A big shock hit the business world on the 1st of August when Fitch Ratings downgraded the United States’ credit rating.
Fitch, a company that rates how safe it is to lend money to different countries, said they’re worried about the US government’s financial situation. They think things might get worse over the next few years.
This news affected the US bond market, causing it to drop the next day. That’s a big deal because it means people are less confident about lending money to the US government. This situation also has an impact on global financial markets.
But what does this have to do with Africa? Well, Africa’s economy is connected to the world’s economy. When big changes happen in a major economy like the US, it can affect other countries too, including African nations. In this article, we’ll explore how this downgrade could affect Africa’s economy and why it’s important for us to understand these global money matters.
Reduced capital inflows
An inflow of foreign capital can potentially raise the level of domestic expenditure in the economy. This increase will further lead to a surge in the demand for non-tradable goods that results in an appreciation of the real exchange rate.
But the recent US Credit downgrade will likely affect this. This is because investors will become more risk-averse and less likely to invest in emerging markets like Africa. Also, since African economies are more sensitive to global economic changes, investors can reduce their overall investments, which can lead to reduced capital flowing into African countries.
Higher borrowing costs
African countries that have borrowed money in US dollars will see their borrowing costs increase as a result of the downgrade. This is because the interest rates on US treasury bonds, which are used as a benchmark for borrowing costs, will rise. But analysts have said the rating announcement bears little on the reputation of U.S Treasury bonds.
Addressing newsmen, Mark Zandi, chief economist at Moody’s Analytics, said “I don’t think global investors learned anything from the downgrade. When push comes to shove, if anything is going on in the global economy or even in the U.S., they’ll come here and buy U.S. treasury bonds. It’s the safest asset on the planet.”
The US credit downgrade can trigger a series of impacts on African currencies. This is because investors can withdraw their money from riskier markets, like some African countries, in favour of safer options. This will consequently lead to a decrease in demand for African currencies, causing their value to drop.
Additionally, it could lead to reduced imports from African nations, affecting their trade balance and currency value. Changes in US interest rates can influence interest rate differences with African countries, potentially attracting capital away and weakening their currencies.
A weaker currency will make African exports less competitive, leading to reduced trade. A report by the African Development Bank, AFDB noted that this constitutes the most important transmission channel through which African economies will be impacted.
Since, the US is the main market for oil exports from Chad, Gabon, Angola and Nigeria, and for Lesotho’s garments, these countries would be affected by the US credit downgrade.
Slower economic growth
The factors mentioned above will make it more difficult for businesses to invest and grow. The recent downgrade of the United States’ credit rating is expected to have a ripple effect on Africa’s economic growth.
Slower economic growth can lead to fewer job opportunities, lower income growth, and potentially less investment in various sectors. It can further hinder overall development and prosperity within a country.
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