A number of countries in sub-Saharan Africa are in danger of slipping into a major debt crisis as government debt burdens across the region rise at a faster pace and to higher levels than in other emerging markets, a report by Fitch Ratings warns.
Eight countries are already in debt distress and a further 18 are at high risk of distress, leading to a heightened risk of rating downgrades and defaults according to Fitch. Debt situations in the region were already worrisome prior to the coronavirus outbreak with the number of defaults more than doubling since 2013.
Measures taken to curb further spread of the coronavirus disease have devastated emerging market economies in a number of ways – the fall in oil prices, tourism numbers, remittances and global trade, disruption to economic activity, exchange rate pressure, rise in risk premiums, and diminished market access.
An unprecedented oil price crash between March and April makes it worse for Africa’s main oil exporters – Angola, the Republic of Congo, Gabon, and Nigeria – who rely heavily on oil revenues for fiscal and external financing and have few fiscal or monetary buffers. Countries that depend on tourism such as Cape Verde and Seychelles have also been badly affected.
The pressure is reflected in the respective countries’ external finances, Fitch notes. It expects an increase in the median of public and private-sector net external debt to 41 percent of the countries’ gross domestic product at end of 2020 (from 2 percent in 2011) and external debt service payments to 18 percent of current external receipts this year (from 5 percent in 2012).
Many sub-Saharan countries’ generally weak credit fundamentals (beyond high public debt) reduce their debt tolerance and resilience and leave them disproportionately vulnerable to the global coronavirus shock, the report adds.
Fitch predicts that the median of government debt-to-GDP for the 19 countries it rated in sub-Saharan Africa will rise (from 26 percent in 2012) to 71 percent by the end of 2020 compared to 57 percent across other emerging markets.
More so, the median budget deficit is expected to widen from 4.9 percent in 2019 to 7.4 percent in 2020, a record high in the modern era. And the combination of lower GDP and wider budget deficits will trigger a jump in the median government debt ratio by 14 percentage points to 71 percent of GDP at the end of 2020, the report said.
Downgrades
Fitch has downgraded seven countries – Angola, Cabo Verde, Gabon, Nigeria, Seychelles, South Africa, and Zambia – since the beginning of March this year based on the economic impact of the pandemic and the limited margin of resilience from the rise in debt.
Mozambique and the Republic of Congo have defaulted since 2016, and ratings pointed to more stress ahead. Zambia is rated “CC” (default is a strong probability) and Gabon, Mozambique and the Republic of Congo “CCC” (a real possibility of default).
Another 13 countries are in the single “B” range – experiencing a degrading financial situation that is highly speculative – and seven are rated “negative” outlook – Kenya, Uganda, Cameroon, Ethiopia, Namibia, Nigeria, and South Africa.
Risks to fight against poverty
The unsustainable debt levels present significant risks to global commitments to end extreme poverty according to Fitch. A poorly managed debt crisis would set back progress towards the Sustainable Development Goals, as well as reverse the development progress made over the past decade after debt relief programs freed up resources for development in 30 African countries.
The International Monetary Fund’s emergency support worth $8 billion to 13 Fitch-rated sub-Saharan African countries as well as the Group of 20 Debt Service Suspension Initiative, which covers bilateral debt service in 2020, provide useful fiscal and external financing.
But the DSSI relief and new IMF loans are not designed to address debt stocks and medium-term risks to debt sustainability while the provisions are equivalent to just 0.9 percent and 1.2 percent of GDP, respectively, Fitch adds.
