World Bank Says Fed Tapering Could Threaten Africa’s Growth

Tighter global financing conditions, lower commodity prices and political unrest could weaken growth prospects in sub-Saharan Africa, according to the World Bank.

“The tapering of asset purchases by the Federal Reserve is expected to lead to a rise in base interest rates and spreads,” the Washington-based lender said in its Global Economic Prospects report released today. “South Africa, which has strong links with global financial markets, is particularly vulnerable to sudden stops of capital.”

South Africa relies on portfolio inflows to help finance the gap on its current account, which widened to 6.8 percent of gross domestic product in the third quarter. The Fed’s monetary stimulus program has also helped to prop up emerging-market currencies like the rand since 2009. Concern that it may be withdrawn helped push the South African currency down 19 percent against the dollar in 2013, the worst performer among 16 major currencies tracked by Bloomberg.

The Fed’s plan has mostly been priced into the market, Kaushik Basu, chief economist of the World Bank, told reporters on a conference call from Washington yesterday.

“There is probably going to be an overall slowdown in capital inflows into emerging and developing economies, but we expect this to happen slowly and smoothly and with no big turbulence,” Basu said.

Growth Forecasts

A protracted decline in commodity prices due to increased output and weaker demand could shave up to 3.8 percentage points off growth for oil exporters whose economies aren’t very diversified, like Angola and Gabon, the World Bank said.

The bank cut its growth estimate for the region for 2013 to 4.7 percent from 4.9 percent, and kept its forecast for this year unchanged at 5.3 percent. Excluding South Africa, it expects growth of 6.4 percent.

While there will be a repricing of risk as the Fed reduces its stimulus program, it shouldn’t have a “dramatic” effect on African nations, Konrad Reuss, head of Standard and Poor’s sub-Saharan African unit, said at a conference in Johannesburg today.

Risks include the political instability in the Central African Republic, which could “deteriorate further with spillovers to neighboring countries,” while Nigeria’s battle against Islamist militants may also hurt economic growth, the World Bank said.

South Africa’s economy probably grew 1.9 percent last year, held back by labor disputes and weak demand for exports, the bank said. It predicts growth will accelerate to 2.7 percent this year and 3.4 percent in 2015.

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