Impact of COVID-19 on Financial Stability in Africa
Covid-19 has been very damaging to global equity and debt markets, especially in developing markets with riskier assets. The impact on developing markets has been exacerbated by falling commodity prices and depreciating currencies. The turbulence in financial markets, together with the negative effects of economic lockdowns, has prompted fiscal and monetary authorities in most countries to enact economic stimulus packages and other liquidity-boosting measures to safeguard financial stability. With Africa’s economic outlook revised downward, financial instability is still a major risk owing to huge capital outflows, trade disruption, reduced foreign direct investment and funding shortages. Remittances have dried up and, as households and businesses become distressed, default rates are on the rise, risking the sudden stop of credit markets. Creditors are increasingly unwilling to lend off the back of weakening borrowers’ credit quality and low investor and business confidence. For African countries, the cumulative effects of the pandemic crisis are a projected recession amid widening fiscal deficits, falling government revenues and soaring debt servicing costs. In the midst of this, ratings agencies have been downgrading countries by revising downward their speculative-grade default forecasts to recessionary levels and increasing market-implied defaults. Macroeconomic resilience, particularly in Africa, is being tested by both the health and economic impact of Covid-19; a virus that is still largely unknown as its impact becomes more severe and lengthier than initially anticipated. While the most vulnerable countries are in dire need of assistance from the international community to mitigate the economic impact of Covid-19, central banks are fundamental to maintaining financial stability on the continent. It is therefore more important than ever for African governments to strengthen monetary, fiscal and financial policy interventions to forge economic recovery plans as the pandemic is brought under control.