A quicker and sharper-than-expected normalisation in interest rates in the US could trigger a reversal in capital flows to South Africa, the World Bank’s latest ‘Africa’s Pulse’ warns, adding that any sharp increase in global interest rates could also complicate debt dynamics for sub-Saharan Africa as a whole.

The publication shows that government debt in sub-Saharan Africa remains elevated, with median government debt expected to be around 50% of gross domestic product (GDP) in 2017, more than 15 percentage points above the level in 2013. “In South Africa, government debt in 2017 is expected to rise two percentage points to about 53% of GDP.”

The report notes that, in the post-crisis period, African countries have had measured success in tapping global capital markets—especially international bond markets. Sovereign debt issuance increased from an average of $3.5-billion in 2010 to 2013 to $6.2-billion in 2014 to 2017. “Issuance has been on fairly favourable terms: the weighted average coupon is 6.5%, and the average maturity is 20 years”.

Seven countries account for over three-fourths of the total bond debt issued, including South Africa, Côte d’Ivoire, Ghana, Nigeria, Angola, Zambia, and Kenya.

As the region’s only emerging market, South Africa would be particularly vulnerable to adverse swings in investor sentiment, the report states.

Following a sustained period of loose monetary policy, the US Federal Reserve started hiking rates in 2015. It has raised rates three times in less than a year and is expected to hike again in December. To date, the increases have be modest, but in September chairperson Janet Yellen said she was “wary of moving too gradually” in tightening monetary policy.

Africa’s Pulse says that, after enjoying a period of favourable external conditions for several years, countries in the region could well confront a tightening in financial conditions. This tightening could arise from a normalisation of monetary policy in advanced countries, a decrease in other sources of funding and rising sovereign risks in the region. “International bond market conditions are still bullish; however, it is questionable whether these conditions will hold in the future.”

Already capital flows into South Africa decelerated to 4.2% of GDP in 2015, after posting an annual average amount of 6.6% of GDP between 2011 and 2014. The report states that the reduction in capital flows to South Africa was mainly driven by reduced foreign direct investment, which accounted for about half of the drop in total inflows.

Meanwhile, the bank reaffirmed its view that South Africa would grow by only 0.6% in 2017, which is in line with the International Monetary Fund’s lowered October projection in the World Economic Outlook of 0.7%, down from 1% in July.

Growth in South Africa is projected to rise to 1.1% in 2018 and 1.7% in 2019. The forecast for 2019 was revised down by 0.3 of a percentage point.

“The outlook remains challenging, with policy uncertainty and low business confidence expected to continue to weigh on investment.”

In addition the report suggests that government will face challenges in its efforts to maintain the fiscal consolidation path. “National government revenue is increasing at a slower pace than expenditure, as real economic activity remains weak. With tax revenue collection shortfalls making it difficult to attain the target set out in the budget, the country’s deficit is expected to narrow only marginally in 2017.”