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African currencies are facing renewed pressure as higher interest rates in major economies threaten to trigger capital outflows and increase the cost of servicing external debt, according to Access Bank Group.
The bank said the pressure was being driven by widening yield differentials and rising borrowing costs as major central banks maintained a hawkish monetary policy stance.
It said higher interest rates in the United States, Europe and Japan could make African assets less attractive to foreign investors, encouraging capital to move into developed markets offering higher returns.
“Wider yield differentials in favour of the dollar, euro and yen reduce the appeal of frontier assets and encourage portfolio outflows,” Access Bank said in its latest market commentary.
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The bank said Japan was particularly significant because investors had traditionally borrowed cheaply in yen to invest in higher-yielding assets in countries including Nigeria, Egypt and Ghana.
Higher Japanese interest rates could increase the cost of such funding and trigger the unwinding of these trades, putting further pressure on African currencies, the bank said.
The bank said African governments and companies would also face higher debt-servicing costs because much of the region’s external borrowing was priced against United States Treasury yields or floating dollar benchmarks.
“This matters beyond the current cycle,” the bank said, warning that long-term borrowing costs were likely to remain above levels seen during the 2010s.
The bank attributed the structural rise in long-term yields to persistent fiscal deficits, ageing populations, increased defence spending and growing demand for capital linked to artificial intelligence investment.
It said the normalisation of the term premium, which had previously remained suppressed, was also contributing to higher borrowing costs.
“External finance is therefore unlikely to return to 2010s conditions, even once the war premium fades,” it said.
The outlook presents an additional challenge for African economies that rely heavily on foreign capital to finance government spending, infrastructure and private-sector investment.
Weaker currencies could further increase the local-currency cost of servicing external debt, putting additional pressure on government finances and private-sector borrowers across the region.
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