Exchange rates heaping pressure on emerging markets across Africa

Exchange rate issues continue to climb the risk management agenda across Africa as countries battle to cope with low oil and commodity prices as well as a strengthening dollar. In its annual risk report, the Irmsa highlights the issue, with exchange rate risk climbing to the second greatest risk among industry leaders. The International Monetary Fund (IMF) has been urging African countries to allow the exchange rates to float freely as a way to manage external shocks. And Fitch Ratings said support from the IMF has helped to mitigate external liquidity risks and reduced the medium-term default risks in several frontier markets that entered into new programmes in 2016. However, it warned: “Potential improve-ments in sovereign credit profiles will depend on each country’s level of compliance with IMF conditions and implementation risks are often high.” It said, in the two years leading up to their IMF loans, Fitch took negative rating action on five of the eight sovereigns that entered standby arrangements or extended fund facilities in 2016, including Kenya and Tunisia. Egypt’s stable rating outlook in the run-up to its programme reflected existing reform efforts before the IMF became involved, said Fitch, while Ivory Coast, which had been upgraded in 2015, signed a successor agreement in December 2016. “A lack of currency flexibility was also a factor in pushing some frontier markets into IMF agreements,” said Fitch. Egypt was an example of those who all ran down foreign exchange reserves at unsustainable rates trying to resist currency depreciation in a global environment of US dollar strength. However, they have allowed more flexibility since beginning discussions with the IMF, which has helped reduce pressure on their external balance sheets, the rating agency added. Political upheaval has also been a theme. Iraq is involved in ongoing conflict with the Islamic State group, while government instability has paralysed parliament and led to mass protests. Egypt and Tunisia went through political revolutions in 2011 and both are still dealing with underlying tensions and security risks. “IMF loans should alleviate external liquidity pressures and reduce the risk of sovereign default, particularly where IMF assistance has been supported by other multilateral assistance or has improved access to global bond markets. However, all of these countries still have either large current account or fiscal deficits, or both. Reducing these vulnerabilities will be key to stabilising or improving their ratings,” suggested Fitch. Jamaica provides one example of how an IMF programme can be credit positive. Pakistan also managed to stabilise its economy after a period of loose fiscal and monetary policy during its three-year IMF agreement that ended in 2016. However, without sustained commitment from the authorities, longstanding weaknesses may remain unaddressed and there is a risk that governments will back away from reforms in the face of public opposition. Fitch reported that Zambia is among those who have announced their intent to seek IMF assistance, highlighting that further IMF loans are likely to be agreed with several other frontier markets in 2017. Conversely, it said, the Angolan government last summer broke off talks with the IMF over a potential loan. The IMF halted disbursements to Mozambique last year after the government revealed previously undisclosed debt. Earlier this month, IMF officials urged the Angolan government to do more to counter the effects of the low oil price to help shore up its economy. In a new report, the IMF notes: “The oil price shock that started in mid-2014 has substantially reduced fiscal revenue and exports. Growth was estimated to come to a halt in 2016, with the non-oil sector contracting by 0.5%, dragged down by the industrial, construction and services sectors; industrial production, despite the potential for import substitution, was constrained by shortages of imported inputs due to limited availability of foreign exchange.” It also warns that annual inflation is estimated to reach 45% by end 2017 – the highest rate in more than a decade – reflecting higher domestic fuel prices, a weaker kwanza and the lagged effects of loose monetary conditions until the first half of the year. The IMF applauds the Angolan authorities for taking steps to mitigate the impact of the shock, but urges further measures to stabilise macroeconomic conditions and address more forcefully the dependence on oil and diversify the economy. It underscores that monetary and exchange rate policies should play a central role in rebalancing the foreign exchange market but welcomed the recent measures taken by the central bank to tighten liquidity conditions, Meanwhile, in nearby Mozambique, on 18 January 2017, the government missed an interest payment on its dollar-denominated bond notes. S&P Global Ratings commented: “We believe that restructuring talks on the notes will probably be held and we will likely reassess the foreign currency rating on Mozambique on completion of any restructuring. “In the next several months, we anticipate the completion of an independent evaluation of the government’s debt position by risk consulting firm Kroll, followed by a debt sustainability assessment (DSA) by the IMF before the IMF and other donors can begin providing any support. On completion of the DSA, it is likely that the authorities will push hard to negotiate a borrowing package with the IMF.

Exchange rates heaping pressure on emerging markets across Africa

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Related Articles