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 US 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 report said.
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 report said.
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.
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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 $1.6 trillion.
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 US 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.
