While foreign currency shortages in Sub-Saharan Africa stemming from lower oil and commodity prices are easing, it will take time for sovereigns, banks and non-financial companies to restore their financial health, Moody’s Investors Service said in a report: “Foreign-currency shortages are subsiding but will take time to overcome” .

“Falling oil and commodity prices over the past two years have led to foreign currency shortages in numerous Sub-Saharan African countries, with oil exporters hit particularly hard,” said Lucie Villa, a Moody’s Vice President — Senior Analyst and co-author of the report. “The stabilisation in oil and commodity prices over recent months will help to ease the pressure, but any recovery will depend on continued higher prices and could take some time.”

Managing foreign currency shortages will remain a key policy challenge for Sub-Saharan oil exporters.

In recent quarters, dollar rationing, currency devaluation and foreign currency borrowing by governments have stemmed the fall in foreign exchange reserves in Angola and Nigeria. But this has been to the detriment of the non-oil economy, price stability and government balance sheets.

In Gabon and the Republic of the Congo, which are members of the Central African Monetary and Economic Union (CEMAC) and where access to foreign currency borrowing is limited, the common local currency is pegged to the euro and foreign exchange reserves have collapsed, Moody’s expects reserves to continue falling through 2017, but at a much slower rate.

In the region’s banking sector, banks in Angola, Nigeria and the Democratic Republic of the Congo remain the most affected by foreign currency shortages due to their economies’ high reliance on dollars. Their foreign currency deposits have been depleted and they have limited capacity to source new foreign funding. “The resultant currency devaluations have also eroded banks’ loan quality, profitability and capital”, added Constantinos Kypreos, a Moody’s Senior Vice President and co-author of the report.

In Nigeria and Angola, pressures appear to be receding somewhat as their central banks are now injecting more dollars into the economy on the back of higher oil prices and related revenues. Banks in South Africa are the least affected, reflecting the system’s limited dollarization levels and low reliance on foreign funding.

Although a gradual increase in commodity prices over recent months is supporting foreign currency liquidity and helping to ease currency shortages, it is too early to conclude that pressures on banks have reversed. This can only happen gradually as dollars flow back into the economies and exchange rates in ‘unofficial’ markets converge with official rates. Despite these challenges, banks in Sub-Saharan Africa generally maintain high capital buffers and their profitability is robust.

Non-financial companies operating in oil exporting countries such as Nigeria and Angola have been most affected by dollar scarcity and local currency weakness. Moody’s expects these challenges to continue in 2017 but alleviate in 2018. “Dollar shortages make it difficult to pay suppliers of imported goods and equipment, meet dollar debt payments or to repatriate funds outside of the respective countries”, says Dion Bate, a Moody’s Vice President and co-author of the report. “The associated local currency weakness increases the cost of servicing unhedged foreign currency debt obligations, reduces repatriated profits in foreign currency and lowers operating margins, as companies are not able to pass on high import costs to the consumer”, adds Mr Bate. Non-financial corporates with dollar revenues such as commodity operators and corporates with dollar-linked contracts are insulated from these risks.