Economic Trends in Sub-Saharan Africa
Based on Fitch Ratings’ Sub-Saharan Africa – Credit Outlook Report (May 2007)
The economic performance for sub-Saharan Africa remained good in 2006, with the region achieving a third consecutive year of strong growth (5.7%, down from 6% in 2004 and 2005). Non oil-producing economies grew by over 5% for the third year in a row. The region benefited from a favourable external environment – strong global demand and rising prices for both oil and key non-oil commodities such as copper, gold, zinc and coffee, which have risen each year since 2003. Internally, growth was supported by better macroeconomic management, increased government spending facilitated by additional debt service savings from the Multilateral Debt Relief Initiative (MDRI), and oil windfalls. Growth is also being supported by rising investment to address infrastructure bottlenecks in the energy sector and on roads and increased foreign investment into minerals extraction. The MDRI, record-high oil prices and continued high non-oil commodity prices have had positive credit implications for countries in sub-Saharan Africa, while the impact of the expiry of the Multifibre Arrangement (MFA), which eliminated quotas on textiles, has been less severe than originally anticipated.
With most of the external debt written off and greater entrenchment of macroeconomic stability, attention is turning to developing local debt markets as a cost-effective, sustainable source of long-term financing for governments. In addition, there is increased interest from foreign investors in the region’s local debt capital markets and a trend towards international bond issuance for the first time by some sovereigns and private-sector companies. These developments are positive from the point of view of transparency and market discipline and provide an additional source of financing to address infrastructure. However, countries need to ensure that the funds raised are used productively so as to raise growth and retain debt sustainability.
China’s trade and investment is having a positive impact on the region’s economic prospects. Sub-Saharan African exports to China grew at an annual average of 39% in 2001-2006, and China’s share of sub-Saharan Africa’s total exports rose to 10.8% in 2006 from 4.2% in 2000. The extent to which sub-Saharan African countries benefit will depend on domestic policies to improve their business environments and institutions in order to take better advantage of increased Chinese involvement and interest in the region.
Source: IMF, WEO April 2007Domestic debt has been the prevalent form of budget deficit financing for the more developed countries in sub-Saharan Africa, such as Fitch-rated South Africa (BBB+) and Namibia (BBB-). South Africa has one of the most developed domestic debt markets of all emerging markets and for these two countries this is a rating strength, making them more resilient to external shocks and helping to deepen financial markets. Elsewhere in Africa, easy access to very concessional borrowing has tended to limit the development of domestic debt markets, and countries have tended to turn to domestic financing when they have been off track with the IMF programme and unable to access concessional donor funds. In such cases, high macroeconomic instability increases the cost of borrowing, puts pressure on budgets and crowds out private borrowing. This has been the situation with Malawi (B-) until recently and was the situation in Ghana (B+) until 2003. They have both used the space created by debt relief to lower their domestic debt burdens.
Most sub-Saharan countries that have adequate macroeconomic frameworks, making them eligible for debt relief, have access to concessional loans and grants as a source of borrowing and revenue for their budgets. And, in many cases, domestic debt issuance is mainly for the purposes of liquidity management of the high aid inflows rather than budget financing.
With most of the external debt written off by bilateral and multilateral creditors, domestic debt now makes up a larger share of public debt for many countries in the region. With greater entrenchment of macroeconomic stability, attention is also turning to the development of local debt markets as a cost-effective, sustainable source of long-term financing for governments as well as providing a benchmark for private borrowing, tapping excess savings and helping to deepen financial markets more generally. Improved debt sustainability following debt relief has increased interest by foreign investors in the region’s local debt capital markets. They are also attracted by the higher yields and more stable currencies than before.
As such, a number of countries have lengthened the tenure of their debt and opened their domestic debt markets to foreigners. For example, Uganda (B), Kenya and Tanzania have lengthened the tenure of debt to 10 years or more, Nigeria (BB-) to seven years and Ghana and Zambia to five years. Others, such as Malawi and Rwanda (B-), plan to issue bonds with a maturity of over one year in the near term, once macroeconomic stability becomes more entrenched. In most cases debt is issued for the purpose of sterilising excess liquidity, but in a few cases, for example Kenya, limited access to donor funds has facilitated the development of the domestic debt market, considered one of the more developed in the region, and fostered fiscal discipline.
Domestic debt issuance in the West African Economic and Monetary Union (WAEMU) CFA franc zone has also picked up since 2003 as a result of the freeze of credit facilities from the regional central bank to member states. These had been set at 20% of the previous year’s fiscal revenue. Member states are required to repay outstanding obligations over a period of 10 years. This has encouraged governments to issue state debt to finance the repayments and budget deficits. In 2007, a number of the countries in the WAEMU zone, for instance Benin and Mali, plan to extend the maturity of bonds to five years. By contrast, the consolidated budget position of the oil-producing Economic and Monetary Community of Central Africa (CEMAC) zone has been persistently in surplus and their domestic debt markets less active.
