21 November 2017

Africa: Moody's - Sub-Saharan African countries face rising risk of financing stress

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South African rands - bank notes and coins.
press release

London — The risk of sovereign financing stress is building in Sub-Saharan Africa (SSA) as the peak of maturing international debt approaches and countries contend with deteriorating credit quality, rising interest rates and an untested institutional capacity to take mitigating action, Moody's Investors Service said in a report today.

Moody's report, "Sovereigns -- Sub-Saharan Africa, Risks of financing stress build across region, especially at lower end of rating scale" is available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. This report does not constitute a rating action.

"The risk of financing stress among Sub-Saharan African sovereigns will increase as we approach the peak of maturing international debt in the early 2020s," said David Rogovic, a Moody's Assistant Vice President - Analyst and the report's co-author. "Several countries in the region already exhibit similar vulnerabilities to the emerging market debt crisis in the late 1990s."

Some African sovereign issuers were able to borrow relatively cheaply, at longer maturities and in greater amounts relative to their domestic bond markets, as foreign investors were attracted to the region's improving credit metrics, strong growth, and search for yield.

The peak in SSA bond issuance in 2014 coincided with a deterioration in credit quality as the growth outlook for the region dimmed due to a combination of weaker Chinese growth and lower commodity prices.

The commodity shock also hit government revenue and export receipts and contributed to a worsening of fiscal and current account positions, while currency depreciation increased the cost of servicing foreign-currency denominated debt. These negative trends have been evident in rating actions, with SSA sovereign downgrades outnumbering upgrades 20 to 2 since the start of 2015.

While some sovereigns will manage difficulties rolling over debt, Moody's expects problems to arise on a case-by-case basis.

In addition to recent sovereign defaulters like Mozambique (Caa3 negative) and Republic of the Congo (Caa2 negative), existing credit weaknesses mean Gabon (B3 negative), Ghana (B3 stable), and Zambia (B3 negative) are most susceptible to the risk of financing stress given large Eurobond maturities falling due next decade.

A range of factors mitigate related risks in Sub-Saharan Africa, including the still relatively small share of commercial debt for most SSA sovereigns, the low share of short-term debt, and fixed interest rates on debt which counter the risks associated with a sudden spike in market interest rates.

Even with restructurings of international bonds in SSA and elsewhere, the bond market remains open for the majority of the SSA sovereigns which have outstanding international bonds.

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