RISK MANAGEMENT | 20 June 2023

Surviving Africa’s
Dollar Drought


Gerald Katsenga

Head of Global Markets
Corporate Sales, Absa
Regional Operations


How Absa is supporting Africa’s corporate treasurers through the crisis of US dollar hard currency liquidity shortages

Africa is in the grip of a dollar drought. Several Sub-Saharan African (SSA) countries, including Kenya, Nigeria, Ghana and Tanzania, have for several months experienced shortages of US dollars, which is a huge challenge for businesses on the continent, as the greenback is the dominant currency in international transactions.

“These hard currency liquidity shortages have further driven foreign exchange (forex, or FX) weaknesses in the region’s currencies, which saw a depreciation of about 8.8% over the first five months of 2023,” says Gerald Katsenga, Head of Corporate Sales: Absa Regional Operations. Added to that, markets like Nigeria and Ghana are experiencing import backlogs, while in Kenya and Tanzania commercial banks have had to restrict sales of US dollars to their clients.

What’s causing the problem, and what can Africa’s corporate treasurers do about it?

Tumbling FX receipts

Katsenga says the challenge is largely driven by exogenous factors. “The IMF expects global growth to decline to 2.8% in 2023, from 3.4% in 2022,” he says. “As a result, hard currency receipts for many SSA countries continue to tumble as demand for the region’s exports wanes. And if our exports aren’t going anywhere, that means our FX receipts fall as well.”

Coupled with that, hard currency demand has surged in SSA markets amid higher import costs on the back of the geopolitical tension in Russia and Ukraine, which has pushed up oil prices. “At the same time,” Katsenga adds, “we’ve seen a risk-off sentiment as investors shy away from emerging market assets. Idiosyncratic risks from Domestic Debt Restructuring programs in the likes of Ghana and Zambia has led to contagion risks that have also led to capital flight in some SSA countries.”

Crisis and opportunity

The good news, says Katsenga, is that the FX challenges may soon abate. “I’m an optimist,” he says, “and I’m seeing potential opportunities ahead. In Nigeria, the Dangote petroleum refinery recently came online, which is expected to produce more than 650,000 barrels a day when it’s at full capacity. That should significantly reduce Africa’s most populous nation’s refined oil import bill. Read, if you like, its FX demand savings of approximately $30 billion annually and an additional potential $10 billion in inflows.”

Markets like Ghana and Kenya have also sought to reduce the demand for oil imports, which contributes significantly to FX demand in Sub-Saharan Africa, through direct government-to-government agreements with oil-exporting countries in the Middle East.

The African Continental Free Trade Area’s Pan-African Payment and Settlement System  is another potential solution. “Instead of having to purchase dollars for intracontinental trades, PAPSS’s single-payment system allows you to resettle those trades in local currencies,” Katsenga explains. “That will also address some of the FX hard currency liquidity challenges we’re having in the region.”

FX hedging solutions

“Managing FX risk is extremely difficult for corporate treasurers in times like these,” says Katsenga, “but Absa continues to support them with FX hedging solutions.” Exporters with hard currency are not readily willing to part with their US dollars in case of further depreciation, while importers are battling to plan and cost for import supplier payments. Meanwhile, some exporters are sitting with dollars, worried that if they sell now they might lose out on potential depreciation.

“For clients like that we structure solutions – like FX forward hedging structures, for example – that ensure they get some carry benefit,” says Katsenga. “On the other hand, you have importers who are facing FX liquidity challenges. We’re assisting them with short-term FX funding structures that give them access to near-term FX liquidity, and then settling those structures in the medium to longer term.”

The dollar liquidity problem, he says, should solve itself – one way or another – over the long term. But in the here and now, it’s comforting for Africa’s corporate treasurers to know that FX hedging solutions are available to them and their businesses.

Gerald Katsenga

Head of Global Markets Corporate Sales, Absa Regional Operations

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