Nigeria’s Debt Ranks Stronger than All Countries in SSA Region
President Muhammadu Buhari

Nigeria’s Debt Ranks Stronger than All Countries in SSA Region

Nigeria’s debt profile appears to be better ranked among countries in the Sub-Saharan African region, Fitch Ratings key forecast for 2021 indicates.

At an estimated ratio of 30.1%, Nigeria debt to gross domestic product (GDP) trail Ethiopia 32.1% and Cote d’Ivoire 43.2%.

Zambia’s general debt to GDP is estimated at 138.2% as against 151.1% for Cabo Verde and Angola 126.9% of the economic size.  

Net external debt as percentage of the nation’s gross domestic product (GDP) is expected to print at 7.7% compare with 389.4% in Mozambique.

Trailing Nigeria’s ratio, Lesotho net debt to GDP ratio is expected to print at 9.6% while other 17 countries in the region have strong double digits ratios.

Estimated net external debt to GDP ratio in Angola is pegged at 60.2, Benin Republic 41.4, Cameroon 26.7%, Cabo Verde 89.1 and Republic of Congo 72.

On the list are Cote d’Ivoire with estimated net external debt to GDP ratio of 20.1, Ethiopia 26.8, Gabon 49.9, Ghana 42, Kenya 37 and Namibia 32.

Others are Rwanda 54.4, Seychelles 70.8, South Africa 25.8, Uganda 33.2 and Zambia 130.6.

In its sector outlook, the Ratings firm hinted that most sub-Saharan African (SSA) sovereigns will experience an acceleration in GDP growth in 2021.

However, the region’s relative resilience to the coronavirus pandemic shock in 2020 means that the rebound will be milder than in other regions.

In addition, with the resumption of fiscal consolidation, Fitch said budgetary policies will constrain growth in most countries.

Still, diversified countries should achieve robust rates of growth in 2021 while oil-exporting countries will underperform reflecting weaker foreign-exchange availability and a tighter policy mix, experts added.

Fitch Ratings expects that after a surge in 2020, government debt will remain on a gradual upward trend as urgent infrastructure needs and socio-political pressures will slow down fiscal consolidation efforts.

In several cases, the Ratings said debt is or is close to being unsustainable, raising the risk of debt distress and default.

It understands that financing pressures have eased since the start of the health crisis and will be buttressed by very supportive monetary policy in the developed world and support from international financial institutions remains key in many countries.

Rating Outlook:

Negative Seven out of 19 SSA countries are on negative outlook while five sovereigns are rated ‘CCC’ or below, so Fitch does not assign an outlook.

Explaining this, Fitch stated that this points to a high risk of further downgrades, after a record high number in 2020 while noting that only Cote d’Ivoire is on positive outlook.

Rating Distribution Weighting:

Fitch said ratings in SSA are concentrated around the ‘B’ category, with only Namibia and South Africa in the ‘BB’ category.

It thus observed that there was an unusual rise in the number of ratings at ‘CCC’ and below in 2020, reflecting elevated default risk.

The low ratings in the region are symptomatic of weak structural l factors, such as GDP-per-capita and World Bank governance indicators, combined with rising debt levels and liquidity pressures.

“The median rating for the SSA region has declined since 2014, when the oil-price shock led to a wave of rating downgrade”, the report reads.

Fiscal Constraints Hinder Recovery

In 2020, Fitch indicated that median growth in SSA fell less sharply than in many other regions, partly reflecting relatively limited coronavirus infection numbers and a reluctance by authorities to impose tough lockdowns given the large size of the informal sector and limited social support networks.

Meanwhile, South Africa was picked as an exception, both with high infection rates and a strict lockdown.

The more limited rebound and the constrained fiscal space of SSA economies in many cases means that the rebound will be milder than in most other regions: SSA growth in 2021 – forecast at 4% – will be below the 2014-2018 average, which at 4.5% was the second-highest after Asia-Pacific (4.7%).

The Ratings stated that in all four East African sovereigns (Ethiopia, Kenya, Rwanda and Uganda) and in most of West Africa (Benin, Cote d’Ivoire and Ghana), economic output remained positive in 2020, slowing from very high levels, and is likely to rebound strongly.

