EXX Africa assesses the outlook for six major African sovereigns at risk of debt distress, according to the IMF and ratings agency Moody’s. Our assessment is sometimes at odds with these institutions’ rankings, as some countries are making steady improvements in their debt position whereas others are facing critical debt servicing pressure.
On 18 February, Moody’s Investors Service rated the Republic of the Congo, Mozambique, and Zambia as the three African countries (as rated by Moody’s) that are most exposed to credit risks due to what it terms unfavourable debt structures. Moody’s says these countries have narrow external buffers, financing constraints on domestic banking sectors, and weak debt-management capacity. To a lesser extent, Moody’s also rates Ghana, Angola, and Kenya as being vulnerable to credit risks.
Government debt as a percentage of GDP is stabilising in many African countries, although several sovereigns remain at high risk of a financing shock in 2020 and 2021. According to Moody’s, these higher risk markets have heightened exposure to global financing conditions, amplified foreign-currency exposures, and increased refinancing risk. Some countries have also shifted toward non-traditional creditors that usually offer less transparent terms – read China and opaque pre-export financing structures.
In order to assess Moody’s ratings, EXX Africa provides a forecast for each of the six countries listed by the ratings agency. Our special report is based on the proviso that Moody’s rates only a select number of African sovereigns, whereas EXX Africa rates all 54 African countries. Therefore, countries rated by EXX Africa that actually score the highest level of sovereign risk, i.e. Eritrea, Zimbabwe, Libya, and Sudan, are not mentioned in this assessment.
THREE SOVEREIGNS MOST EXPOSED TO CREDIT RISKS IN 2020/21
Republic of Congo – Hidden debt and loan delays
In January, new figures showed that the national oil company, the Societe Nationale des Petroles du Congo (SNPC), is carrying up to USD 3.3 billion in previously undisclosed oil-backed liabilities, which could bring the country’s public debt to almost USD 13 billion – constituting 115 percent of GDP, up from the previously estimated 86 percent. Also in January, the IMF halted the release of the second tranche of its three-year USD 448.6 million Extended Credit Facility given delays in restructuring some USD 1.7 billion worth of commercial debt in the form of oil-backed loans. The restructuring talks are reportedly in a deadlock as the Congolese government seeks a partial capital write down and is refusing to allocate oil cargoes to repay the debt to commodity traders, which are considering legal action.
It is highly likely that reports of hidden debts at SNPC also fed into the IMF’s decision to halt the release of the second tranche of funding in January. Coupled with delays in negotiations around the restructuring of commercial debt along with the possibility of court proceedings, the much-anticipated relief envisioned in the Extended Credit Facility programme last year is now expected to take longer to materialise. This financial pressure has the potential to build ahead of the next presidential elections scheduled in 2021. Moreover, the implementation of austerity measures, as required by the IMF, will impact public services and the government’s ability to implement reintegration efforts of militants.
See Country Outlook: Congo, Republic
Mozambique – On the path to recovery
EXX Africa strongly disagrees with Moody’s that Mozambique should continue to be rated as among the sovereigns at highest risk of debt distress. Mozambique’s economy is recovering on the back of final investment decisions by major energy companies, given the expected boost to foreign exchange levels derived from direct royalties, taxes, carried interest, and other financial contributions, as well as indirect benefits to the broader economy. Economic growth will recover from the negative impact of Cyclones Idai and Kenneth in 2019 to over 6 percent this year. The impending influx of dollars is anticipating that investment in the LNG project will eradicate future foreign exchange shortages and calm inflation. Foreign reserves have grown to almost USD 4 billion.
A sustainable recovery path will also depend on progress in restructuring the debt deals. A lingering dispute over the validity of some of Mozambique’s loans may protract the restructuring timeline. The restructuring is being motivated by a stronger desire by the Mozambican government to reengage with the IMF, because the state needs billions of dollars in loans to fund its own participation in the natural gas concessions. The IMF has insisted that any agreements with holders of previously undisclosed debts should be consistent with returning Mozambique’s debt position to a sustainable path. The Fund is considering granting Mozambique a funded programme this year, which would further place the country on the path to a sustainable recovery.
