22 January 2018

Nigeria: Huge Debt Service Cost in Nigeria, Others, Worries Moody's

Photo: World Bank

The elevated public debt-service cost in Nigeria and some other countries in Africa calls for concern, Moody's Investors Service stated in a report at the weekend.

The region's debt-servicing cost on weighted-average basis increased to almost to 12.3 per cent of revenue in 2017 from seven per cent in 2013, and was expected to hover at around 13per cent in the medium term, one of the leading global rating agencies revealed.

Moody's noted that while this largely reflects a sharp fall in revenue and increasing borrowing costs for oil exporters, particularly Nigeria, interest costs relative to revenue were escalating across the region.

Also, Moody's stated that the outlook for sovereign ratings in Nigeria and other countries in sub-Saharan Africa, were negative for the coming 12-18 months, driven by the region's subdued and fragile growth recovery, which also weighs on the prospects for fiscal consolidation and debt stabilisation.

It stated this in a report titled: "Sovereigns -- sub-Saharan Africa, 2018 outlook negative amid subdued growth, elevated debt and political risks."

"Our negative outlook for sub-Saharan African sovereigns reflects the region's subdued growth recovery, fiscal challenges and heightened political risks," Moody's Vice President -- Senior Analyst and the report's co-author, Zuzana Brixiova said.

"Higher and more stable global growth will provide limited uplift to Africa's growth because commodity prices are still low and there are domestic structural bottlenecks.

"Risks stemming from government balance sheet pressures and liquidity stress as well as external imbalances remain elevated, while domestic political tensions increase policy uncertainty and impede reforms."

Moody's expects growth in sub-Saharan Africa to accelerate to 3.5 per cent in 2018 from an estimated 2.6 per cent in 2017, supported by the strengthening global economy and a modest rise in commodity prices.

However, it noted that the recovery remains fragile, uneven and sub-par and barely above population growth. Falling productivity, reflecting relatively low investment and the challenging business environment, will also weigh on longer-term trends.

"In 2018, most Moody's-rated sovereigns in the region are expected to stabilise their fiscal deficits, but at higher levels than were seen before the commodity price shock. The region is thus unlikely to see a decisive reversal in elevated debt levels given the countries' consolidation challenges, increased interest costs and subdued growth.

"Debt accumulation is likely to slow in 2018 and beyond due to improved (but still relatively low) commodity prices and some fiscal consolidation, but a return to 2013 debt-to-GDP levels will be challenging at a time of modest growth in the region.

"Currency risks will remain heightened in countries with large shares of foreign currency public debt. Reserve buffers will provide only limited mitigation. As Sub-Saharan African countries approach the peak of maturing international debt in the early 2020s, refinancing risks will continue to rise," it noted.

Government liquidity stress - a key driver of Moody's past rating actions in the region, according to the report, remained heightened especially among commodity-dependent sovereigns. It continues to be driven by elevated fiscal deficits and challenging funding conditions, where greater reliance on domestic financing has increased borrowing costs.

It, however, noted that income levels have deteriorated in a number of countries in the region, increasing pressure on governments to extend subsidies, or constraining the government's ability to remove subsidies as intended.

The report noted that high levels of urbanisation and sizeable young populations, if matched with skilled labour force and job creation, would accelerate industrialisation in Africa.

"It would also help raise productivity via innovation and economies of scale, particularly in middle-income countries in southern Africa. An emerging middle class would also strengthen aggregate domestic demand. Seizing the opportunities provided by these demographic trends (youth, urbanization, emergence of middle class) is not assured and hinges on delivering on broader structural reform agenda," it added.

According to the agency, deteriorating wealth levels across the region would increase pressure on governments to implement populist measures, such as the 2017 decision to extend free higher education in South Africa. Moreover, it stated that a gradually expanding and more educated and globally interconnected middle class would increase calls for greater accountability and more prosperous, equitable and well governed economies.

"However, social tensions cannot be easily assuaged through either fiscal stimulus or redistributive spending given governments' limited resources amid fiscal tightening. Droughts and rising food prices in eastern and southern Africa are often sources of unrest. Separately, long-serving political leaders amplify succession risk in Uganda and Rwanda."


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