SSA Countries Face Debt Challenges as Growth Returns
The sector outlook for sub-Saharan Africa (SSA) sovereigns is neutral, Fitch Ratings says in a new report, as growth is expected in line with earlier trends amid persistent pandemic risks.
In its latest report on the region, the global rating agency noted that countries are still grappling with the pandemic-related deterioration of their balance sheet, reflected in seven of the 19 SSA sovereigns being on a negative outlook.
However, it said the recent upgrades of Benin, Cote d’Ivoire, Gabon and Seychelles show that for some countries the impact of the pandemic has been less severe than expected. Read more>> Outlook on Sub-Saharan Sovereigns is Negative – Fitch
In east Africa, the negative outlooks on ratings for Kenya, Rwanda and Uganda (all ‘B+’) reflects concerns about the ability to halt the rise in government debt.
It said in West Africa, growth in Benin (B+/Stable) and Cote d’Ivoire (BB-/Stable) will remain strong and debt is below the regional median. However, Ghana (B/Negative) faces a high-interest burden and the recent sharp rise in Eurobond yields complicates refinancing, the rating note stated.
In southern Africa, Lesotho (B/Negative), Namibia (BB/Negative) and South Africa (BB-/Negative) are struggling to stabilise public finances amid low growth and socio-political challenges.
“Mozambique (CCC) could be boosted in the medium term by large natural gas projects, but insurgency and governance challenges pose risks. Ethiopia (CCC) and Zambia (RD) are seeking debt restructuring under the G20 Common Framework”.
Fitch said the main oil exporters Angola (CCC), the Republic of Congo (CCC), Gabon (B-/Stable) and Nigeria (B/Stable) have already gone through a period of adjustment since the 2014-2015 oil price crash and will benefit from higher prices.
Specifically, it pointed that Cameroon (B/Stable) has handled the pandemic notably well, with barely a change in government debt. The small tourism-dependent islands Cabo Verde (B-/Stable) and Seychelles (B+/Stable) will benefit from the tourism recovery, despite further delays, according to the rating note.
Low Vaccinations Raise Risk of New Infection Waves
Covid-19 vaccination rates in SSA are the lowest among major regions, with a median of six doses per 100 people for Fitch-rated SSA sovereigns, and progress in 2022 will remain slow, due to supply challenges (exacerbated by the demand for boosters), widespread vaccine hesitancy and distribution challenges.
Although infections have been contained in most countries, the omicron variant (with South Africa already seeing a sharp surge in infections) highlights the risks of potentially more severe infection waves, the report reads.
Thus, Fitch Ratings assumes only limited further impact of the pandemic on the region’s economic activity, with continuing damage concentrated on tourism and transport sectors, as governments and businesses have learned to adapt and temporary targeted tighter restrictions have in many cases brought down infections.
High Public Investment Reliance Poses Risks to Growth Median
Explaining further, Fitch hinted that GDP growth will be 4% in 2022, after 4.3% in 2021, close to the average of 3.9% for the five years to 2019. Continued normalisation of economic activity will support growth.
“The easing of restrictions on international travel, even if delayed by the omicron variant, will help sovereigns with a significant tourism industry. Fiscal policy will turn less supportive in many countries although drastic austerity is unlikely”.
Particularly the fast-growing sovereigns in east Africa have been relying on public investment to drive growth, but the surge in debt levels in the region means this growth model may no longer be sustainable and SSA countries have generally struggled to shift to more private-sector-driven growth, it added.
Government Debt to Remain High
With the macroeconomic condition, Fitch said median government debt is expected to rise to 73% of GDP in 2022, up from an estimated 70% in 2021 and 58% in 2019.
This mainly reflects a still high median fiscal deficit of 5.4% of GDP in 2022, down from 7% in 2021 but well above the 3%-4% range before the pandemic, it added.
“Most governments with high debt levels plan fiscal consolidation. This reflects pressures to address the high debt service burden as the interest to revenue ratio is high for many sovereigns in the region”, the ratings said.
However, it noted that the pace of adjustment is often slow due to concerns about growth impact and the need to support social spending, deficit reduction often relies on uncertain revenue improvements and the record on implementing fiscal consolidation is weak in several cases.
Global Financial Tightening Raises External Risks
“SSA sovereigns are vulnerable to the expected tightening of global financial conditions although we do not expect a wave of balance-of-payments crises. South Africa, which seemed exposed to the taper tantrum in 2013, has reduced its vulnerability, recording a record current-account surplus due to the surge in commodity prices”, Fitch stated.
It added that any smaller sovereigns in the region run large current account deficits and financing requirements, and access to international capital markets and nonresident financing in local currency has gained in importance, exacerbating the vulnerability.
“A common resistance to letting exchange rates depreciate amid higher rates of inflation, pushed up by the surge in commodity prices and broader global supply challenges, adds to the fragility.
“However, most SSA countries still primarily rely on official external financing, much of which comes at concessional terms”.
Also, the report reads that capital account controls or restrictions on external investments also reduce the risk of sudden large outflows.
In addition, several countries have used benign market conditions in 2021 to refinance Eurobonds maturing over the coming years, or are preparing to do so.
External pressures on the main oil-exporting sovereigns, Angola, the Republic of Congo, Gabon and Nigeria, have also eased, Fitch said in the report.
The surge in oil prices, with an assumption of USD70 a barrel in 2022 and USD60/bbl in 2023, will lead to fiscal and/or current-account surpluses, according to Fitch note.
Official Support to Remain Strong, but Comes with Restructuring Risk
IMF support, in the form of emergency loans with limited conditionality and the Special Drawing Rights allocation, has been important liquidity support for SSA during the pandemic.
Support is likely to remain strong but will shift towards regular programmes with conditionality.
The IMF has raised caps on IMF concessional lending, and new programmes may be available under the new IMF Resilience and Sustainability Trust.
In addition, IMF reservations about the impact of excessive fiscal tightening on the recovery could soften policy requirements attached to programmes, the review noted.
Fitch maintains that IMF support is particularly important for countries like Ghana that have lost access to international markets.
“However, where the IMF deems debt unsustainable or sees a high risk of distress, support from the IMF and other multilateral and bilateral creditors might require a restructuring under the G20 credit facility”.
It said this could involve private-sector creditors and would then likely qualify as a distressed debt exchange and, as such, a default under Fitch criteria. Three countries – Chad (not rated), Ethiopia and Zambia – have requested credit facility treatment.
“The IMF-backed request for credit facility treatment by Ethiopia, which at the time was not facing immediate distress, illustrates that credit facility treatment could in principle be available to a broader set of countries, although concerns about the implications for access to commercial financing has held back most sovereigns”.
Fitch said the scale of relief under the credit facility and the pace at which these countries can return to markets after the restructuring is concluded will be crucial in determining whether other sovereigns will follow suit, although at this stage there are no clear additional candidates.
# SSA Countries Face Debt Challenges as Growth Returns
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