- Central banks across Africa weighing interest rates in the next three weeks are poised to lower them, cautious that the opportunity to ease further may dissipate after President Trump formally assumes office.
- The Trump presidency is anticipated to strengthen the dollar further, primarily due to his commitment to significantly raising tariffs on imported goods.
- A new wave of inflation, driven by the strengthening dollar from the Trump effect, would exacerbate the already high inflation rates in many African countries.
Donald Trump’s return to the Whitehouse sent the dollar surging against both G10 and emerging market currencies in a change that has potentially far-reaching macroeconomic repercussions for African nations.
As Trump’s victory became evident, the “Trump Trade” pushed 10-year Treasury yields up by 0.16 per cent to 4.44 per cent. Meanwhile, the dollar index, which measures the dollar’s performance against a basket of major currencies, saw its largest single-day increase since November 2022. The dollar appreciated up to 1.5 per cent as the results came in during the early morning hours of 6th November.
The Trump presidency is anticipated to strengthen the dollar further, primarily due to his commitment to significantly raising tariffs on imported goods. During his campaign, Trump proposed increasing tariffs by an additional 10 per cent on most foreign products, with goods from China potentially facing tariffs as high as 60 per cent or more.
Thus, there appears to be reflationary and ‘risk on’ approaches hinted at by the US post-election financial market movements. “The initial market reaction reveals the expected policy mix to comprise more expansionary US fiscal policy, reduced government regulation, a change in geopolitical stance and increasingly aggressive trade policy towards global manufacturing centres such as Europe and Asia,” said Thys Louw, an emerging market fixed income portfolio manager at Ninety One.
African Central Banks to Cut Interest Rates
Most African central banks weighing interest rates in the next three weeks are poised to lower them, cautious that the opportunity to ease further may dissipate after President Trump formally assumes office.
Out of the 14 monetary authorities scheduled to announce rate decisions, eight, including South Africa and Kenya, are expected to cut rates. Five are predicted to maintain their current rates, while Nigeria is anticipated to increase.
While domestic factors ultimately influence their decisions, it will be challenging to overlook Trump’s election victory on November 5, unsettling emerging markets as investors speculate that his policies may result in a stronger dollar and increased U.S. interest rates.
“Trump’s stated policies, such as an increase in tariffs and larger budget deficit for the US, are likely to be inflationary and set to put a damper on the ability of African central banks to cut interest rates in 2025,” said EY Africa Chief Economist Angelika Goliger.
A stronger US dollar will negatively impact African countries by increasing the cost of their imports and making dollar-denominated debts more expensive. Additionally, rising US interest rates could lead to a withdrawal of capital from emerging markets, compelling local monetary authorities to raise borrowing costs to steady their currencies.
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Capital Woes for Highly Indebted African Countries
Trump’s threat of additional tariffs on goods imported into the United States is a clear worry to some highly indebted African countries as it would complicate their route in seeking to regain access to the global capital markets.
Some African economies, including Zambia, Ethiopia, Ghana, and Kenya, are currently blocked from raising capital in the global financial markets owing to their heavy debt burdens.
Some of the countries in the spotlight include Kenya and Angola. Angola has recently warned that it is struggling to service its debt while funding daily government spending. On the other hand, the Kenyan government has been questioned by its citizenry concerning the “predatory” tax measure recently implemented. In June, mass protests forced the government to make a U-turn on its proposed tax law. The government has since resorted to borrowing to offset its obligations.
According to David Omojomolo, an Africa-focused emerging market economist at the London-based Capital Economics, “If borrowing from international capital markets becomes more difficult, many in the region will remain reliant on financing from the likes of the International Monetary Fund and World Bank to avert sovereign default,” Omojomlolo warned.
