Foreign exchange shortages could prompt further debt restructuring trend in SSA

• 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, Principal Economist, Global Economics SSA, 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.