(Ecofin Agency) - US lawmakers will review the federal rescue package of $1.9 trillion proposed by the new US president Joe Biden (pictured) this week. The project received support from senators and congressmen and there is no doubt that it will be validated and implemented.
Investors from different financial markets are already positioning themselves, and this will surely have consequences for Africa.
First, the deployment of this stimulus package will lead to the return of inflation to above 2% in the USA due to the movement on benchmark US government Treasury bonds with a 10-year maturity. Their yields (interest plus capital gains on the purchase of securities) are on the rise. Investors who had positioned themselves on these securities were protecting themselves from the consequences of a sluggish economy. But now, they seek to dispose of them.
If inflation were to return, the fact that these Treasury bonds provide very low yields could constitute net losses for investors, especially since the objective of financial investment, among other things, is to beat inflation levels. According to the Brooking Institute, which is fairly conservative in its forecasts, Joe Biden's plan should increase production and wages, two important factors of inflation.
The implication for Africa in such a scenario is twofold. Investors pulling out of U.S. bonds must find new investment objectives. In recent months, however, U.S. stock markets and other indices have not performed following the economic recovery. Therefore, the risks of having an overvalued stock market exist. The only haven opportunities for investors are the bond markets of emerging countries and commodities.
The Institute for International Finance says Africa in particular is expected to mobilize up to $25 billion in the international capital market by 2021. Returning inflation in the United States could increase demand for securities issued by African borrowers and reduce borrowing costs. Côte d'Ivoire, Benin, and even recently Ecobank Nigeria have already experienced this scenario. Nigeria and Kenya are also posting declining yields on their bonds, a sign of investor demand.
The second impact already experienced in Africa is that of rising mineral commodity prices. African gold-producing countries were able to benefit from the rise in gold prices in 2020. Other mining resources are gaining in value, such as copper, which is now at its highest level in the last 11 years, or iron, which continues to grow.
Finally, a strong US recovery could also drive up oil prices and demand for products such as rubber and cocoa, all of which are sources of foreign exchange earnings for Africa.
Export revenues are often favorable to the revival of consumption in Africa. This may be all the more true since, in many countries in the region, local currencies have depreciated against the US dollar in 2020. Rising incomes in the US currency would generate solid gains for governments, businesses, and households, which are the main actors of local financial markets.