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The Federal Reserve’s Decision to Raise Interest Rates Will Strengthen the U.S. Dollar, but Weaken Nearly Every African Currency

us-dollarsThousands of miles and a vast ocean separate Africa from the United States. But the distance will not shield African nations from the U.S. Federal Reserve’s decision to raise its benchmark interest rate Wednesday after years of easy-money policies.

The announcement pushing the federal funds rate up a quarter of a point from the near-zero levels that had prevailed for seven years will strengthen the U.S. dollar and weaken just about every African currency. Some countries with ballooning debt and high exposure to global markets, such as Ghana, South Africa and Angola, will be most vulnerable, according to financial experts and analysts, while others, including Ethiopia and Ivory Coast, have buffers that may help them cope.

“It’s likely going to affect currencies across the board in most countries, and in sub-Saharan Africa quite dramatically,” said Anna Rosenberg, practice leader for sub-Saharan Africa at Frontier Strategy Group, a global research and advisory firm in Washington that specializes in doing business in emerging markets. “The moment your currency depreciates by 50 percent, your economy depreciates by 50 percent on paper. It knocks off a few billions on the economy overnight.”

Federal Reserve Chair Janet Yellen said Wednesday continuing economic growth and the improving labor market contributed to the U.S. central banks’s decision to lift the federal funds rate. The widely anticipated move signaled the Fed’s confidence that the U.S. economy has significantly improved since the financial crisis of 2007-08. The new benchmark rate, which is what commercial banks pay to borrow from the Fed, will hover between 0.25 percent and 0.5 percent.

With its unsustainable domestic- and foreign-debt burdens, Ghana may be the hardest-hit African nation in the aftermath of the rate hike. The West African country’s debt-to-GDP level was 71 percent in June, and much of its debt is in the form of short-term, dollar-denominated bonds acquired over the past few years, which means Ghana will soon have to repay its debt in dollars. These debt payments will be even more expensive for Ghana following the Fed’s move. With oil revenue down 56 percent and the Ghana cedi currency losing value against the U.S. dollar this year, the country will struggle to come up with the money for these payments on its own, and lenders may not be willing to refinance the debt. Down the road, the Ghanaian government may be forced to default on its debt in the coming years.

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