The rating implications of more developed domestic capital markets are mainly positive from the point of view of improving transparency and fiscal discipline and of providing an additional source of financing to address the infrastructure bottlenecks caused by years of underinvestment and exposed by current higher growth rates. As they deepen, they may provide a cost-effective source of borrowing for the government and other entities. Nevertheless, foreign interest can increase market volatility and initially the cost of borrowing will be higher than from official creditors.
In most cases there is no difference in the local currency and foreign currency ratings in sub-Saharan Africa; high reliance on concessional donor financing means that governments are no less likely to default on foreign debt than on local debt. Out of Fitch-rated countries, the higher local currency ratings for Lesotho (BB-) and Mozambique (B) reflect the very small level of domestic debt relative to overall debt. In the case of Mozambique the government has a policy of retiring at year-end all treasury bills issued for liquidity management during the year. By contrast, in a very rare instance, the local currency rating for Cameroon (B) is one notch lower than the foreign currency rating, reflecting the de facto subordination of local debt to external debt, as illustrated by the government default on its local debt in 2004 while it was current on external debt.
For similar reasons, there is a trend towards an increase in external borrowing on commercial terms by the official and private sectors. This is due to improved external debt sustainability, the graduation from Poverty Reduction and Growth Facility (PRGF) arrangements with the IMF to non-borrowing Policy Support Instruments (PSIs), and insufficient concessional funding from the African Development Bank and International Development Association (World Bank) and other traditional multilateral creditors to meet regional infrastructure development needs. Ghana is leading the way, and is planning a sovereign bond issuance later this year. Zambia and Nigeria are exploring the possibility of sovereign bond issuance. Two Nigerian private banks have issued international bonds on the back of Nigeria’s initial sovereign rating.
From a debt sustainability point of view, the cancellation of debt offers some countries the scope to borrow. For example, Nigeria has the lowest gross external debt burden of any sovereign rated by Fitch, while the need to develop infrastructure is compelling. And although many of these countries are going to depend on donor finance for years to come, modest sovereign borrowing would help to set a benchmark for pricing corporate and bank issuance. Still, some countries, such as Mozambique, aim to rely solely on official funding for infrastructure development for the foreseeable future. A key concern from a rating point of view is that funds are used productively and raise growth potential so as to maintain debt sustainability.
China’s role in the region has been rising fast since the start of the decade, both directly – through investment, bilateral trade and aid – and indirectly – through the impact of Asian demand on high commodity prices over the past three to four years. Due to a number of countries in the region relying on exports of primary commodities, China’s strong growth and demand for commodities has had a positive impact on these countries’ economic outlook. Oil producers, of which there are around 10 in Africa, have been the biggest gainers; but many non-oil commodity producers have also achieved an overall improvement in terms of trade, despite high oil import prices. While accelerating investment into natural resources from China (and India) is for strategic reasons, high commodity prices are attracting more global investment from elsewhere into Africa’s extractive sector. Fitch expects Asian demand to remain high, continuing to benefit commodity producers in sub-Saharan Africa.
The direct role of China in terms of aid, trade and investment could help to reduce poverty and promote development and the region’s global integration. Chinese firms are involved in an increasing number of infrastructure investments in the energy, roads and railroads sectors, which they construct at competitive cost. They also provide targeted aid and credit lines at preferential rates for infrastructure projects, often tied to access to resources or construction contracts. Trade flows between China and Africa, though small in absolute terms from the point of view of China, have accelerated since the start of the decade. Sub-Saharan African exports to China grew at an average annual rate of 39% in 2001-2006 (compared with 15% for its overall exports growth, 20% to the US and 11% to the EU). China’s share of total sub-Saharan African exports rose to 10.8% in 2006 from 4.2% in 2000. Therefore China has had a big role in promoting exports growth and markets diversification. The majority of goods are extractive exports – oil and metals – although other commodities, such as cotton and timber, are also present. The bulk of exports are from a limited number of countries.
For its part, China exports capital equipment and consumer goods to Africa. Although China provides cheaper goods for Africa, they can be a threat to domestic manufacturing and hurt job creation, and there is a widening trade deficit in favour of China. In the specific clothing and textiles exports sector, growing Chinese competitiveness following the removal of global quotas at the end of 2004 has had a negative impact on exporting countries under the US African Growth and Opportunity Act (AGOA) and other trade agreements. There are also concerns that China’s growing role in giving preferential loans with less emphasis on governance and reforms could endanger external debt sustainability over the medium to longer term.
Nevertheless, China’s fast pace of growth and the recent trend of rapid trade growth between the two regions are likely to continue and Chinese influence to increase. This will continue to boost Africa’s growth and development prospects. The extent to which African countries benefit will depend on domestic policies to improve their business environments and institutions in order to take better advantage of increased Chinese involvement and interest in the region. There is also a need for countries to maximise efficiency by coordinating aid from China and other sources.