The decision by the United States to freeze funding for its core aid agency has sent shockwaves through recipient countries, potentially hampering their ability to attract private investments, according to investors.
The U.S. Agency for International Development (USAID) plays a critical role in bolstering private investments in various sectors, from healthcare to small businesses, and contributes to the creditworthiness of major emerging markets seeking loans on international financial markets. The elimination of USAID could hinder investment in countries such as Sri Lanka and South Africa, making borrowing on global markets more expensive.
Investors highlight that USAID funding supports the growth of startups in the world's poorest nations, paving the way for future private investments. Additionally, its financial assistance reduces risks for financial institutions investing in projects like irrigation expansion and hospital construction, multiplying the impact of the initial funding.
Giulia Pellegrini, senior portfolio manager for emerging market debt at Allianz Global Investors, emphasized that the cuts could have long-term implications on a country's creditworthiness, affecting its economic stability. Simon Schwall, CEO of the Africa-focused startup Oko, expressed immediate concerns over the potential closure of his business due to the loss of USAID funding, which accounted for a significant portion of the company's cashflow.
The abrupt reduction in U.S. foreign aid could have far-reaching consequences for struggling nations like Ethiopia, potentially impeding their economic recovery. The impact of these cuts on emerging markets comes at a critical time when these economies are seeking investment to address pressing needs, such as climate change and infrastructure development.
Florian Kemmerich, managing partner at impact investment firm KOIS, highlighted that the drastic cuts may limit the availability of viable investment projects, stressing the importance of not-for-profit capital to bridge the gap between risk and returns in these regions. Bond investors are closely monitoring the situation, particularly in countries heavily reliant on USAID, such as Ethiopia and Ukraine.
While some nations like Kenya plan to offset the loss of aid through increased borrowing, others like South Africa face potential setbacks in crucial programs like HIV/AIDS funding. The broader impact of reduced aid could lead to higher borrowing costs, affecting countries' budgets and economic activities in the long run.