The Changing Landscape of Africa’s Dollar Liquidity

In the past decade, Africa has seen a significant shift in its financial landscape, particularly in terms of dollar liquidity and debt structure. This article aims to shed light on these changes and their implications for the continent’s economic future.

The total external debt of Africa was estimated at $1.1 trillion in 2022 and is projected to rise to $1.13 trillion by 2023. This increase can be attributed to several factors, including the lingering effects of the Covid-19 pandemic on economies and their fiscal space, rising costs of energy and food prices due to the Russian-Ukraine war, and the escalating costs of adapting to climate change.

Interestingly, yearly bond issuances in Africa have seen a substantial increase, moving from an average of $10 billion annually in the early 2000s, to about $80 billion annually by 2016–2020. This trend has been driven by the very low global interest rates, with investors seeking yields in emerging markets.

Moreover, the structure of Africa’s debt has undergone a dramatic transformation in the past decade or more, accentuating a trend that started in the mid-2000s. Non-Paris Club bilateral creditors and commercial creditors have increasingly become major sources of Africa’s sovereign debt. While bilateral debt represented 52% in 2000, this declined to 25% by 2021; commercial debt’s share of total debt increased from 17% in 2000 to 43% in 2021.

One of the most notable changes has been the rapid growth in debt owed to China. The share of China’s debt rose from just 1% of total debt in the mid-2000s to 14% of total external debt by 2021. Most of this debt is for infrastructure.

Blue chip corporates, renowned for their reputable and financially sound business, play a significant role in Africa’s financial landscape. These companies are often at the forefront of managing liquidity in innovative and effective ways. Their size and stature mean they are better equipped to weather economic downturns and offset weaknesses in one market with strengths in another. This ability to balance across diverse markets contributes to their liquidity management.

Moreover, blue chip companies are typically well-capitalized with market capitalizations often in the billions of dollars. This financial robustness allows them to navigate through downturns and maintain liquidity. Furthermore, these companies often have high credit ratings, which can facilitate access to capital markets and enhance their liquidity positions. Although they are robust, ICAP Africa does assist clients in Africa with liquidity.

Investment in blue-chip companies is often deemed less risky by investors due to their stability and reputation. Their shares are highly liquid, making them a popular choice among investors. This high liquidity, combined with reliable capital returns and consistent dividend payments, make blue chip shares among the most reliable portfolio investments.

Blue chip corporates in Africa, as elsewhere, are key players in managing dollar liquidity. Their strategies and approaches provide valuable insights for other businesses navigating the complex financial landscape. These insights benefit us to give us sound advice to our clients.

These shifts in Africa’s financial landscape present both challenges and opportunities. As we move forward, it will be crucial for policymakers, investors, and stakeholders to understand these dynamics and their implications for Africa’s economic future.