African Economies Vulnerability to US Fed rate hike … Ghana the most vulnerable

LONDON, Capital Markets in Africa — Monetary policymakers as well as market analysts routinely cite tightening by the US Federal Reserve among risks to macroeconomic stability. In 2015, the US Federal Reserve has been a major source of uncertainty for the global economy but the markets now expect a rate rise at the Federal Open Market Committee meeting on 15-16 December 2015. Beyond this, rates are expected to follow a gradual upwards path throughout 2016. An important question for the rest of the world then, is what impact the movement will have on other economies.  

To answer this question with reference to Africa, the latest quarterly economic report (Economic Insight: Africa, Q4 2015) by the Institute of Chartered Accountants in England and Wales (ICAEW) assessed the risks of Fed rate hike on African economies. To do so, a ‘vulnerability index’ was constructed which focuses on three measures, namely; a country’s current account balance, its growth in private sector credit, and its ratio of foreign debt to reserves ratio. These indicators are scaled, harmonized and summed together to provide an overall vulnerability score for each country. The higher the score, the more vulnerable the economy to the rise in the US Federal Reserve rate.

According to the ICAEW’s vulnerable index, Ghana emerges as the most vulnerable African economy with a score of 273 out of 300. This is attributed to a very high current account deficit and a history of rapid credit growth. The next vulnerable economy is Seychelles and followed by Guinea, Tanzania and Democratic Republic of Congo. Kenya occupied a sixth  position in terms of vulnerability scoring almost 250 points out of 300. See Figure below for the vulnerability position of other African economies.  

The report point out that while this index goes far in providing nuance to the usually crude analysis of the vulnerability of African economies to a US Federal Reserve rate hike, it is not exhaustive. Therefore, a country-by-country analysis should be relied upon to draw policy conclusions in order for country specific factors to be accounted for, the report concluded.