See Country Outlook: Mozambique
Zambia – Multiple defaults and rampant fraud
Zambia’s sovereign is a facing a dire two-year outlook. Last year, the country defaulted on a loan from the African Development Bank, twice defaulted on a loan from Italian bank Intesa San Paolo, and defaulted at least once on a payment due to Russia’s Sukhoi, which has since cancelled the aircraft order. The government has also defaulted on payments at several construction projects, including Chinese ones which have since been suspended or abandoned. Most recently, in February, China National Complete Engineering Corporation halted work on the USD 500 million Kafulafuta Dam in the Copperbelt due to delayed payments from the government. In February, S&P ratings agency lowered its long-term sovereign credit rating on Zambia to ‘CCC’ from ‘CCC+’, warning that the country is vulnerable to non-payment of upcoming commercial obligations.
In January, Finance Minister Bwalya Ng’andu’s January made a request for a funded programme from the IMF, which is seeking a complete curb on all borrowing. However, since then, there have been reports of new loans being contracted by the government, including from Israel’s Elbit Systems and Russia’s Sukhoi. The government is also facing persistent allegations of misappropriation of funds and embezzlement, most recently in the health sector where Danish company Missionpharma has suspended its pharmaceutical supply over payment arrears of USD 10 million. In February, the World Bank reported that USD 117 million of aid to Zambia is transferred to offshore tax havens, while another USD 306 million is transferred into individual accounts unrelated to the intended use. Such allegations of unrestrained borrowing, fraud, and aid diversion are likely to stall any eventual deal with the IMF and thus keep Zambia in debt distress.
See Country Outlook: Zambia
THREE SOVEREIGNS VULNERABLE TO CREDIT RISKS IN 2020/21
Angola – Seeking urgent loan restructuring
Angola’s government is urgently seeking to recover billions in stolen funds by its political and business elite, while attracting new investment in its oil sector to avoid a debt servicing crisis. Angola’s oil production dropped from 1.8 million barrels per day (bpd) five years ago to 1.2 million today. The impact on the economy has been disastrous, with economic output shrinking since 2016 and inflation running at 20 percent. To counter this economic decline, Angola hopes for greater investment in its oil and gas sector as an alternative to Chinese loans. China has lent some USD 40 billion in credit and project finance to Angola over the past 15 years (some estimates are much higher).
However, few western lenders have expressed an interest in funding new investments. The IMF is calling for more spending cuts and more substantial economic reforms. In late 2018, the Fund committed to a three-year USD 3.7 billion credit facility in exchange for austerity, economic restructuring, and banking sector reforms. Lourenço’s government is trying to stall the IMF’s painful reforms by seeking a recovery of stolen funds, although the prospect of a settlement with the dos Santos family seems unlikely. Meanwhile, massive non-performing loans in local kwanza currency have also triggered a credit crisis. The ratio of debt-service to GDP is now estimated at over 91 percent. Chinese lending partners are unwilling to renegotiate, extend, or restructure loans, raising risk of a debt servicing crisis in coming years.
See Country Outlook: Angola
Ghana – Towards highly debt-distressed status
The IMF believes that Ghana is on the brink of becoming a highly debt-distressed country, a classification which would raise the cost of credit for the sovereign, while shrinking the fiscal space to finance capital projects. In February, the Fund said almost 100 percent of Ghana’s tax revenue is spent on the public sector payroll and interest payments. The IMF, which no longer has a programme in the country, has urged the government to improve domestic revenue mobilisation and halt borrowing. The total debt stock of the country now exceeds USD 40 billion, while interest payments on loans will cost the nation more than USD 4.1 billion this year.
Ahead of the 2020 elections, the government is lauding its own efforts to have stabilised debt levels around 63 percent of economic output. However, the IMF warns about Ghana’s ability to honour its international obligations, which could impact Ghana’s plans to issue another Eurobond in 2020. Finance Minister Ken Ofori-Atta has said he wants to return to the Eurobond market, for the seventh time in the past eight years, to raise USD 3 billion to pay for expenditure items the country cannot fund from domestic sources. Ghana’s gross international reserves are forecast to fall to just 2.3 months of import cover in 2020. While the government seeks to replenish reserves with a Eurobond issuance and other commercial and multilateral borrowing, such loans usually drain reserves even faster as debt servicing costs spiral.
