Euromoney’s country risk survey shows the safety of sub-Saharan Africa (SSA) issuers is once again in question, as economies flounder, debts spiral and capital access tightens.
Investors were bullish on the region’s prospects when African sovereigns took advantage of favourable market conditions and their bonds were snapped up eagerly by investors eyeing ‘returns-potential’ underpinned by strong economic growth. Many of them will now be having their doubts.
Far from it being a period of emergence, reform and infrastructure development, the past decade has been more of a lost opportunity to lessen the region’s vulnerability to commodity-price shocks and famine. China’s slowdown and the ensuing fall in oil and other commodity prices devaluing currencies across the region are heightening debt servicing and repayment risks, which have risen sharply with capital access tightening.
Of the 14 countries issuing Eurobonds for the first time in recent years, only three – Côte d’Ivoire, Senegal and Seychelles – are safer or at least no riskier than they were. That leaves 11 with country risk scores which are presently lower than their peak scores during the past five years, symbolizing increased investor risk:
The region is struggling not only from capital access and falling commodity revenue, but also from rising food insecurity linked to the devastating effects on agriculture from the persistent drought accompanying the El Niño weather effect. The UN estimates some 31 million people in southern Africa require food aid, a figure that is predicted to rise to 49 million by the end of the year. There are concerns for several countries in eastern parts of the continent, too, experiencing serious flooding.
Oil prices, meanwhile, remain depressed, fluctuating at just under $50/barrel. With non-oil commodity producers also struggling, the IMF believes SSA is heading for a difficult year, with the region’s economic growth slowing to 3% marking a new 15-year low.
In a new report titled Primary Commodity Booms and Busts: Emerging Lessons from sub-Saharan Africa, the United Nations Development Programme states: “Many countries have clearly saved far too little and even borrowed on the basis of temporarily high revenues, leading to debt crises and deep recessions once prices collapse.” The report goes on to explain how the region’s economies can take action to mitigate these risks, while the IMF also argues for a “policy reset”, but the implication is that few governments have gone far enough to date, and the clock is ticking as debt burdens rise.
Ghana, ranking 99th in Euromoney’s survey of 186 countries, is now working closely with the IMF to restore fiscal sustainability, and has made progress in clearing its arrears and narrowing the deficit. Yet structural reforms are proceeding slowly, and economic management is hamstrung by low commodity prices, with the onset of elections later this year increasing the tendency for populist spending.
Its external debt burden is predicted to reach 44% of GDP this year, the IMF predicts, growing from less than 20% of GDP five years ago. Other countries, including the Democratic Republic of the Congo, Tanzania and Zambia, are among higher-risk sovereign borrowers that have been downgraded in Euromoney’s survey.
Ghana’s financial position is likely to remain constrained throughout 2017, considering the fact that, most of its top Forex earning revenue sources, such as Gold, Cocoa, and Oil are all continuing to show timid price corrections and recoveries. With OPEC continuing to curtail output, it is likely the country might see a bit of relief with respect to its Oil related revenues. Gold will continue to remain constrained considering the increasing Fed interest rates and its tangential impact on the Dollar. The new administration will have to approach its fiscal and monetary policies and tools cautiously.