In response to a deepening shortage of hard currency on the continent, African governments are resorting to measures such as bartering, currency devaluations, central bank exchange controls, and seeking assistance from the International Monetary Fund and the Middle East to strengthen their balance sheets.
Investors are now differentiating between nations successfully enhancing dollar liquidity and those struggling to ensure access to the currency necessary for investment and repatriation of returns. Consequently, countries lacking adequate reserves to cover import costs or debt repayments are facing investor apprehension. This is reflected in the dismal performance of African currencies, with approximately a dozen experiencing declines of at least 15% against the dollar, making them the worst performers globally this year.
“Dollar holdings are part of the value proposition,” said Benedict Craven, country risk manager at the Economist Intelligence Unit. “Will investors be able to trade using foreign exchange from official sources? Will they be able to expatriate their dividends abroad? These questions are separating where investment is going.”
The impact of the dollar squeeze is most evident in local currencies, with Eurobond issuers like Egypt, Nigeria, and Angola being compelled to devalue this year. Dwindling capital inflows have led to record lows against the greenback for currencies such as Kenya’s shilling and Zambia’s kwacha. Kenya, facing significant dollar-debt repayments next year, has seen its dollar bonds incur a 2.1% loss since July, outpacing the 1.7% average loss for emerging and frontier peers in a Bloomberg sovereign dollar bond index. Nairobi’s stock index has recorded the steepest decline among 92 global markets tracked by Bloomberg in 2023, slumping by 32%, while the shilling has fallen by 19%.
In Zambia, Mozambique, and Nigeria, the inability to access foreign financing has compelled governments to increase domestic issuance in shallow markets, resulting in higher borrowing costs. Since April 2022, African sovereigns have been shut out of international debt capital markets. Nigeria’s longest-dated naira bond is now trading at a record 18% yield, but foreign buyers remain cautious due to concerns about depreciating local currencies and challenges in repatriating returns. In Zambia, foreign holdings of domestic debt have dropped from 29% at the end of 2021 to approximately 22%, attributed in part to the restructuring process and liquidity issues.
IMF rescue
In certain instances, the IMF is providing assistance. In order to strengthen its reserves in advance of a $2 billion eurobond maturity in June, it announced last week that it will increase financing to Kenya by $938 million. Because of this, yields on the 2024 notes fell by nearly 200 basis points in just four days, ending on Friday, even though they are still much higher than 14%.
“The general perception is when a country trades above 10% in USD yields they are not able to issue in the USD market,” said Lars Krabbe, a portfolio manager at Coeli Frontier Markets AB. “This is of course not good for the general investment environment and debt sustainability in these countries and makes them highly dependent on concessional funding” such as IMF loans, he said.
On the other hand, countries with less pressing foreign-exchange needs are becoming more appealing.
“Countries with less punishing dollar-denominated loan amounts and bond repayments, and large stocks of foreign reserves, are most attractive,” said David Omojomolo, Africa economist at Capital Economics. “And more so those that have made large FX adjustments already.”
One such country is Egypt. Citigroup Inc. strategists are the latest to express optimism about the North African nation’s dollar debt, driven by the acceleration of state asset sales and the government’s progress in meeting IMF-set targets. According to al-Borsa, the central bank is nearing the finalization of securing up to $5 billion in new deposits from Saudi Arabia and the United Arab Emirates.
Egypt’s eurobonds have delivered a robust return of 8.7% in the second half of this year in dollar terms, contrasting with losses experienced by the average developing-nation peers in a Bloomberg sovereign credit index.
For Kaan Nazli, a portfolio manager at Neuberger Berman Asset Management, investors are likely to favor sovereign issuers that have better access to alternative financing sources, citing Ivory Coast and Senegal as examples.
“Ivory Coast, for example, was able to rely on blended finance deals at reasonable cost over the last year,” he said.
The West African nation has additionally secured an IMF loan, and its currency, the CFA franc, is pegged to the euro, providing a buffer against fluctuations. In the same region, Senegal is drawing investments into public-private partnerships in climate finance.
Comparatively, losses in the eurobonds of both Senegal and Ivory Coast have been less pronounced than those of Kenya and narrower than the average since July. Their performance this month has surpassed that of their peers.
Simultaneously, the scarcity of dollars is adversely affecting consumers and local businesses, leading to a surge in import costs and fueling inflation.
In Nigeria, prices of prescription drugs for conditions like hypertension and diabetes have tripled in the past year. One of Zimbabwe’s major retailers, OK Zimbabwe, reported that sales volumes are now below the break-even point due to escalating costs and an exchange rate that has driven customers to the informal sector. In Malawi, the price of corn, a dietary staple, has more than doubled over the past year.
“The problem is there’s only so much you can do if you don’t have a vast trove of dollar reserves,”said Sonu Varghese, global macro strategist at Carson Group. “For investors, the risk that these countries remain on the verge of crisis hasn’t gone away.”