(The following statement was released by the rating agency)
Fitch Ratings says in its 2014 Outlook report for Sub-Saharan African (SSA) sovereigns that growth will pick up in 2014, helped by recovery in Europe, but financial market turbulence linked to Fed tapering could pose challenges for sovereigns with twin deficits and high foreign participation in local markets. Overall, the region’s rating outlook is stable.
Fitch expects GDP growth to pick up slightly in 2014, to average 5.1%. Moreover, median growth outside South Africa, the largest but also the slowest growing economy in the region, will rise to 6.3%. Faster global growth, particularly in Europe, and continued strong FDI will help. However, Africa’s growth story is not mainly externally or commodity driven. More fundamental is the benefit of enduring macro stability, which is raising business and consumer confidence, together with increased public infrastructure spending, funded in an increasing number of cases by non-concessional finance, notably Eurobonds.
The prospect of Fed tapering caused a hiatus in Eurobond issuance from May but Nigeria re-opened the market in July with its second issue and Ghana followed shortly afterwards, although its weakened fundamentals meant it paid a higher yield. With liquidity likely to be less abundant in 2014, countries with weaker fundamentals, especially twin deficits, and with heavy foreign investor participation in local markets, are likely to face more challenges than countries with smaller financing needs. South Africa, Ghana and Kenya all fall into the former category. South Africa has experience of dealing with volatile portfolio flows and has a tried and tested policy regime with a floating exchange rate, inflation targeting as well as deep local markets with sophisticated domestic financial institutions. Volatility of portfolio flows will present bigger challenges for the rest of the region.
Fitch considers the overall rating outlook for SSA as stable, despite a much higher balance of Positive over Negative Outlooks compared with a year ago. Of the 16 ratings in the region (we assigned ratings to the Republic of Congo in October), 69% of Outlooks are Stable (up from 60% a year ago), 25% Positive (20% a year ago) and only 6% Negative (20% last year).
Three countries were moved to Positive Outlook in 2013 – Rwanda, Seychelles and Uganda – compared with just one move to Negative – Cape Verde. However, downgrades of Ghana, South Africa and Zambia outweighed the one upgrade of Mozambique. Since all the rating changes were to Stable Outlooks, this also helped increase the balance of Positive over Negative Outlooks.
The history of rating improvement in SSA has been slow. In over a decade of ratings in the region, none aside from South Africa has moved up by more than a notch. This is partly a reflection of the heavy weight of structural weaknesses in the average SSA credit – per capita income, governance and financial development – which are difficult to change quickly. Positive Outlooks are therefore unlikely to be converted to upgrades quickly.
The three downgrades in 2013 are still tending to weaken, even though Fitch judges current trends to be consistent with Stable Outlooks. Deterioration is most evident in Ghana, with double digit twin deficits and a gradual fiscal consolidation likely to disappoint, despite high and rising debt. South Africa’s growth has weakened this year, with negative implications for debt dynamics. Structural reforms that might invigorate growth are unlikely before the 2014 elections. Zambia’s lurch into heavy fiscal deficit this year was a surprise and seems likely to continue in 2014.
The biggest external risk to Africa in 2014 will come from Fed tapering. By contrast, the risk of a hard landing in China, on which Africa is highly dependent both directly and indirectly, is less than it was a year ago. The main domestic risk could come from over-loose fiscal policy which has emerged in a few countries in 2013 – all subject to negative rating action. Elections in 2014 in South Africa, Mozambique and Namibia are unlikely to bring significant changes in policy in Fitch’s view. The report, ‘2014 Outlook: Sub-Saharan Africa Sovereigns’ is available at www.fitchratings.com or by clicking the link below.
Link to Fitch Ratings’ Report: 2014 Outlook: Sub-Saharan Africa
Source: Reuters
