Trump's aid cuts imperil emerging market investment cash
US aid pullback threatens efforts to secure private cash
Investments in health, agriculture at risk
Countries' creditworthiness in question over medium term
LONDON, Feb 6 (Reuters) - The United States' decision to freeze and potentially scrap its core aid agency jolted countries receiving its funding and could make it harder for emerging economies to attract private cash, investors said.
The U.S. Agency for International Development (USAID) not only disbursed $44 billion in fiscal 2023, but anchors private investment in everything from healthcare to small businesses, and underpins the creditworthiness of bigger emerging markets borrowing money on sovereign debt markets.
Its elimination could undermine investment in countries from Sri Lanka to South Africa and make it more expensive for them to borrow on international markets.
Money from the agency, investors say, enables start-ups in the world's poorest countries to grow to the point they can lure private investors.
Elsewhere, relatively small amounts of its money help lower the risk for banks and other lenders looking to invest in efforts to expand irrigation, or build hospitals, leveraging the cash into millions more. Its support can boost the ability of governments to repay debts, bolstering their economies.
"They do have implications for the medium and long-term creditworthiness of a country," said Giulia Pellegrini, senior portfolio manager for emerging market debt at Allianz Global Investors, referring to the cuts.
The near-total U.S. foreign aid funding freeze took effect last month and President Donald Trump said he would like to wind down USAID.
For Simon Schwall, chief executive of Africa-focused startup Oko - which is backed by Morgan Stanley and Newfund Capital and facilitates and designs crop insurance for farmers in Mali, Ivory Coast and Uganda - the impact has been immediate.
He said the company is at risk of closure without USAID money which would have accounted, directly and indirectly, for 80% of Oko's cashflow this year.
"We cannot raise the investment we were planning to," without replacing USAID, he said. "We are very much at risk of having to close the business if we don't find any alternative partners."
Alternatives are limited. The United States provided 42% of all humanitarian aid tracked by the United Nations in 2024, and other countries have also sought to cut aid spending.
The rapid pull-back could also knock some struggling nations like Ethiopia immediately and erode other economies.
"It could be a big setback for these frontier markets," said Seaport Global emerging market credit analyst Himanshu Porwal.
IMMEDIATE AND EXTENSIVE
Emerging markets were poised for an investor comeback after years of punishing outflows due to the COVID-19 pandemic, high global interest rates and Russia's invasion of Ukraine.
Debt restructurings in Ghana, Sri Lanka and Ukraine boosted hopes that private cash inflows could help meet growing - and expensive - needs for everything from climate change to infrastructure.
The outlook is now murkier.
Florian Kemmerich, managing partner with impact investment specialist firm KOIS, said the speed and depth of the U.S. cuts could diminish the number of investable projects.
"You need not-for-profit capital... otherwise it wouldn't work, because the mismatch of risk and return is something which makes no sense," he said.
USAID typically offers grants and technical support, but it has also enabled some blended finance, and its $70 million investment fund with Norway aimed to spur hundreds of millions of investment dollars for farmers and agricultural businesses in Africa.
CREDITWORTHY IMPACTS
Bond investors said they were closely monitoring the cuts and implications for countries like Ethiopia, the second-largest recipient of USAID after Ukraine.
The East African country is in the midst of restructuring its sole sovereign dollar bond and working to recover from a punishing civil war.
"In terms of overall financing needs, the U.S. aid is a lot more meaningful for the likes of Ethiopia," said abrdn portfolio manager Edwin Gutierrez, adding that it "doesn't have a lot of funding sources available to it".
Ethiopian officials did not immediately comment.
Ukraine, embroiled in three years of war with Russia, got over $16 billion from USAID last year - nearly 10% of its GDP.
Timothy Ash, senior sovereign strategist with RBC BlueBay Asset Management, noted that former U.S. President Joe Biden front-loaded about $50 billion of funding for Ukraine this year - and Europe also provided money.
"They have a war chest of about $100 billion that should insulate them," Ash said. But "it's damaging, definitely."
Other recipients, such as Nigeria or Kenya, can replace lost aid with borrowing. Kenya's finance minister told Reuters the country would need to reallocate spending if the freeze becomes permanent, while Nigeria increased the size of its 2025 budget to 54.2 trillion naira ($36.4 billion) on Wednesday, from 49 trillion naira.
South Africa, a Trump target over a land expropriation law, gets 17% of its HIV/AIDS programme funding from the United States. Not replacing it risks causing an economic drag if those living productively with the illness fall sick.
Pellegrini noted that borrowing - and building up potentially expensive debt - comes at a cost.
"That will imply, in turn, that they will go to the capital markets, they will issue bonds, perhaps at higher yields, which will in turn again impact their budgets and what they can do with the money," she said. "So it's a vicious cycle."
