Growing Pains

High deficits may push fragile economies in Africa toward Greek-style debt crises. Early in June, Kenya, Uganda and Tanzania outlined plans to boost infrastructure spending as they struggle to maintain economic growth dampened by high fuel costs and food prices. Because such projects will explode their national deficits, the three countries are seeking to attract more private investment. It?s a tricky situation for investors.

Kenya?s growth forecast was revised down to 5.3 percent in 2011 from 5.6 percent last year; the Kenyan shilling plummeted by 12 percent this year and inflation is forecast to reach 18 percent during the fourth quarter. Nairobi will boost infrastructure spending by 15 percent, expanding the deficit to 7.4 percent of gross domestic product, up from 5 percent of GDP last March. That means higher bond yields for investors, with the yield on one-year Treasury bills jumping to 9 percent, the highest level in nine years. Uganda plans to increase expenditure by 40 percent in the next fiscal year to build highways and develop hydropower projects. The budget deficit will widen to 5.0 percent of GDP from the current 4.8 percent. Kampala has cut its 2011 growth forecast to 6.3 percent from 6.4 percent. Tanzania pledged to boost infrastructure spending by 85 percent to help grow the economy by a projected 6 percent in 2011, down from 7 percent last year.

Caribbean economies are also among the most heavily indebted in the frontier market. Debt burden has become a major constraint on economic growth, increasing the region?s vulnerability to the global financial crisis. Jamaica successfully completed a debt exchange, but smaller economies may not be that lucky. Barbados, one of the region?s best managed economies, was downgraded by Moody?s Investors Services, a warning signal to other island nations to reduce their debt burden.

Stocks fell sharply in mid-June in South Africa, Egypt and other emerging markets, sending the benchmark indices to their lowest level in three months after the European Union refused to extend emergency loan to avert a default by Greece. The losses for South African bourses were curbed, however, by data showing domestic spending growth grew, which attracted foreign investors seeking high bond yields. In Egypt, the main bourse rose 1.6 percent in mid-June, the highest jump since January, as the market tried to recover from the political revolution earlier this year. However, analysts cut Suez Cement, the country?s biggest publicly traded producer of the building material, to ?sell? from ?neutral? after its stock lost 1 percent during the first two weeks of June.