African markets are suffering severe market pressures.

In many ways, the current situation is a “perfect storm” with structural and cyclical issues combining to create twin deficits, rising inflation, rapidly depreciating currencies, multiyear low growth rates and a run on foreign exchange reserves.

Nowhere is this pinch felt more acutely than in Zambia and Ghana. Both were touted as rising African stars, but now are cited by the International Monetary Fund as the most vulnerable to debt distress.

The Zambian economy is under siege. The country is battling with a host of issues, both domestic and external. On the external front, the slowdown in the Chinese economy, emerging market risk aversion and a plunge in commodity prices have taken their toll, while internally the country is facing a power crisis, fiscal pressures and an election next year.

The combination of these issues has seen the Zambian kwacha become the worst performing currency over the past year, losing more than 80 percent of its value. Zambia’s situation bears similarities to those exhibited in Ghana around its 2012 election, which has raised alarm that it could be heading down the same path.

Ghana, formerly the darling of West Africa, and one of the fastest growing economies in the world, is in the middle of a major economic crunch. From a stellar 13.6 percent growth rate in 2011 driven by bumper cocoa, gold and oil revenues, the country’s economy deteriorated significantly to the point it was forced to seek external assistance to remedy its problems.

Like Ghana, Zambia’s economy is characterised by a lack of confidence arising from policy drift rather than decisive action at a time of economic trouble. But how exactly did these countries slip so badly? Zambia’s maiden eurobond issuance in 2012 was issued at a lower yield than Spain, while Ghana was the fastest growing economy in the world in 2011.

Strong growth in the last decade allowed both countries to achieve lower middle income status and tap international capital markets, while prudent macroeconomic management and the adoption of market liberalisation policies boosted their investment profiles.

Buoyed by a favourable commodity cycle, the countries displayed strong growth rates in the aftermath of debt relief, and were lauded as politically stable multiparty democracies with track records of peaceful transfers of power – a rarity on the African continent.

However, in many ways, these mature political systems are actually the reason for the turbulence. Many of these issues can largely be traced to the “political business cycle” around elections, and particularly excesses in relation to wage increases as incumbent parties are distracted by the prospect of re-election, and become lax. Indeed, this lack of fiscal discipline is at the heart of both countries’ problems.

 

Opinion by Ronak Gopaldas, head of country risk at Rand Merchant Bank.

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