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Foreign exchange (forex) shortages become more pronounced as
economies face ongoing high import price pressures and higher debt
servicing requirements.
Forex depletion challenges servicing debt, thus more
sub-Saharan Africa (SSA) countries are likely to seek debt
restructuring.
Stricter capital controls are likely such as the example of
Kenya and Angola show.
SSA currencies are likely to remain weak against the US dollar
during the second half of 2022, and pressure on the terms of trade
will only start to taper in early 2023.
More SSA economies are showing a gradual increase in significant
forex shortages, a trend our team has documented in our recent
research.
All countries in the SSA region benefited from the International
Monetary Fund's additional Special Drawings Right allocation during
August 2021, which was added to their official international
reserves. We see that an expansion of current-account deficits
— triggered by events such as a sharper-than-projected slowdown
in global growth and reduction of trade flows, high debt servicing
obligations and a higher import bill — will worsen SSA forex
buffers in the near term.
The pressure on the terms of trade will only start to taper in
early 2023, constraining hard currency availability for
non-oil-exporting countries during the fourth quarter of 2022 and
potentially into 2023. SSA currencies are likely to remain weak
against the US dollar during the second half of 2022, with this
situation continuing into 2023.
Multiple factors including portfolio flow changes, adjustments
in foreign reserve positions and inflation differentials are all
important drivers of the outlook. A higher import bill on the back
of high global energy and food prices has so far outweighed any
gains expected from weaker currencies that could in theory help SSA
economies' exports to gain market share, thus support forex
reserves.
Concerns over forex shortages have recently been raised in
Mauritius. The reason for these shortages is twofold: Forex
providers such as exchange bureaus are faced with higher
operational costs, and there is a broader liquidity problem in the
economy. Weaker growth in the eurozone, which is the biggest
tourism market for Mauritius, is one root cause.
In Kenya, weaker foreign direct investment inflows (FDI) have
raised concern over sufficient forex holdings. While the country's
central bank sees these still at adequate levels, the Kenyan
government has imposed stricter capital controls to foreign capital
repatriation.
Angola's non-oil FDI inflows have fallen to the lowest level
since 2012 during the first two quarters of 2022. The economy has
also been dealing with a softening in forex holdings even with an
improved trade balance, prompting an adjustment in its capital
controls policy. The drawdown in forex resulted mainly from higher
debt servicing, as debt service suspensions from mainland Chinese
banks come to an end with higher oil prices. Angola's foreign debt
to mainland China shrank by USD350.8 million in the first quarter
of 2022 compared with December 2021.
Nigeria — next to Angola one of the largest oil producers in
SSA — has failed to strengthen its foreign reserve position
during 2022. Political uncertainty given the upcoming presidential
election in February 2023 will impede any decisive action to
improve forex shortages.
Ethiopia, which is known for its chronic low import cover, is at
high risk of lacking sufficient external debt repayment capacity
amid its critically low levels impacted by the military conflict in
the north of the country. This could challenge Ethiopia's ability
to service upcoming interest payments, such as the USD33-million
Eurobond coupon payment due on Dec. 11.
With expected low forex buffers, we anticipate that more SSA
countries will seek debt restructuring. We recently published a
report on Mozambique with our analysis indicating that, from 2024,
weakening gas prices and fiscal slippage will increase the risk of
Mozambique needing further debt restructuring. The probability that
Ghana will restructure its debt has increased as interest costs
surge and the Eurobond markets stay inaccessible.
Posted 08 November 2022 by Alisa Strobel, Senior Economist, Research Advisory Specialty Solutions, S&P Global Market Intelligence
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
