In a report released on November 12, the rating agency Standard & Poor’s (S&P) noted that high economic growth rates in the sub-Saharan Africa (SSA) region did not translate into improved credit quality this year. The report, entitled ‘Fiscal and External Weaknesses Constrain African Sovereign Credit Ratings, Despite Strong Economic Growth,’ emphasises SSA sovereigns’ single commodity dependence, weak economic diversification and subsequent weakness of fiscal metrics tied to a narrow base. Economic activity in SSA remains largely clustered around the extractive sector. S&P notes that single commodity-dependence renders SSA sovereigns vulnerable to supply and demand shocks and subsequent price dynamics. Whilst SSA countries suffered from a general softening in the global commodities market, geopolitical risk supported global oil prices, thereby adding to fiscal woes via increased imports and higher subsidies. S&P stated that the deterioration in the fiscal and external positions, in particular, remain binding constraints to improving sovereign credit risk ratings in the SSA region. In addition, low political and institutional predictability continue to weigh on the creditworthiness of SSA countries. In recent years, sovereign issuers in the SSA region have turned increasingly to the international capital markets to source funding for an array of infrastructure projects and fiscal funding needs.
S&P projects real GDP growth in the SSA region to average 5% in 2013, similar to previous years. This is on par with the projection by the International Monetary Fund (IMF). The IMF stated in their October 2013 report, entitled ‘Regional Economic Outlook: Sub-Saharan Africa, Keeping the Pace,’ that it expects economic growth in SSA to average 5% in 2013 before escalating to 6% in 2014. SSA growth averaged 4.9% in 2012. At the upper end of the spectrum, S&P expects Mozambique and Rwanda to yield growth rates in excess of 7% in 2013, whilst the agency projects very weak performances for South Africa and Cape Verde. S&P stresses in the report that the robust growth figures however stem from very low GDP levels. In fact, five of S&P’s SSA rated sovereigns – namely Burkina Faso, Kenya, Mozambique, Rwanda and Uganda – trend well below the “B” median in terms of GDP per capita, at below $1,100 against a global median of $3,000. In turn, only six rated sovereigns (Angola, Botswana, Cape Verde, Congo, Gabon and South Africa) boast a GDP per capita figure in excess of $3,000.
WHY DO WE CARE? We have noted a significant deterioration in the current account positions of a number of countries in the SSA region in recent years, although the factors driving this vary considerably between individual countries. For some countries, the widening has been driven – at least partially – by strong investment spending, which will hopefully yield significant dividends in terms of higher export receipts, improved business climates as infrastructure improves, and an increase in commercially viable extractive sector output. Similarly, the widening of fiscal deficits on aggregate differ dramatically on a country-to-country basis – whilst fiscal discipline may be sacrificed over the short term in favour of capital formation, we remain circumspect of a number of SSA countries’ tendencies to overshoot fiscal targets (particularly near election times) and slow fiscal consolidation processes. Nonetheless, large fiscal and external deficits – irrespective of the origin thereof – render a sovereign vulnerable to global factors against which it has little scope to defend itself. Large single-commodity dependence only serves to exacerbate underlying vulnerabilities.
We concur with the main findings of the S&P report that a deterioration in fiscal and external positions, as well as political risk, will continue to constrain sovereign credit ratings. Whilst the SSA region holds significant investment potential, the quantification of risk remains challenging, and only places a stronger emphasis on thorough due diligence processes. A narrow economic base, various degrees of opacity in the business environment, a narrow scope for benchmarking, and illiquidity are key challenges impeding an investment decision. We are more circumspect than the IMF and S&P in terms of the economic growth outlook for the SSA region. Our baseline projection is for real GDP in SSA to expand by 4.85% in 2013 and 5.25% in 2014.
Analyst: Irmgard Erasmus
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