Get a look at the day ahead in U.S. and global markets with the Morning Bid U.S. newsletter. Sign up here.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Reuters
19 minutes ago
- Reuters
Oil prices dip as market awaits EIA report
HOUSTON, Aug 12 (Reuters) - Oil prices dipped on Tuesday as traders watched for a U.S. government short-term market outlook report following a bullish report on demand and supply issued by OPEC. Brent crude futures lost 20 cents, or 0.3%, to $66.43 a barrel by 10:36 a.m. CDT (1536 GMT). U.S. West Texas Intermediate crude futures were off by 39 cents, or 0.61%, to $63.51. "We're still locked into a range, waiting for an Energy Information Administration report this morning," said Phil Flynn, senior analyst at Price Futures Group. Flynn said traders were watching to see if the EIA report would track with a report issued earlier on Tuesday by OPEC on its demand and production outlook. The Organization of the Petroleum Exporting Countries raised its forecast for global oil demand next year and trimmed its forecast for growth in supply from the United States and other producers outside the wider OPEC+ group, pointing to a tighter market outlook. OPEC's monthly report on Tuesday said global oil demand will rise by 1.38 million barrels per day in 2026, up 100,000 bpd from the previous forecast. Its 2025 projection was left unchanged. U.S. President Donald Trump extended a tariff truce with China to November 10, staving off triple-digit duties on Chinese goods as U.S. retailers prepared for the critical end-of-year holiday season. This raised hopes that an agreement could be reached between the world's two largest economies and avert a virtual trade embargo between them. Tariffs risk slowing global growth, which could sap fuel demand and drag oil prices lower. U.S. consumer prices increased in July as tariff-induced rising costs for imported goods helped to drive the strongest gain in six months for one measure of underlying inflation. Also potentially weighing on the oil market, Trump and Russian President Vladimir Putin are due to meet in Alaska on Friday to discuss ending Russia's war in Ukraine. The U.S. has stepped up pressure on Russia to end the conflict, with Trump setting a deadline of last Friday for Russia to agree to peace in Ukraine or have its oil buyers face secondary sanctions. He has also pressed India and China to reduce their purchases of Russian oil. "If Friday's meeting brings a ceasefire or even a peace deal in Ukraine closer, Trump could suspend the secondary tariffs imposed on India last week before they come into force in two weeks," Commerzbank said in a note. "If not, we could see tougher sanctions against other buyers of Russian oil, like China."
Reuters
19 minutes ago
- Reuters
Cheaper gasoline restrains US consumer prices; worries about data quality rise
WASHINGTON, Aug 12 (Reuters) - U.S. consumer prices increased marginally in July, though rising costs for services such as airline fares and some tariff-sensitive goods like household furniture caused a measure of underlying inflation to post its largest gain in six months. The mixed report from the Labor Department's Bureau of Labor Statistics on Tuesday also suggested the disinflationary trend in services was stalling, with a record surge in the cost of dental services and strong increase in healthcare prices. While the pass-through from President Donald Trump's sweeping import duties to goods prices has so far been limited, economists continued to believe higher inflation was around the corner. Given that the Federal Reserve places more emphasis on services inflation, some observers cautioned that an interest rate cut at the U.S. central bank's September 16-17 policy meeting was not a done deal despite signs of deteriorating labor market conditions. Much will depend on the employment and inflation reports for August. "For those at the Fed who want to watch and wait, there is plenty here for them to make the case," said Conrad DeQuadros, senior economic advisor at Brean Capital. "For those who want to cut, they will argue tariffs are a one-time effect, the pass-through is modest and they want to cut because of risks to the labor market. This report, therefore, clinches nothing either way." The Consumer Price Index rose 0.2% last month after a gain of 0.3% in June, in line with economists' expectations. While financial markets breathed a sigh of relief on the data, concerns are mounting over the quality of the government's inflation and employment reports following budget and staffing cuts that have resulted in the suspension of data collection for portions of the CPI basket in some areas across the country. Those worries were amplified by the firing of Erika McEntarfer, the head of the BLS, early this month after data showed stall-speed job growth in July. Trump on Monday nominated Heritage Foundation economist E.J. Antoni, a critic of the BLS, to head the statistics agency, causing apprehension among some economists. Antoni was a contributor to "Project 2025," the controversial conservative plan to overhaul the federal government. The president seized on the tame headline CPI number to bolster his long-held view that consumers would not pay for tariffs, and singled out economists at Goldman Sachs for what he said were bad predictions on the tariff impact. "Tariffs have not caused Inflation, or any other problems for Country," Trump posted on his Truth Social media platform. The moderation in the CPI reflected a 2.2% decline in gasoline prices. Food prices were unchanged after rising 0.3% for two straight months. Grocery store food prices fell 0.1% as a 3.9% drop in the cost of eggs more than offset a 1.5% increase in beef prices and a 1.9% rise in the cost of milk. Droughts in past years reduced cattle herds and raised the cost of feed, leading to higher beef prices. In the 12 months through July, the CPI advanced 2.7%, matching the rise in June. Excluding volatile food and energy components, the CPI rose 0.3%, the biggest gain since January, after climbing 0.2% in June. The so-called core CPI was lifted by higher prices for services, including a 4.0% rebound in airline fares. Healthcare costs increased 0.7%, the largest rise since September 2022, amid solid rises in