Governments in sub-Saharan Africa (SSA) are facing increasingly expensive debt financing, as favourable global and domestic conditions come to an end, ratings agency Standard & Poor's (S&P’s) Ratings Services asserted in a report published on Monday.
According to the report, over the past few years, SSA sovereigns had enjoyed unusually favourable financing conditions, with many issuing maiden bonds in the global capital market and yields hitting all-time lows in mid-2014.
This, the agency argued, resulted from exceptionally loose monetary policies pursued by central banks in the developed world and advantageous commodity prices.
“The tide has turned. We think these sovereigns will direct an increasing share of revenues over the next three years to servicing their debt . . . [as a result of] global factors, such as exchange rate movements and tightening liquidity conditions.
“The effective management of these changes will pose difficult policy choices for African governments,” held S&P’s.
Several SSA sovereigns' currencies had depreciated at a rapid pace over the past year, with only four of the 18 countries rated in the region having experienced currency depreciation of less than 10% against the dollar over 2015.
A direct impact of a depreciating currency, the report added, was the increase in a sovereign's foreign currency debt burden relative to its gross domestic product.
“We find that Mozambique, Zambia, Ghana, Angola and Senegal are most affected by such ‘debt inflation,’” it stated.
Moreover, depreciating currencies had forced regional central banks to hike policy rates to stymie inflation, pushing up Treasury bill interest rates.
In addition, the refinancing of dollar-denominated commercial debt was also set to become more expensive in the future, against the backdrop of the US Federal Reserve’s tightening of monetary policy.
“Domestic factors primarily derive from underlying fiscal performance. We expect fiscal performance to deteriorate for 12 of the 18 rated SSA sovereigns over the next three years and that their debt will remain elevated. As a result of the impact of global and domestic factors, we expect that interest expenditures will increase in nearly all of the SSA region,” S&P’s cautioned.
It further projected that, for over one-third of the regional sovereigns rated, interest expenditures would reach or surpass 10% of government revenues over the next three years.
These expected developments were already largely incorporated into its SSA sovereign ratings, which were forward-looking assessments of creditworthiness.
“Ratings could still come under strain if global factors exerted unexpectedly stronger pressure on the SSA governments, or if the sovereigns' fiscal positions deteriorated more than we presently expect, as highlighted in our published outlook statements.
“Nevertheless, we currently view this scenario as unlikely for most SSA sovereigns. Of the 18 sovereigns we rate in the region, five have a negative outlook and the remainder carry a stable outlook,” the report concluded.