Sovereigns with domestic funding constraints will face higher exposure to a potential tightening in financial conditions, Moody's Investors Service said in a report.

As gross borrowing requirements surged and global funding conditions tightened during the most acute phase of the global pandemic, African sovereigns increasingly relied on domestic and local currency (LC) funding sources.  

“Where present, local currency funding sources mitigate fiscal and liquidity risks and promote financial development,” says Elisa Parisi-Capone , a VP-Senior Analyst at Moody's and the author of the report. “Addressing a higher share of local currency debt in the overall composition of debt reduces exposure to adverse currency movements, offers the government more funding options and enhances monetary policy effectiveness."