According to the Bretton-Whood institution, foreign investors can pull out their capital at short notice when economic conditions become unfavourable to them.
The warning comes as frontier markets in Africa such as Ghana, Nigeria and Kenya fret about the side effects of tighter monetary policies in the US.
The Resident Representative of the IMF in Ghana, Mr Samir Jahjah, at a meeting with officials of the Bank of Ghana and other senior government officials in Accra said managing capital flows had become “a bigger issue than [it] has ever been” for sub-Saharan states.
Speaking on the topic, “Managing Volatile Capital Flows: Experiences and Lessons for sub-Saharan African Frontier Markets”, Mr Jahjah warned that countries like Ghana should not expect their love-story with international investors who bring cheap and abundant funding to last forever.
He said countries such as Ghana are becoming vulnerable to financial shocks as they rely more on foreign investors who can pull out their capital at short notice if they feel the economic situation is deteriorating.
In 2012, Ghana attracted high levels of foreign direct investment of about eight per cent of GDP, which was underpinned by the discovery and production of oil in 2011.
In August 2013, Ghana sold a bond of US$1 billion with a 10-year maturity potential at a yield of eight per cent. The yield was higher and the excess bids were lower than those in other African countries that issued Eurobonds earlier in the year, perhaps partly reflecting the deteriorating financial conditions.
Ghana’s first 10-year Eurobond, which was issued in 2007, was four times oversubscribed but yielded as little as 4.5 per cent in April 2013.
But the IMF is warning that African countries should anticipate “continuing volatility and increasing funding costs” as advanced economies’ central banks gradually move away from their unprecedented accommodative policies.
“Given the trend toward deeper integration with global financial markets, sub-Saharan African frontier markets are likely to become increasingly vulnerable to global financial shocks,” the IMF resident representative said.
Deficit concerns overshadows Ghana’s economic performance
The Washington-based body has again, in its Regional Economic Outlook for sub-Saharan Africa cautioned Ghana to consolidate its fiscal deficit in the coming years or risk recording public sector debt to unsustainable levels.
On October 17, Fitch downgraded Ghana’s credit rating from B+ to B, warning that “policy credibility has been significantly weakened” due to the size of the budget deficit and noting the rising costs of servicing domestic government debt.
Again, higher global interest rates are expected to increase the debt-servicing burden, while a longer-lasting loss of global appetite for “frontier market” debt could create significant challenges for the country.
African countries have benefited for the past three years from investors’ hunger for yield due to ultra-loose monetary policies in the US, Japan and Europe.
Although portfolio flows are supported by strong growth prospects, the fiscal developments shows a deteriorating economic and current account deficit positions of the country and global push factors, which caused emerging market bond turmoil in mid-2013. High domestic interest rates have sustained the interest of foreigners in the medium-term domestic market (about one-third of domestic debt is held by foreigners).
The increased participation of foreigners in the government debt markets could be an additional source of vulnerability resulting from rollover risks.
African governments, including Ghana, have raised a record US$8bn in global sovereign bonds – including from several debuts – this year, up from just US$1bn a decade ago. And foreign investors have for the first time become active players in some domestic bond and equity markets there.
In the past, countries in Africa relied heavily on aid from donor countries to finance their needs. Since 2010, however, easy global financial conditions, combined with sustained high growth, have led to a significant increase in private capital inflows.
During 2010-12, net private flows to sub-Saharan African countries doubled, compared to that of 2000-07. Flows to several key regional heavyweights, including Ghana, Kenya, Mozambique, Nigeria, Senegal, Uganda, and Zambia, registered a fivefold increase in the same period.
Source: Daily graphic