Country risk: Kenya, Gabon, Ghana among the borrowers contemplating sub-Saharan shock

Investors were bullish on the region’s prospects when African sovereigns took advantage of favourable market conditions and their bonds were snapped up eagerly by investors eyeing ‘returns-potential’ underpinned by strong economic growth. 

Many of them will now be having their doubts.

Far from it being a period of emergence, reform and infrastructure development, the past decade has been more of a lost opportunity to lessen the region’s vulnerability to commodity-price shocks and famine.

China’s slowdown and the ensuing fall in oil and other commodity prices devaluing currencies across the region are heightening debt servicing and repayment risks, which have risen sharply with capital access tightening.

Of the 14 countries issuing Eurobonds for the first time in recent years, only three – Côte d’Ivoire, Senegal and Seychelles – are safer or at least no riskier than they were.

That leaves 11 with country risk scores which are presently lower than their peak scores during the past five years, symbolizing increased investor risk:

Perfect storm

The region is struggling not only from capital access and falling commodity revenue, but also from rising food insecurity linked to the devastating effects on agriculture from the persistent drought accompanying the El Niño weather effect. 

The UN estimates some 31 million people in southern Africa require food aid, a figure that is predicted to rise to 49 million by the end of the year. There are concerns for several countries in eastern parts of the continent, too, experiencing serious flooding.

Oil prices, meanwhile, remain depressed, fluctuating at just under $50/barrel. With non-oil commodity producers also struggling, the IMF believes SSA is heading for a difficult year, with the region’s economic growth slowing to 3% marking a new 15-year low. 

In a new report titled Primary Commodity Booms and Busts: Emerging Lessons from sub-Saharan Africa, the United Nations Development Programme states: “Many countries have clearly saved far too little and even borrowed on the basis of temporarily high revenues, leading to debt crises and deep recessions once prices collapse.”

The report goes on to explain how the region’s economies can take action to mitigate these risks, while the IMF also argues for a “policy reset”, but the implication is that few governments have gone far enough to date, and the clock is ticking as debt burdens rise:

Ghana, ranking 99th in Euromoney’s survey of 186 countries, is now working closely with the IMF to restore fiscal sustainability, and has made progress in clearing its arrears and narrowing the deficit. 

Yet structural reforms are proceeding slowly, and economic management is hamstrung by low commodity prices, with the onset of elections later this year increasing the tendency for populist spending.

Its external debt burden is predicted to reach 44% of GDP this year, the IMF predicts, growing from less than 20% of GDP five years ago.

Other countries, including the Democratic Republic of the Congo, Tanzania and Zambia, are among higher-risk sovereign borrowers that have been downgraded in Euromoney’s survey.

Kenya elections

Kenya, lying 104th in the global rankings, is supposed to be one of the safer prospects, with its decent growth rate underpinned by infrastructure spending, but is also slumping ahead of the elections in August 2017.

Experts have concerns about the country’s banks, with non-performing loans rising and fraudulent activities identified. There are also internal security risks and policymaking uncertainties tied to the elections delaying investments and flattening Kenya’s growth profile.

However, concern for the region is not just affecting bond prospects already considered high risk. 

Some of the region’s safer, medium-risk investments are sliding too, including South Africa now ranking 63rd in the survey with its well-documented political and economic challenges.

Namibia, just one place below South Africa, is also in danger of slipping into the fourth of ECR’s five tiered categories, questioning its reputation as investment grade just as much as South Africa.

Not far below is Gabon, ranking 76th, and Nigeria (90th) falling precipitously on the oil-price collapse.

The collapse in commodity prices presents an opportunity for African borrowers to diversify their economies and put their public accounts in order. 

Unfortunately, however, too many factors are conspiring against them, and time is running out as the benefits of debt relief are atrophying. 

Since demonstrating a ravenous appetite for all things African and emerging, bond investors now require nerves of steel. 

The continent on the whole is becoming riskier, making portfolio-building a selective exercise.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.