Foreign Currency Shortages Continue to Hit Oil Exporters in Sub-Saharan Africa

Even though oil prices have stabilized recently, oil exporters in Sub-Saharan Africa will continue to have a difficult time managing foreign currency shortages racked up in recent years.

"Falling oil and commodity prices over the past two years have led to foreign currency shortages in numerous Sub-Saharan African countries, with oil exporters hit particularly hard," said Lucie Villa, a Moody's vice president, senior analyst and co-author of a recent report. "The stabilization in oil and commodity prices over recent months will help to ease the pressure, but any recovery will depend on continued higher prices and could take some time."

In Angola and Nigeria during the past six months or so, governments have tried to shore up the fall in foreign exchange reserves by rationing dollars, devaluing currencies and borrowing in foreign currencies, Moody’s said. “But this has been to the detriment of the non-oil economy, price stability and government balance sheets,” analysts with the ratings agency said.

The Republic of Congo and Gabon peg local currency to the euro and foreign exchange reserves have collapsed, with reserves expected to fall more this year, Moody’s said.

Nonfinancial companies operating in oil exporting countries like Nigeria and Angola have seen the most impact from local currency weakness, and analysts expect these problems to continue this year but ease in 2018. "Dollar shortages make it difficult to pay suppliers of imported goods and equipment, meet dollar debt payments or to repatriate funds outside of the respective countries," said Dion Bate, a Moody's vice president. "The associated local currency weakness increases the cost of servicing unhedged foreign currency debt obligations, reduces repatriated profits in foreign currency and lowers operating margins, as companies are not able to pass on high import costs to the consumer."

Banks in Angola, Nigeria and the Democratic Republic of the Congo have been the most affected by foreign currency shortages because of their economies’ reliance on dollars, as they’ve seen foreign currency deposits deplete with limited access to new foreign funding. "The resultant currency devaluations have also eroded banks' loan quality, profitability and capital," said Constantinos Kypreos, a Moody's senior vice president.

Higher oil prices and associated revenues are relieving pressures in Nigeria and Angola central banks, which are injecting more dollars into the economy, Moody’s said. Regardless, banks in Sub-Saharan Africa typically keep high capital buffers and enjoy robust profitability.

– Nicholas Stern, senior editor

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