A surge in interest rates in the developed markets – the Eurozone and US – could damper portfolio inflows that African states are enjoying right now, it has emerged.
However, David Lashbrook, the head of Africa Investment Strategies at Momentum Global Investment Management, said the reduction in portfolio inflows would not certainly lead to major strain in those African markets.
Portfolio inflows refer to investments in a range of securities, bonds and other types of investment strategies in a particular country.
The African continent has many rapidly growing economies in the globe. This means they can fight their way out of debt.
“Nigeria is by far the most liquid fixed income market in Africa outside of South Africa and its local and hard currency bonds feature in JPMorgan’s GBI Emerging and EMBI indices respectively. Because of this, Nigeria’s bonds sold off more than many other African bonds during the EM sell off in Q2 of this year,” Lashbrook said in a statement.
“Nigeria has significant foreign reserves and a current account surplus. So it is capable of withstanding external shocks,” he continued in the same statement.
Late last week, the European Central Bank (ECB) left interest rates unchanged at 0.5 percent, preferring not to react, at least for now, to indications of a swelling financial strain in the Eurozone.
Mario Draghi, the president of the ECB, said his bank will maintain rates at “current or lower levels” for a longer spell.
“With smaller FX (foreign exchange) reserves and twin current account and budget deficits, Kenya could be seen as more vulnerable. Yet, the country withstood the flight of foreign capital before March’s election and Kenya’s local currency bonds…rallied during the second quarter because the base rate was cut by 1% to 8.5% in the face of declining inflation,” Lashbrook concluded.