The situation of some African countries has deteriorated markedly in recent months. In the face of increasing scarcity of hard currencies, devaluations and exchange controls are increasingly commonplace, but the help of the International Monetary Fund (IMF) and the Middle East is increasingly needed. This creates new dividing lines for investors. Increasingly, they are paying attention to how dollar liquidity is shaping up. A dozen or so African currencies have depreciated by 15 percent or more this year. A lack of foreign exchange means that countries are unable to fully finance their current account deficits, said Yvonne Mhango, Africa economist at Bloomberg Economics. Countries with overvalued currencies, such as Nigeria, Kenya and Angola, as well as countries with low foreign exchange reserves, such as Malawi, are most at risk.

Some issuers who have issued bonds on the European market have also been affected. Egypt, Nigeria and Angola have already been forced to devalue this year, and dwindling capital inflows have pushed the Kenyan shilling and Zambian kwacha to record lows against the dollar. Kenya will have to spend a considerable amount of dollars to repay its debt in the coming year. Zambia is already in arrears. The prices of Kenya's dollar bonds have fallen by around 2 percent since the beginning of July, the stock index of the Nairobi Stock Exchange has collapsed by 32 percent, and the shilling has depreciated by 19 percent. Last week, the IMF announced that it would provide the country with an additional $938 million in loans ahead of a $2 billion Eurobond maturing in June next year. As a result, the yield on the bond fell by almost 2.5 percentage points, but is still at a whopping more than 14 percent.

Zambia, Nigeria and Mozambique under pressure

Since April 2022, hardly any African country has been able to issue an international bond. The governments of Zambia, Mozambique and Nigeria have been forced to issue more domestic bonds in a market with a rather low capacity, leading to rising borrowing costs. Nigeria's longest-dated naira bond is trading at a record yield of 18 percent. But this does not attract foreign venture capital to the country - there is only devaluation, but concerns about exchange controls also play a role, which make it difficult to repatriate profits. In Zambia, the share of foreign creditors in the volume of domestic loans has fallen from 29 per cent at the end of 2021 to around 22 per cent at present.

The general perception is that a country whose dollar-denominated bonds yield more than 10 percent cannot place dollar-denominated bonds, said Lars Krabbe, portfolio manager at Coeli Frontier Markets. This, of course, is not good for the investment environment and debt sustainability of these countries and makes them highly dependent on concessional financing such as IMF loans.

On the other hand, investors are focusing more on countries with less urgent foreign exchange needs – and those that have already made major adjustments to the foreign exchange regime, says David Omojomolo, Africa economist at Capital Economics. This includes, for example, Egypt. Sales of sovereign assets have increased and the country appears to be on track to meet the targets set by the IMF, according to Citigroup strategists. The central bank is on the verge of securing up to $5 billion in new deposits from Saudi Arabia and the United Arab Emirates, it said. The country's dollar Eurobonds were in high demand in the second half of this year.

Investors would likely prefer sovereign issuers that have better access to alternative sources of financing, such as Côte d'Ivoire or Senegal, says Kaan Nazli, portfolio manager at Neuberger Berman. Côte d'Ivoire was able to rely on blending agreements at reasonable costs last year. In addition, the country has secured an IMF loan, while its currency, the CFA franc, is pegged to the euro, making it less volatile. Senegal is attracting climate investments to the country with public-private partnerships. The prices of the Eurobonds of both countries have held up above average since July.

In weaker countries, on the other hand, the shortage of dollars is causing higher import costs and fueling inflation. In Nigeria, for example, the price of prescription drugs for conditions such as high blood pressure and diabetes tripled last year. Zimbabwe's largest retailer, OK Zimbabwe, has been driven into the red by rising import prices, and in Malawi, the price of maize has more than doubled in the past year. The problem is that a country has limited resources against insufficient dollar reserves, says Sonu Varghese, macro strategist at the Carson Group. From an investor's point of view, the risk that these countries remain on the brink of crisis has not disappeared.