EMERGING MARKETS - AFRICA
Executive preview:
Sub-Saharan African economies have substantial funding needs for development. However, limited equity capital and high debt costs remain key barriers despite access to funding broadening over time. Three of the largest markets – South Africa (Ba2 stable), Kenya (Caa1 positive) and Nigeria (B3 stable) – face a combination of structural weaknesses which keep borrowing costs high and will take time to address.
- More effective policy frameworks would support lower debt financing costs.
Borrowing costs are high across the board, although debt costs in South Africa are lower than in the other two markets. Debt costs for banks, nonfinancial companies and sovereigns have increased in all three markets alongside higher policy rates during the past five years, but banks have withstood the increase by actively repricing assets. While concessional lending from development partners helps lower foreign currency debt costs, it has not fully offset high local and foreign market interest rates.
- Despite advanced financial markets, South Africa has higher borrowing costs than emerging market peers.
South Africa's borrowing costs are lower than those in frontier markets like Kenya and Nigeria. All sectors benefit from deep financial markets and effective monetary policies, but costs are still higher than in many major emerging markets because of economic and fiscal constraints. Without improvements, South Africa risks continuing a negative spiral in which high interest rates aimed at attracting inflows amid subdued growth limit domestic investment and further hinder economic prospects.
- Kenya's sometimes uncertain policies and shallow markets keep debt costs high despite moderate inflation.
Limited savings and a large informal economy constrain market depth. Corporate access to market debt is highly restricted, exacerbated by high sovereign funding needs which crowd out the private sector. Banks are key for credit allocation but sometimes face policy uncertainty. While the government has taken steps to improve market function and financial inclusion, these challenges take time to address. Building policy continuity and strong relationships with development partners will aid progress.
- High inflation and limited savings raise Nigeria's costs.
The sovereign and banks have mitigated high market borrowing costs through lower-cost funding sources, but companies are less able to do the same. However, Nigeria's financial markets are better at channelling funds to companies than Kenya, partly because competing demand from the sovereign's funding needs is lower. Recent reforms aim to establish robust financial markets, especially for foreign exchange, and strengthen monetary policy transmission channels but are starting from a low base. Future efforts to deepen financial markets, boost confidence and tackle corruption may help gradually lower borrowing costs.