Africa: Sustained capital outflows to weigh on banking sectors in 2020

LAGOS (Capital Markets in Africa) – Moody’s Investors Service indicated that a prolonged period of capital outflows from emerging markets (EMs) will have an adverse impact on the foreign-currency liquidity, asset quality, and profitability of African banks in 2020. It said that the banking sectors of Angola and the Democratic Republic of the Congo are the most exposed to capital outflows, given their high dollarization rates, as well as to the elevated reliance of the Angolan economy on hydrocarbon exports. It also noted that Nigeria’s banking system is vulnerable to sustained capital outflows, even though banks have reduced their unhedged loans in US dollars and increased their buffers in foreign currency.

In contrast, it considered that banks in Morocco and South Africa are less vulnerable, due to their low exposure to loans and funding in foreign currency. Moody’s pointed out that the challenging operating conditions reduced investors’ risk appetite and drove them to increasingly withdraw their investments from EMs, including from Africa, which is affecting the banks’ liquidity. Further, it said that portfolio outflows and lower commodity prices will deplete foreign currency reserves and put pressure on domestic currencies, which will add challenges to the banks’ financial profiles. It anticipated the banks’ non-performing loans ratios to increase, mainly due to unhedged loans denominated in foreign currency. It also noted that banks with a relatively high share of foreign-currency loans will register declines in their capital ratios that are reported in local currencies, given that the conversion of foreign-currency loans inflates the size of loans in local currency and increases the risk-weighted assets. In parallel, it expected the banks’ profitability to weaken, due in part to higher provisioning costs.