Recent interest rate rises in advanced economies to counter high inflation have curbed investor risk appetite in Africa. This is reducing flows of foreign currency into the continent, with a knock-on impact for the banks. Weakening local currencies and the lingering effects of the COVID-19 pandemic on supply chains are making things worse. Some banking sectors are more vulnerable than others.
The eurobond market has largely dried up. Aggressive rate hikes have made previously affordable debt more costly and many African economies are effectively priced out of the eurobond market. Sovereigns with outstanding eurobonds have seen yields rise by more than six percentage points during the past 18 months. Yields have risen particularly sharply for Ghana (Ca stable), ultimately culminating in its debt default, further underscoring a lack of investor confidence in the country. Dollar shortages in import-dependent economies are making difficult operating conditions worse. Some central banks are rationing foreign currency, placing additional pressure on banks' borrowers, which already contend with higher interest rates and rising inflation. In Nigeria (Caa1 stable) many importers and manufacturers are unable to access all their foreign exchange needs. Angola (B3 positive) had benefited from higher oil prices, but dollar liquidity has tightened, forcing the central bank to intervene to clear some of the accumulated backlog of dollar demand.

Sharp local currency depreciation raises debt repayment and pressures bank's capitalisation. Several African currencies have lost ground against the dollar, particularly in the first half of 2023. Local currency depreciation places further pressure on financial institutions by eroding their capital buffers, potentially hurting loan performance and by increasing local currency inflation. Most banks in Nigeria have sizeable long net open positions, once their foreign exchange (FX) swap positions with the central bank are taken into account. Banking sectors with large volumes of foreign currency liabilities nearing maturity and limited foreign currency liquidity are most vulnerable. Some markets carry large volumes of FX liabilities maturing within 12 months and also have low levels of foreign currency in the system. Risks are particularly pronounced in Egypt (B3 review for downgrade), where some banks have substantial FX liabilities. Banks in Kenya (B3 negative) are also vulnerable because of their short on-balance sheet net open positions, as banks have more FX liabilities than FX assets.