With Weak Commodity Prices, African Nations With Dollar Debt In Trouble
A surge in foreign debt issuance by African nations has left some
fragile economies exposed to the risk of billions of dollars in foreign
exchange related losses if the U.S. currency strengthens abruptly, a
think-tank said on Wednesday.
Judith Tyson, senior researcher at the Overseas Development Institute
(ODI), said the notional losses in terms of higher interest and capital
repayments could total $11 billion in the event of a slump of 35
percent in African currencies against the dollar.
Ivory Coast would be most exposed, risking losses equivalent to some
11 percent of its GDP, due to its high debt and long maturities, the
Seychelles could face losses equivalent to 6.5 percent of its gross
domestic product (GDP), with Gabon and Senegal faces possible losses of
around 4 percent, she said.
The CFA currency of Ivory Coast, Senegal and Gabon is pegged against the euro.
“We are calling for caution,” Tyson said, urging investors and
governments to be responsible with debt issuance in the face of weaker
commodity prices and slowing growth prospects.
“Sub-Saharan Africa has the potential to repeat the problems which
occurred in the early 1990s in Asia and Latin America, when damaging
financial crisis pushed millions back into poverty for a decade,” her
Over the past two years, there has been a rise in sovereign bond
issuance in sub-Saharan Africa as countries have exploited robust
economic growth and a wave of dollar liquidity to enter financial
markets at low interest rates.
Investors, meanwhile, have sought out yield in African frontier markets, due to low interest rates in developed economies.
Foreign debt issues for sub-Saharan Africa last year exceeded $6.25
billion, bringing the stock of debt to over $18 billion. That remains
small relative to regional GDP measured by the World Bank at more than
But some countries are more exposed after heavy issuance in 2014.
Ghana’s overall debt to GDP rate is 65 percent of GDP, while Senegal and
Mozambique both have more than 50 percent, according to the World Bank.
The normalising of Western interest rates risked sucking capital from
African markets, further weakening African currencies and plunging them
into an economic downturn, the report said.
Commodity exporters, such as oil-rich Gabon, have a ‘natural hedge’
against dollar appreciation because export revenues are denominated in
the U.S. currency.
But a slowdown in export markets and a slump in commodities prices –
particularly oil – have also placed robust economic growth rates in
jeopardy, undermining countries’ ability to pay.
Tyson said that irresponsible use of debt by some countries was
adding to the problem, as many raised on international markets had not
been used for investment that would boost future economic growth.
She said Mozambique had borrowed $850 million for its national
fishing industry but instead spent the money on military boats and
equipment. Ghana had also spent heavily on hefty public sector pay
increases, resulting in a wide fiscal deficit, prompting it to open
talks on an IMF programme.