Dollar Scarcity Is Driving More African Nations Into Crisis.

African governments are struggling to obtain dollars, causing a new division for investors. With a growing scarcity of hard currency on the continent, governments are resorting to bartering, devaluing their currencies, imposing central bank exchange controls, and seeking assistance from the International Monetary Fund and Middle East to stabilize their finances. 

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Investors are favoring nations that are successfully increasing dollar liquidity but avoiding those unable to guarantee access to the currency needed for investment and repatriating returns. They are also steering clear of countries lacking adequate reserves to cover import costs or debt repayments. African currencies have been the worst performers globally this year, with around a dozen depreciating at least 15% against the dollar. The ability to trade using foreign exchange from official sources and expatriate dividends abroad is becoming a crucial factor in investment decisions. 

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The dollar squeeze has been most evident in local currencies, with Eurobond issuers like Egypt, Nigeria, and Angola being forced to devalue this year. Capital inflows have dwindled, resulting in record lows for currencies like Kenya's shilling and Zambia's kwacha against the dollar. Kenya's dollar bonds have seen losses of 2.1% since July, with Nairobi's stock index dropping 32%, the most among 92 global markets tracked by Bloomberg. 

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In Zambia, Mozambique, and Nigeria, limited access to foreign financing has led to increased domestic issuance, driving up borrowing costs. African sovereigns have been unable to access international debt capital markets since April 2022. The IMF has stepped in to provide support in some cases, expanding financing to countries like Kenya to bolster their reserves ahead of significant debt maturities. 

However, countries with less urgent foreign exchange needs and substantial foreign reserves are becoming more appealing to investors. For example, Egypt has garnered positive attention from strategists as the government appears on track to meet targets set by the IMF.

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According to al-Borsa, the central bank is on the verge of securing up to $5 billion in new deposits from Saudi Arabia and the United Arab Emirates. Egypt's Eurobonds have provided investors with returns of 8.7% in the second half of the year in dollar terms, outperforming the average developing-nation peers in a Bloomberg sovereign credit index. Portfolio manager Kaan Nazli believes that sovereign issuers with better access to alternative sources of financing, such as Ivory Coast and Senegal, will be a priority for investors. Both countries have been able to secure financing deals at reasonable costs and are attracting investments in public-private partnerships in climate finance.

In contrast, the dollar shortage is causing import costs to soar, leading to inflation that is hurting consumers and local businesses. In Nigeria, prices of prescription drugs for conditions like hypertension and diabetes have tripled in the past year. Zimbabwe's OK Zimbabwe retailer has reported sales volumes dropping below the break-even point due to rising costs and an unfavorable exchange rate. Additionally, Malawi has seen the price of corn, a staple food, more than double over the past year.

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Sonu Varghese, global macro strategist at Carson Group, expressed concern that countries without substantial dollar reserves are at risk of remaining on the verge of crisis, posing a potential risk for investors.

In addition to impacting investors, the dollar shortage is also hurting consumers and local businesses as import costs soar, fueling inflation. This has led to significant price increases for essential goods in countries such as Nigeria and Zimbabwe. The situation has raised concerns about the potential for these countries to remain on the verge of crisis.

Overall, the scarcity of dollars in African countries is having widespread implications for both governments and investors, as well as for local economies and populations.

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SOURCE:

-GHANA WEB- "Dollar Scarcity Is Pushing More African Countries To Crisis"

-NORVAN REPORTS- "Dollar Scarcity Is Pushing More African Countries To Crisis"