Liquidity stress, low growth and political risk drive negative outlook for Sub-Saharan African sovereigns, says Moody’s

The creditworthiness of sovereigns in Sub-Saharan Africa (SSA) has an overall negative outlook for 2017, reflecting the liquidity stress facing commodity-dependent countries, subdued economic growth, and persistent political risk, Moody’s Investors Service said in a report on Tuesday.

The report, “Sovereigns — Sub-Saharan Africa: Negative Outlook Amid Liquidity Stress, Low Growth, Political Risk” is an update to the markets and does not constitute a rating action.

The negative outlook for sovereign creditworthiness in 2017 in Sub-Saharan Africa reflects Moody’s expectations for the fundamental credit conditions that will drive sovereign credit in this region over the next 12-18 months.

“Sub-Saharan Africa’s economies will continue to face commodity-induced liquidity stress in 2017, with recurring fiscal deficits amid challenging financing conditions,” said Lucie Villa, a Moody’s Vice-President — Senior Analyst and co-author of the report. “These will remain important credit constraints and underpin our negative outlook for Sub-Saharan Africa sovereigns overall.”

The negative pressures on Sub-Saharan Africa’s sovereigns were reflected in numerous negative rating actions in 2016.

By the end of last year, Moody’s had downgraded a third of the region’s 19 rated sovereigns by an average of around two notches. This compares with 29 downgraded sovereigns globally (22% of the 134 countries rated by Moody’s) by an average of slightly more than one notch.

Five of the seven sovereigns downgraded in SSA in 2016 carry negative outlooks, underscoring Moody’s view that pressures that led to rating downgrades will persist in 2017.

The negative impact on liquidity from the oil and commodities price shock will primarily be concentrated in Gabon, Mozambique, the Republic of the Congo and Zambia, but will also be evident in Angola and to a lesser extent in Nigeria. However, in other countries, Moody’s expects liquidity risk to remain broadly stable next year.

The authorities in the majority of the 19 rated SSA sovereigns have embarked on fiscal consolidation plans, which Moody’s expects will have a positive impact in 2017. A noticeable exception is Botswana where the government will continue its counter-cyclical policy started in 2015.

However, fiscal consolidation policy will face obstacles, stemming in particular from subdued growth, related social demands and potential shocks from the weather and geopolitics.

Real GDP growth among rated countries in the region is forecast at 3.5% in 2017 from 1.5% last year, although it will vary markedly across the region. Countries that are dependent on commodity exports will see economic activity constrained in 2017.

Sluggish growth in Nigeria and South Africa will greatly influence the region’s outlook given the size of their economies, which jointly account for almost two-thirds of the GDP of the 19 rated SSA sovereigns.
Both economies will gradually recover from the impact of negative supply-side shocks, but growth will remain subdued.

By contrast, Moody’s expects rapid growth in Ethiopia, Ivory Coast and Senegal. East African countries such as Uganda, Kenya and Rwanda, will continue to benefit from public capital spending and low oil prices. In the latter case however, growth will be supported to the detriment of a rise in government indebtedness, while in the former, rapid growth will occur in parallel with government debt stabilization.

Political risk will continue to be a credit constraint in parts of Sub-Saharan Africa in 2017, with potential for civil unrest in countries which will hold presidential elections in 2017 and 2018 such as in the Democratic Republic of the Congo and Rwanda.