down inflation could make it worse.
In a tweet early Wednesday, the Tesla CEO and Twitter owner called on the Fed “to cut interest rates immediately” or risk “amplifying the probability of a severe recession.”

The remarks came in an exchange with Tesmanian co-founder Vincent Yu in which several others participated.
Later in the thread, NorthmanTrader founder Sven Henrich observes that the Fed “stayed too easy for too long totally misreading inflation and now they’ve tightened aggressively into the highest debt construct ever without accounting for the lag effects of these rate hikes risking they’ll be again late to realize the damage done.”
Musk replied, “Exactly.”
This isn’t the first time Musk has warned of impending economic doom.
In a similar exchange on Oct. 24, the world’s richest man estimated a global recession could last “until the spring ’24,” though he noted he was “just guessing.” That prediction came amid a slew of economic warnings from other business executives including Amazon CEO Jeff Bezos, JPMorgan CEO Jamie Dimon and Goldman Sachs CEO David Solomon.

The Fed appears to be entering the late stages of a rate-hiking campaign aimed at tackling inflation still running near its highest level in more than 40 years. The central bank has increased its benchmark rate half a dozen times this year, taking the overnight borrowing rate to a target range of 3.75%-4%, and is expected to hike a few more times before stopping.
In recent days, Fed officials have said they expect smaller increases ahead than the four consecutive 0.75 percentage point increases, the most recent of which came in early November. Fed Chairman Jerome Powell is addressing the public Wednesday afternoon in a speech to be delivered at the Brookings Institution.

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Stocks bounced when October’s U.S. consumer price index came in below expectations earlier this month, as investors began to bet on an easing of the Federal Reserve’s aggressive interest rate hikes.
While most economists expect a significant general decline in headline inflation rates in 2023, many are doubtful that this will herald a fundamental disinflationary trend.

Prices of fruit and vegetables are on display in a store in Brooklyn, New York City, March 29, 2022.
Andrew Kelly | Reuters

Global markets have taken heart in recent weeks from data indicating that inflation may have peaked, but economists warn against the return of the “transitory” inflation narrative.
Stocks bounced when October’s U.S. consumer price index came in below expectations earlier this month, as investors began to bet on an easing of the Federal Reserve’s aggressive interest rate hikes.

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While most economists expect a significant general decline in headline inflation rates in 2023, many are doubtful that this will herald a fundamental disinflationary trend.
Paul Hollingsworth, chief European economist at BNP Paribas, warned investors on Monday to beware the return of “Team Transitory,” a reference to the school of thought that projected rising inflation rates at the start of the year would be fleeting.
The Fed itself was a proponent of this view, and Chairman Jerome Powell eventually issued a mea culpa accepting that the central bank had misread the situation.
“Reviving the ‘transitory’ inflation narrative might seem tempting, but underlying inflation is likely to remain elevated by past standards,” Hollingsworth said in a research note, adding that upside risks to the headline rate next year are still present, including a potential recovery in China.

“Big swings in inflation highlight one of the key features of the global regime shift that we believe is underway: greater volatility of inflation,” he added.

The French bank expects a “historically large” fall in headline inflation rates next year, with almost all regions seeing lower inflation than in 2022, reflecting a combination of base effects — the negative contribution to annual inflation rate occurring as month-on-month changes shrink — and dynamics between supply and demand shift.
Hollingsworth noted that this could revive the “transitory” narrative” next year, or at least a risk that investors “extrapolate the inflationary trends that emerge next year as a sign that inflation is rapidly returning to the ‘old’ normal.”
These narratives could translate into official predictions from governments and central banks, he suggested, with the U.K.’s Office for Budget Responsibility (OBR) projecting outright deflation in 2025-26 in “striking contrast to the current market RPI fixings,” and the Bank of England forecasting significantly below-target medium-term inflation.

The skepticism about a return to normal inflation levels was echoed by Deutsche Bank. Chief Investment Officer Christian Nolting told CNBC last week that the market’s pricing for central bank cuts in the second half of 2023 were premature.
“Looking through our models, we think yes, there is a mild recession, but from an inflation point of view,” we think there are second-round effects,” Nolting said.
He pointed to the seventies as a comparable period when the Western world was rocked by an energy crisis, suggesting that second-round effects of inflation arose and central banks “cut too early.”
“So from our perspective, we think inflation is going to be lower next year, but also higher than compared to previous years, so we will stay at higher levels, and from that perspective, I think central banks will stay put and not cut very fast,” Nolting added.
Reasons to be cautious
Some significant price increases during the Covid-19 pandemic were widely considered not to actually be “inflation,” but a result of relative shifts reflecting specific supply and demand imbalances, and BNP Paribas believes the same is true in reverse.
As such, disinflation or outright deflation in some areas of the economy should not be taken as indicators of a return to the old inflation regime, Hollingsworth urged.
What’s more, he suggested that companies may be slower to adjust prices downward than they were to increase them, given the effect of surging costs on margins over the past 18 months.
Although goods inflation will likely slow, BNP Paribas sees services inflation as stickier in part due to underlying wage pressures.
“Labour markets are historically tight and – to the extent that there has likely been a structural element to this, particularly in the U.K. and U.S. (e.g. the increase in inactivity due to long-term sickness in the UK) – we expect wage growth to stay relatively elevated by past standards,” Hollingsworth said.

China’s Covid policy has recaptured headlines in recent days, and stocks in Hong Kong and the mainland bounced on Tuesday after Chinese health authorities reported a recent uptick in senior vaccination rates, which is regarded by experts as crucial to reopening the economy.
BNP Paribas projects that a gradual relaxation of China’s zero-Covid policy could be inflationary for the rest of the world, as China has been contributing little to global supply constraints in recent months and an easing of restrictions is “unlikely to materially boost supply.”
“By contrast, a stronger recovery in Chinese demand is likely to put upward pressure on global demand (for commodities in particular) and thus, all else equal, fuel inflationary pressures,” Hollingsworth said.
A further contributor is the acceleration and accentuation of the trends of decarbonization and deglobalization brought about by the war in Ukraine, he added, since both are likely to heighten medium-term inflationary pressures.
BNP maintains that the shift in the inflation regime is not just about where price increases settle, but the volatility of inflation that will be emphasized by big swings over the next one to two years.
“Admittedly, we think inflation volatility is still likely to fall from its current extremely high levels. However, we do not expect it to return to the sorts of levels that characterised the ‘great moderation’,” Hollingsworth said.

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