After an unprecedented number of downgrades in 2020 in response to the rise in government debt and liquidity challenges resulting from the Covid-19 pandemic, rating momentum for sub-Saharan African (SSA) sovereigns has turned more positive in 2021, with three upgrades (Benin, Cote d’Ivoire and Gabon) and one downgrade (Ethiopia) since the beginning of the year, Fitch Ratings says in a new report.
But the balance of Outlooks remains Negative: Fitch revised Ghana (June) and Rwanda (July) to Negative, while Kenya, Lesotho, Namibia, Rwanda, South Africa and Uganda still carry Negative Outlooks. This reflects continued uncertainty about whether sovereigns will be able to stabilise and reduce their debt levels, as well as risks to external liquidity in an environment of tightening global financing conditions.
Median government debt for SSA rose to 66% of GDP in 2020 from 58% in 2019 and is expected to peak at 73% in 2022. Some sharp rises in debt/GDP ratios were due to denominator effects among oil exporters, which the oil price recovery will help to reverse. But the pandemic continues to affect revenue and expenditure in many sovereigns and longer-term challenges persist, including weak public financial management and a heavy reliance on public investment-driven growth.
As a result, debt sustainability remains a challenge for a number of sovereigns, given relatively low fiscal and external receipts. The official sector will provide support and, in many cases, IMF programmes will provide a policy anchor. But when the IMF deems debt to be unsustainable, sovereigns may seek treatment under the Common Framework with potential implications for commercial creditors.
Median GDP growth of Fitch-rated SSA sovereigns was -1.8% in 2020, the smallest contraction among major regions. We expect a recovery to close to trend growth in 2021 but unlike in other regions we do not expect a strong rebound, partly because of more limited base effects and partly because support from government stimulus is more limited, given financing constraints.
Risks of new Covid-19 waves will remain high given low vaccination rates in the region, although the economic impact could remain contained as economies and governments have learned to adapt. Fiscal consolidation efforts could weigh on longer-term trend growth.
The report “Sub-Saharan Africa Sovereign Credit Overview: 4Q21” is available at the link above, or at www.fitchratings.com