However, Fitch said questions remain about their ability to sustain high rates of growth that sometimes rely heavily on debt-financed investment.

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The report indicated that external liquidity shortages will hamper recovery in oil-exporting countries – notably in the Central African Economic and Monetary Community (CEMAC, with Cameroon, the Republic of Congo, and Gabon), Angola and Nigeria – as we expect oil prices to edge up to USD45/bbl in 2021 and USD50/bbl in 2022, from USD41/bbl in 2020.

Fitch however said the island economies of Cabo Verde and the Seychelles, which depend heavily on tourism – will see some recovery, but economic activity will remain depressed until long-haul travel and tourism returns to pre-pandemic levels.

“Lesotho, Namibia and South Africa will rebound after severe lockdowns but will struggle to lift low trend growth”, the report added.

Government Debt Continues to Rise after Surging in 2020

In the report, Fitch hinted that the fall in SSA revenue due to weaker growth, additional pandemic-related expenditure and, in many cases, a lower denominator caused the ratio of government debt to GDP to surge in 2020.

“We expect government debt to continue rising in 2021, albeit at a slower pace”, the Ratings firm stated.

It added that while financing constraints are becoming more binding for some sovereigns, the underlying causes for the long, upward trend in debt since a low in 2012 remain for many: urgent infrastructure needs and social and political pressures.

Thus, the report reads that the surge in SSA debt will raise concerns about debt sustainability, liquidity pressures and greater risk of sovereign default.

Weaker issuers tend to be those that depend heavily on commodity exports, while those countries with more diversified economies and better governance will typically fare better.

Of the 19 SSA sovereigns we cover, we expect the number with an interest-to-revenue ratio above 20% to rise to eight in 2022, which illustrates the rising burden of debt service.

The number with a ratio above 30% will peak at four in 2020 and 2021.

The countries with government debt above 100% of GDP rose to five in 2020 (Angola, Cabo Verde, the Republic of Congo, Mozambique and Zambia) from two in 2019 and there are now four sovereigns rated ‘CCC’ (Angola, the Republic of Congo, Gabon and Mozambique), indicating elevated default risk.

Strong support from official creditors, which became more assertive in the context of the pandemic, will help most SSA issuers navigate liquidity pressures.

International financial institutions, particularly the IMF, have provided significant liquidity support to compensate for increased liquidity pressure related to the crisis.

Typically, this has involved one of the IMF’s emergency financing instruments – the Rapid Financing Instrument or the Rapid Credit Facility – with no conditionality.

The IMF is likely to continue providing extensive support in 2021, although this might increasingly be in the form of regular programmes with conditionality.

However, when the IMF considers debt to be unsustainable, this would typically preclude official creditor financing and could lead to calls for restructuring as a pre-condition for multilateral and bilateral funding.

International support has helped reserves in many cases to hold up in 2020. However, challenges to external stability remain, mostly for oil exporters.

In Nigeria, in particular, authorities are using unorthodox measures to resist downward pressures on the naira, but as the negative impact of these measures becomes more pronounced, a renewed FX readjustment is possible.

In CEMAC, external liquidity is also tight, but we continue to believe that a devaluation will be avoided, helped by continued joint efforts to bolster reserves.

Following key political developments in the region, the report pointed that Governance has continued to be a constraint for ratings in SSA.

Fitch said fiscal consolidation efforts in response to rising debt and debt-servicing costs could accentuate socio-political pressures and increase political instability, exacerbating significant existing tensions within many countries.

Despite significant political violence, elections in Cote d’Ivoire in October have so far not led to a significant destabilisation, but this remains a risk.

Elections in Ghana in December 2020 will be significant, mainly because the previous elections had been associated with large deficit overruns that only became clear afterwards.

The presidential and parliamentary elections in Zambia will be important, as any prior significant progress on debt-restructuring negotiations will be hard.

Elections in Ethiopia, repeatedly rescheduled, may again be suspended and could further de-stabilise the country.

Ratings are unlikely to be directly affected by the outcomes of presidential elections in Benin and parliamentary elections in the Seychelles.

Presidential and parliamentary elections could affect the direction of fiscal policy in Cabo Verde and raise some risk of political stability in Uganda, although no change is expected.