The oversize effect of US dollar movements on developing markets is often overlooked, but the continent needs to find ways to reduce this impact to avoid future debt crises
Whenever I meet clients and investors, the one discussion I always end up having, regardless of market conditions, is on currency markets. Strong views are often expressed about why domestic policy direction or the price of key tradable goods or services is leading to one’s home currency strengthening or weakening.
Many countries instituted fuel or food subsidies to help reduce the effect on their citizens, but this typically increased budget deficits, driving debt levels higher at a point when funding that debt had suddenly become much more expensive. Two: Existing investors who want to extract dividends, or potential future investors, are deterred from investing in that country due to fear of being unable to repatriate capital. This affects the long-term growth potential of an economy, with insufficient investment capital available to be put to work.
This happened even though the US Federal Reserve has continued to hike rates. This has given some much-needed relief to those countries hardest hit, but leads me to ask the question, is it possible to reduce the impact of future gyrations of the dollar on African economies? Being part of the region allows each country to manage their own local debt issuance in CFA, while giving them a wider cross-regional pool of African investors to sell into. Improving local debt-financing capabilities to reduce reliance on dollar external debt will clearly be helpful in managing future dollar fluctuations. However, it doesn’t resolve the issues caused by most major fuel and food goods being priced globally in dollars.
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