See Country Outlook: Ghana
Kenya – Weak revenue collection
New Finance Minister Ukur Yatani has taken cosmetic steps to address growing government spending and debt. He has paid no more than lip service to austerity to soothe creditor concerns, while raising local borrowing, increasing discretionary spending on politically driven projects, and doing little to meet revenue collection targets. The country’s revenue authority has consistently failed to meet the government’s revenue collection targets every financial year. The main concern in the medium term is that slowing economic growth will constrain the government’s ability to service debt, which is now consuming over a third of current revenue.
Kenya’s economy is however expected to benefit from the November 2019 lifting of a cap on commercial lending rates, which should boost banking sector profitability, banking stocks, and the shilling local currency. The removal of the lending rate cap will be certain to please the IMF, which has been highly critical of the measure since its inception three years ago. However, demand for government-issued local currency debt may be subdued. By refusing to cut budgetary spending, the Treasury has committed to increased borrowing from local sources. Kenya’s current borrowing spree is from its own domestic market – The biggest investors in the bonds and bills have been banking institutions, which account for over 54 percent of lending, while pension funds now account for 27 percent of domestic debt. Bad debts among Kenyan banks rose to 12.4 percent of total credit in 2018, the highest level in more than a decade.
See Country Outlook: Kenya
In the aftermath of the US-China trade war, the COVID-19 virus outbreak, and Brexit, African sovereigns will need to step up internal revenue-raising capacity to make up for a shrinking pool of commercial finance. Domestic revenues currently average around 17 percent of GDP across African countries, which should at least be doubled in order to make debt servicing sustainable. To boost internal revenue collection, African governments are not only hiking resource royalties and corporate taxation, but also steering towards formalisation and digitisation to enhance accounting and transparency. Countries like Ghana and Kenya are implementing compulsory electronic payments for all government services, as well as customs and taxes.
Internal revenue collection will be critical to match debt servicing requirements. However, the risk is that many African governments will prefer to reach out to yield-seeking international investors. Both Ghana and Gabon are due to return to Eurobond markets early this year. The share of revenues paid to service debts will be excessive in oil-exporters such as Angola, Ghana, and Republic of Congo. Nigeria already spends two thirds of revenue on debt servicing. Africa’s largest oil exporter has one of the lowest revenue collection rates in the world. Other resource-intensive countries like Zambia and Mozambique face similar risks. Debt levels in both countries are now much higher as a percentage of GDP than prior to the global financial crisis in 2008.
However, some of these countries are making modest improvements in their sovereign risk outlook. Some 21 out of 54 African economies are set to grow by over 5 percent this year; 13 economies, including debt-burdened ones like Kenya, are projected to hit or exceed 6 percent growth. Mozambique is fast replenishing its foreign reserves to buffer its currency ahead of a likely budget support deal with the IMF in coming months. Moody’s also recently upgraded Ghana’s ratings outlook, after the country successfully completed an IMF programme and due to its positive primary balance. Ghana’s ongoing USD 5 billion banking and power sector bailout will need strong support from the IMF and other concessional lenders in order to stabilise the economy.
A country like Zambia poses a far more complex sovereign risk outlook due to the high cost of collateralisation of Chinese loans and a general lack of transparency on Chinese project finance terms. The Zambian treasury has little control over the project finance terms and renegotiations on these will be cumbersome and complex. Any bailout deal reached between Zambia and the IMF can only occur once Chinese debt has been restructured, like in the Republic of Congo. For Zambia, such a scenario is more likely towards maturity of its two existing Eurobonds when the need for restructuring will be far greater. Both Zambia and Republic of Congo will become bellwethers on IMF support and Chinese debt restructuring as other African economies seek to avoid a debt servicing crisis in coming years. EXX Africa will continue to frequently assess both countries’ debt position and political risk outlook.