Prolonged Sudan conflict may have negative credit implications for multilateral lenders

If fighting descends into civil war, destruction of social and physical infrastructure would lead to lasting economic consequences, Moody's says

Black smoke rising above Khartoum International Airport as battles between the forces of two rival generals continue. AFP

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The military conflict raging in Sudan that killed more than 420 people in 10 days could have negative credit implications for neighbouring countries and multilateral development banks (MDBs) that have funding exposures to the African nation and the broader region.

Although the situation remains “fluid and unpredictable”, it could potentially develop into a prolonged conflict, Moody’s Investors Service said in its latest note on Sudan.

“The fighting has caused significant damage to major infrastructure in Khartoum, such as the international airport, hospitals and schools and has forced most economic activity and government business to halt as civilians shelter in their homes,” Moody’s analysts led by John Walsh said in the report.

“If the conflict descends into a prolonged civil war, destruction of social and physical infrastructure would have lasting economic consequences for Sudan.”

A prolonged conflict between warring parties fighting for dominance in Khartoum could also affect the asset quality of MDBs in Sudan, overall non-performing loans and may crimp their liquidity.

Any spillover to neighbouring countries, or a “general deterioration in the wider region's security environment”, would trigger broader asset-quality concerns for MDBs with a higher concentration of loans in countries such as Chad, South Sudan, Ethiopia and Egypt.

Sudan plunged into a deeper economic and humanitarian crisis this month after deadly street battles erupted in Khartoum between the army and the paramilitary Rapid Support Forces that are vying for control of the country.

Army chief Gen Abdel Fattah Al Burhan and his former deputy Gen Mohamed Dagalo, who heads the RSF, have turned a dispute over the integration of the paramilitary into the regular army into street warfare.

The situation has caused worldwide concern about the fate of the impoverished country of 44 million, as well as the safety of foreigners stranded there.

Foreign citizens and diplomats from countries such as the US, UK, Germany, Spain and Jordan have left Sudan and efforts are under way for more evacuations.

Sudan's economy was reeling even before the latest conflict. It relied heavily on the international community for funding, and was derailed after a 2021 military coup that halted an internationally backed transition to democracy.

Major economic backers led by the US and the World Bank suspended billions of dollars' worth of debt forgiveness and aid.

The country is facing its worst economic crisis and is edging closer to the international isolation it suffered for most of the 29-year rule of Omar Al Bashir, who was overthrown in 2019.

Moody’s said the MDBs that are most exposed to Sudan and neighbouring countries include Trade and Development Bank (TDB) and Africa Export-Import Bank (Afrexim), which have 34 per cent and 31 per cent of their development-rated assets, respectively, in the region.

TDB had loans worth $931 million in Sudan, which equals 14 per cent of total development-rated assets it had at the end of last year. The vast majority — 95 per cent — of this exposure is in the form of trade finance facilities previously used to fund food and fuel imports.

However, the conflict is unlikely to have “immediate implications for TDB’s asset quality, NPL ratio or liquidity because no significant repayments are due until the second half of 2024", Moody’s said.

Islamic Corporation for the Development of the Private Sector (ICD) had an exposure to Sudan equalling 1.3 per cent of its total assets, or about 3.1 per cent of its development-rated assets at the end of the first quarter of this year.

Afreximbank had 2.4 per cent of development-rated assets in Sudan at the end of 2021.

Islamic Development Bank, African Development Bank and International Development Association have an exposure to Sudan of less than 1 per cent of their development-rated assets.