Hard currency bond issuances by African countries plummet to $6bn in 2022 – Afreximbank report
In its latest comprehensive report titled “Africa’s 2023 Growth Prospects: Securing Growth Resilience in a Polycrisis World,” Afreximbank sheds light on the formidable challenges facing emerging markets and developing economies amidst tightened global financial conditions.
These regions have found themselves disproportionately affected by factors such as capital flow volatility and depreciating currencies, which have significant implications for their economic stability and growth prospects.
One notable case study explored in the report is Egypt, which has proven highly vulnerable to capital flow volatility and sudden stops. Throughout 2022, the country experienced a significant outflow of approximately $20 billion in local debt, as global investors exhibited risk aversion and opted to withdraw from Egyptian markets.
This wave of investor exodus placed tremendous pressure on Egypt’s exchange rate, leading to a substantial depreciation of over 55% during the course of the year. Such a sharp currency devaluation not only amplifies economic uncertainties but also presents challenges for businesses and households alike.
The report unveils a broader trend where the currencies of many developing nations depreciated against the US dollar in 2022, exacerbating concerns around inflationary pressures. The devaluation of local currencies serves as a double-edged sword, compounding inflationary challenges and further dampening economic growth prospects. As the cost of imports rises, businesses face increased production costs, and consumers bear the brunt of higher prices for goods and services.
Moreover, the report notes that data sourced from the Institute of International Finance underscores the magnitude of the problem. The report indicates that emerging markets experienced a net issuance of hard currency debt in negative territory throughout 2022. The COVID-19 pandemic, coupled with risk aversion among investors, contributed to a significant decline in bond issuances by African sovereigns.
This decline was striking, with bond issuances plummeting from around $20 billion in 2021 to a mere $6 billion in 2022. This dramatic reduction in sovereign bond activity limits access to international capital markets and constrains these economies’ ability to fund development projects and address critical infrastructure needs.
While spreads, which soared during the geopolitical crisis of 2022, have narrowed to some extent, they continue to remain at elevated levels. The persistence of heightened spreads hampers the ability of African countries to tap into international capital markets, limiting their access to crucial funding sources necessary for sustainable growth and development.
Afreximbank’s report signals the urgent need for policymakers in emerging markets to address the vulnerabilities exposed by tightened global financial conditions. Enhancing resilience and fortifying economic structures against capital flow volatility and currency depreciation should be key priorities.
Governments and central banks must implement proactive measures to attract and retain foreign direct investment, while also ensuring effective management of fiscal policies to safeguard against inflationary pressures.
Furthermore, fostering domestic industries and diversifying export bases can help mitigate the risks associated with heavy reliance on imports and volatile international markets. Governments need to promote a conducive business environment, supporting entrepreneurship and innovation, while also strengthening institutions to combat corruption and bolster investor confidence.
The Afreximbank report underscores the formidable challenges faced by emerging markets and developing economies amid tightened global financial conditions. The vulnerabilities arising from capital flow volatility and depreciating currencies necessitate proactive and strategic measures to ensure sustainable growth and resilience. By implementing robust policies and structural reforms, these economies can navigate the complex financial landscape and position themselves for long-term success in an ever-changing global economy.