hospital and related services. Prices for dental services surged by a record 2.6%. Motor vehicle maintenance and repair costs soared as did the cost of financial services. Overall services prices rose 0.3% for a second straight month. Tariffs continued to drive up the cost of household furnishings and supplies, which rose 0.7%, while footwear prices surged 1.4%, the biggest increase since April 2021. Motor vehicle parts and equipment prices vaulted 0.9%, driven by a 1.0% increase in the cost of tires. But prices for appliances fell after two months of hefty increases, while apparel barely rose and prescription medication was cheaper. Core goods prices increased by a mild 0.2%, which some economists said suggested softening demand was curtailing businesses' ability to pass on higher costs from tariffs to consumers. Others disagreed, pointing out the on-again, off-again manner in which some duties have been implemented. "Some businesses are probably holding off on price increases while they wait to see where tariff rates settle out," said Bill Adams, chief economist at Comerica Bank. "But nobody goes into business to lose money, and companies will eventually pass on price increases one way or another." The core CPI increased 3.1% on a year-over-year basis in July after an advance of 2.9% in June. Based on the CPI data, economists estimated the core Personal Consumption Expenditures Price Index rose 0.3% in July, matching the gain in June. That would raise the year-on-year increase to 3.0% from 2.8% in June. Core PCE inflation is one of the measures tracked by the Fed for its 2% target. The U.S. central bank left its benchmark overnight interest rate in the 4.25%-4.50% range last month for the fifth straight time since December. Stocks on Wall Street were trading higher on Tuesday. The dollar slipped against a basket of currencies. Yields on longer-dated U.S. Treasuries rose. The BLS has suspended data collection after years of what economists described as the underfunding of the agency under both Republican and Democratic administrations. The situation has been exacerbated by the Trump administration's unprecedented campaign to reshape the government through deep spending cuts and mass layoffs of public workers. Citing the need to "align survey workload with resource levels," the BLS suspended CPI data collection completely in one city in Nebraska, Utah and New York. It has also suspended collection on 15% of the sample in the other 72 areas, on average. That has led the BLS to use imputations, opens new tab to fill in the missing information. The share of different cell imputation in the CPI data has jumped to 32% from only 10% in July 2024. Different cell imputation, which the BLS uses when all prices are unavailable in the home cell, maintains the item category but expands geography. The home cell method, considered by economists as higher quality, uses the average price of the same item in the same location as the missing product's price. Economists said they would be closely watching the data for increased volatility from these measures and any shifts in the trend when the new commissioner assumes his duties. "It will be interesting to see whether the data continues to follow the trajectory we anticipate, given the well-known impact of tariffs," said Elizabeth Renter, senior economist at NerdWallet. "One of many problems this changing of the guard introduces, increased skepticism about data quality. It may become difficult to determine whether any changes in the data are reflections of actual improvements."
Reuters
19 minutes ago
- Reuters
Miran calls Fed independence 'paramount' but declines to elaborate
Aug 12 (Reuters) - President Donald Trump's nominee to the Federal Reserve Board of Governors on Tuesday said the U.S. central bank's independence was 'of paramount importance' but declined to elaborate further, citing his coming approval process in the Senate. "I've always been clear that the independence of the Fed is of paramount importance," Stephen Miran, who is currently chair of the White House Council of Economic Advisers and who last year laid out a case for increasing presidential control of the Fed Board, told CNBC. "But...I do have the nomination going in front of the Senate and I really can't speak about that and get ahead of the Senate process." Miran has called for a complete overhaul of the Fed's governance, making the case in a paper he co-authored last year for the Manhattan Institute for increasing presidential control of the Fed Board, including by shortening members' terms. He also wants to end the "revolving door" between the executive branch and the Fed, and nationalize the Fed's 12 regional banks. If confirmed by the Senate, he would take over from former Fed Governor Adriana Kugler following her surprise resignation earlier this month, as she returns to her tenured professorship at Georgetown University. He would become one of seven members on a Fed Board now helmed by Jerome Powell, against whom Trump repeatedly rails over the central bank's refusal to lower interest rates as Trump demands. Two other governors were appointed by Trump during his first term and the other three are Biden appointees. But the vacancy Miran would fill extends only to January 31. Trump said Miran would hold the seat while he and his advisers search for a successor to Powell, whose term as Fed chair expires next May. Miran, asked to respond to inflation data released earlier on Tuesday, said the president's tariff policies are not resulting in meaningful inflation. The Consumer Price Index advanced 2.7% year-on-year in July but an underlying measure was up 3.1% at the fastest since January. "I do think that inflation has been well behaved, particularly since the president took office," he said. The majority of Fed officials had until recently been concerned that tariffs would exacerbate inflation and that worry has been the main driver in their decision not to lower rates. But a weak jobs report for July has changed that narrative, and rate futures markets now expect rate cuts to start next month. Asked if he believed he would be confirmed by the Senate in time for the next Fed meeting in mid-September, Miran said: "That's up to the Senate, and...I can't speak for them."
