High economic growth rates among most sub-Saharan African (SSA) sovereigns last year are not translating into improved credit quality, according to ratings firm, standard and poor’s (S & P), in a research report released on November 12.
This is because their fiscal and external positions in particular have continued to weaken, according to S& P, which noted that fiscal deficits persist for most rated sovereigns in Africa, and current account deficits remain high in many cases owing to high capital and consumer goods imports.
S & P forecasts that Gross Domestic Product (GDP) growth in the region will average around 5 percent in 2014, similar to previous years.
Mozambique and Rwanda is expected to continue to grow at a rate above 7 percent, the former supported by strong investment inflows in the mining sector, and the latter by its expanding construction and services sectors.
Commodity-extracting countries such as Angola, Ghana, Nigeria, and Zambia are also forecast to still post strong real GDP growth rates above 6 percent.
At the other end of the scale, S & P forecasts only 2 percent growth for South Africa, while Cape Verde’s GDP is set to contract by 1 percent.
For both countries, a combination of domestic and global factors is straining higher growth.
Other sovereigns such as Botswana, Cameroon, and Senegal are all expected to expand their GDP at an average of 4 percent in 2013.
Since upgrading its sovereign rating on Nigeria to ‘BB-’ from ‘B+’ in November 2012, S & P have not lowered or raised any SSA sovereign ratings.
However, it has revised the outlooks on Benin and Uganda to negative from stable in December 2012 on account “of stalling reforms and increasing external imbalances in Benin’s case, and deteriorating donor relations that are dragging on the funding of external and fiscal deficits in Uganda.”
Last year, outlooks were revised on Cape Verde, Mozambique, and Zambia to negative from stable because S & P considered that their external and fiscal positions wer weakening.
On the other hand, the ratings firm revised the outlooks on Senegal and Gabon to stable from negative.
In Senegal, this was prompted by smooth power transition in 2012 and a path of fiscal consolidation. In Gabon sustained higher economic growth and current account surpluses prompted the outlook revision to stable.
In addition, S & P has maintained a negative outlook on the ratings on South Africa.
Various factors constrain the ratings on many African sovereigns, despite high GDP growth rates.
S & P notes that growth for most SSA sovereigns still come from a very low level.
Most sub-Saharan African countries are still very poor in per-capita-GDP terms in a global comparison. Five rated African sovereigns, namely Burkina Faso, Kenya, Mozambique, Rwanda, and Uganda, have GDP per capita below $1,100, while the median globally in the ‘B’ category is above $3,000. Only six rated sovereigns in SSA have GDP per capita higher than $3,000, namely Angola, Botswana, Cape Verde,
Congo, Gabon, and South Africa.
A further constraint on ratings is that most African sovereigns also rely on little diversified economic sectors and sources of fiscal revenues.
For most commodity-producing countries, economic activity is concentrated in the mining or oil sectors, which also results in reliance on fiscal revenues from those sectors.
This makes these African sovereigns vulnerable to changes in the production, demand, or prices of commodities.
Other factors weighing on the creditworthiness of sub-Saharan African sovereigns, in the view of S & P, are low political and institutional predictability.
Furthermore, high oil prices continue to weigh on the current account balances of oil- importing countries. Even among some oil exporters, elevated oil prices can contribute to growing fiscal deficits and debt because many governments like Nigeria pay fuel subsidies, the report notes.
In an attempt to cover their fiscal and external funding needs, sub-Saharan African sovereigns have been increasingly turning to Eurobond issuance as a new source of funding.
S & P’S average rating on sub-Saharan African sovereigns has gradually declined over the past decade.
However, this does not reflect a longer term trend of weakening creditworthiness; rather it is because S & P is increasingly rating a greater number of sovereigns, some of which have lower ratings.
Of the 16 sovereigns currently rated by S & P in sub-Saharan Africa, 11 reside in the ‘B’ category, and three in the ‘BB’ category.
Only two sovereigns–Botswana and South Africa–have investment-grade ratings (that is, ‘BBB-’ or above).
As of Nov. 12, 2013, five of S & Ps 16 sovereign ratings in sub-Saharan Africa had a negative outlook.
No African sovereign currently has a positive outlook, which reflects S & Ps view that there is limited potential for upward rating movements in the near term.
By: PATRICK ATUANYA
